Small Businesses and Freelancing Due to COVID-19
Five frustrations faced by small businesses in the United States because of the coronavirus pandemic include concerns about COVID 19 -related liability and the Payroll Protection Plan by the U.S Government, unforeseen expenditure, reduction in workforce, and reduced sales. According to Moody’s Analytics, between (3-4) million jobs have been eliminated, with another (9-11) million jobs being significantly at risk.
Concerns about COVID 19 -Related Liability
- Small businesses are widely concerned that they would be liable for a lawsuit if a customer alleged that they got a COVID-19 infection on their property, according to a U.S. Chamber and MetLife Small Business Coronavirus Impact Poll released in early June.
- Size of impact: 67% of small businesses with between 20-500 employees are concerned about lawsuits related to contracting COVID-19, as pointed out by the U.S. Chamber and MetLife polls.
- The polls further reported that 51% of small businesses with 5-19 employees are concerned about lawsuits related to contracting COVID-19.
- Industries most impacted: The concern about the effects of a possible second wave of COVID-19 also remains high, with 32% of small businesses reporting they are "very concerned" in the Thryv survey and 27% being "somewhat concerned."
- Unless small businesses receive temporary "safe harbor" protection from liability, this will be an ongoing concern, mainly if a second wave prolongs the length of impact for COVID-19. As a result, offering liability protection or finding some way to offset liability vulnerability for business customers (such as through specialized loans) would be advised.
Concerns about Payroll Protection Plan (PPP)
- In response to COVID-19's impact on small businesses, the federal government launched the Payroll Protection Plan (PPP). Businesses received "loans" that would be completely forgiven if specific qualifications were met. If they were not met, the business is obligated to repay the loan at a 1% rate. Additional complications in the changing terms of the PPP have caused businesses to be concerned that they will not have their loans forgiven, adding to their already-significant financial stress.
- Businesses were initially informed that the 8-week period covered by PPP begins as soon as the loan is disbursed. Furthermore, only 25% of the loan can go to payroll costs. With many businesses not open (and thus not generating payroll) and many employees already laid off, this put many borrowers in the realm of not qualifying for forgiveness.
- An early June LendingTree survey shared that many small businesses are worried they will not qualify for forgiveness, leading to concerns over cash shortages.
- Change of terms: The federal government passed the Paycheck Protection Program Flexibility Act of 2020 on June 4, extending the length of time businesses have to spend the loan to 24 weeks from eight weeks and adjusting the required spending to 60% payroll costs.
- Size of impact: 4.5 million loans from businesses with fewer than 500 employees received $510.8 billion as of June 4, leaving $120 billion still available.
- Size of impact: 63% of businesses applied for PPP; of that number, 44% had been funded by early June.
- Industries impacted: The industries that are predicted to receive the most in PPP in the first wave of funding (involving 1.3 million businesses) are professional, scientific, and technical services ($114,043,000,000), health care and social assistance ($99,848,000,000) and construction ($85,133,000,000), according to an analysis by a team from the University of Chicago (a table with the full breakdown by industry is available in the document as Table 4).
- Size of businesses impacted: According to SBALenders, businesses with more than 200 employees were three times more likely to receive loans than businesses with 15 or fewer employees.
- Based on this information, even with the new requirements, businesses that received PPP but do not qualify for forgiveness may need additional financial help. This would drive demand for flexible loans.
- Unforeseen expenditure is often the downfall for many small businesses, and this is the most likely issue that will arise out of the COVID-19 pandemic. The effects of the lockdown will limit cash flow and place many small businesses under financial pressure. Although most governments globally have offered "assistance" to businesses, the success of these packages does not guarantee a small business's survival.
- The banks will have pressure placed on them to extend loan terms and payment dates, but they too have commitments that must be met. There is a limit to how much leeway banks will extend to small businesses, to the extent it would not be unfair to predict a relatively rocky road in the relationship between small businesses and banks in the immediate future.
- The impact of COVID-19 on the relationship between banks and small businesses will not be fully realized until the various government relief packages have been assessed. If the packages measure up, in terms of the support needed, then the effect between businesses and banks will be limited.
- However, there will be increased pressure on banks to pick up the slack between the government relief and small businesses' needs, the longer the lockdowns, and the shutdown of non-essential services. Banks will face increased scrutiny as small businesses will be backed by public sentiment.
- A study by a networking website on 4 million small business owners revealed over 80% of business owners said, "their business is getting hurt."
- Small businesses, like Lost City Books and Beer Barrio, have seen steep declines in sales since the coronavirus outbreak hit. This is due to people practicing social distancing, not going out, and laid-off workers not having money to spend.
- Without income coming in, some small businesses are attempting to find ways to make sales during the pandemic, while others are closing down.
- On average, businesses "with fewer than 500 employees have less than a month of cash reserves," and most small businesses "live paycheck to paycheck."
- Goldman Sachs recently surveyed more than 1,500 small businesses. Due to COVID-19, 75% of the respondents said fewer sales impacted their businesses. Additionally, more than 50% stated that they could not operate their businesses for more than three months.
Reduction in Workforce
- With small businesses getting fewer sales and struggling to pay bills, many are forced to drop most or all employees. Approximately 40% of small firms are laying off employees.
- For many small businesses, it is challenging laying off employees because, as The Hire Talent firm states, “it takes about a year for each (employee) to become productive and profitable.”
- Small businesses that do not wish to lay off employees are cutting salaries and hours.
- Other small businesses have deferred laying off employees by turning to new products or services to bring in profit. For example, Rented.com saw its 50% fall in revenue due to the COVID-19 outbreak, and now the business is introducing long-term rentals and emergency planning services to secure new clients. Rented.com has not laid off any of its 16 employees.
- Some small businesses that laid off their employees include My Metal Business Cards, which let go of eight of its ten employees, and eAlchemy, that laid off four of its eight employees.
- Skytown Brewing Company and Beer Barrio laid off a total of 30 employees together. The co-founder of One Hot Cookie and the OH Donut Company laid off their entire team and closed one of their locations.
- 3.3 million Americans have already filed for unemployment amid the COVID-19 outbreak. This number is the highest ever reported.
- According to Moody’s Analytics, between (3-4) million jobs have been eliminated, with another (9-11) million jobs being significantly at risk.