Which Small Businesses Are Most Vulnerable to COVID-19 and When?

(For more from this article: https://www.mckinsey.com/featured-insights/americas/which-small-businesses-are-most-vulnerable-to-covid-19-and-when?cid=other-eml-alt-mip-mck&hlkid=7499140e9ccc43c9a2c06c6fc7cc5a35&hctky=10391094&hdpid=a4997f62-946f-47c1-b9fc-47a6c68dd16a        Courtesy McKinsey & Co., 6/18/20 by Dua, Ellingrud, Mahajan & Silberg)

As the fallout from the coronavirus pandemic comes into sharper focus, the position of the nation’s small businesses appears, overall, to be particularly bleak.1 By mid-April, according to a report from the Facebook & Small Business Roundtable, about a third had temporarily stopped operating,2 and by mid-May more than half had laid off or furloughed employees. Our analysis of several surveys of small businesses suggests that before accounting for intervention, 1.4 million to 2.1 million of them (25 to 36 percent) could close permanently as a result of the disruption from just the first four months of the COVID-19 pandemic.3

Our methodologySome small businesses may close because they’re in industries, such as accommodations, food service, and educational services, that are affected by changed customer behavior, especially the physical distancing and mandated operational restrictions that began during the pandemic. Other small businesses may close because they were already at risk financially before the crisis. Indeed, recent research by the Federal Reserve4 finds that only 35 percent of small businesses were healthy at the end of 2019 and that less healthy ones were three times more likely than the others to close or sell in response to a revenue shock
Before the crisis, small businesses accounted for nearly half of all private-sector jobs. Widespread business exits wreak longer-lasting unemployment and economic damage than temporary shutdowns do, so it’s important to understand which small businesses may remain shuttered permanently. That knowledge can help business leaders and policy makers develop interventions to protect small businesses in the short term, ensure that they can participate in the recovery, and put more of them on a more resilient footing in the years to come.
Plotting the effects of COVID-19 against existing financial risk sheds light on the overall vulnerability of small businesses. The sectors most affected by the coronavirus and the least financially resilient include 1.7 million small businesses, employ 20 million workers, and earn 12 percent of US business revenue (Exhibit 2). A long-lasting COVID-19 crisis could continue to affect these sectors disproportionately and make more of their firms vulnerable to permanent closure.

The potential fallout from the pandemic goes deeper the longer it plays out. An additional two million small businesses compete in sectors, such as construction and manufacturing, which have fewer businesses that now report negative effects from the pandemic but are also less financially resilient. The longer the economic impact from COVID- 19 continues, the more risk these sectors face. Construction, for example, is believed to be highly sensitive to the economy’s overall health, so a more protracted recovery, combined with relatively low resilience, could lead to significant vulnerability later.

Determining each sector’s level of immediate vulnerability provides a clearer view of the magnitude of the challenge small businesses face in the first few months of the crisis. Surveys of small-business owners helped us generate a range of estimates. At the low end, half of small businesses experiencing a “large negative effect” from COVID-19 could become vulnerable to closure, according to these owners. At the high end, an additional quarter of small businesses, experiencing a “moderate negative effect,” could become vulnerable to closure.

Differences between sectors depend on how much COVID-19 has affected them and how likely affected businesses are to close (Exhibit 3). It isn’t only the kinds of small businesses with well-known challenges, such as restaurants and hotels, that are greatly affected. So are other small businesses, in educational services, healthcare, and social assistance. Many private-sector educational services, childhood-education centers, sports classes, and art schools, where physical distancing would be a challenge, could become vulnerable. Similarly, small businesses in the healthcare sector—including ambulatory care (such as dentists’ offices) and small private practices that patients may be reluctant to visit in person—are also highly affected.

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