Based on an industry by industry analysis (1), our base case estimate is 21% of U.S. employer small businesses will close in 2020 (2) (3). This is about 1.2 million small businesses.
In our optimistic case, 14% close and in our pessimistic case, 34% close.
The table below (click to enlarge) shows the scenario data. The scenarios are briefly described in note (4) below.
By way of comparison, the SBA chart below shows small business closure and startup rates between 1990-2015.
On average about 8% of small businesses closed each year between 1990 and 2015 and 10% closed at the height of the Great Recession in 2009.
So even in our optimistic scenario, small business closures are 40% higher than in the Great Recession.
Developing small business closure scenarios at this time is quite challenging. There is a high degree of uncertainty associated with the COVID-19 pandemic and its impact on the economy. It's also hard to judge how effective the CARES Act stimulus will be.
Small businesses are also resilient and many have the ability to go dormant or near dormant and then recover once the economy gets better. This is why the small business closure rate only increased by 25% during the worst recession since the Great Depression.
These factors and others are why the closure range across the 3 scenarios is large (14%-34%).
The closure scenario assumptions (4) are the same as we used to develop our small business layoff forecasts, which were released last week.
We're hoping we're wrong and even our optimistic scenario turns out to be too pessimistic.
Notes:
(1) Our analysis looked at industry level historical closure rates (see the U.S. Census business dynamics databases) as well as a variety of sources on small business failures and financial stability (For example, J.P. Morgan Chase Institute's study Cash is King: Flows, Balances, and Buffer Days is a good source for cash balance data by industry).
(2) employer small businesses are businesses that employ at least one traditional (W2) full or part-time employee and have fewer than 500 employees.
(3) Closures include any reason a small business ceases to exist (financial failure, business is sold, owner retires and closes the business, etc.), but the main reason small businesses close is financial stress. Business closures are tracked by U.S. Census; closures due to financial stress are not specifically tracked.
(4) The scenarios are too long to fully cover in this article. Below is a brief description.
Base Case: The pandemic eases by the end of June and the economy starts to re-open over the summer. Q2 GDP is -30%, Q3 +7% and Q4 +12%. Consumer concerns about potential new outbreaks lead to a slow recovery for the travel, entertainment, restaurant, and related industries. The impact of the small business provisions of the CARES Act is mixed. Larger SMBs have much greater success accessing the loans and grants than small SMBs and it takes several weeks for money to flow.
Optimistic Case: The pandemic eases in May and the economy starts to reopen in early summer. Q2 GDP is -27%, Q3 +10% and Q4 +14%. Consumers in the parts of the country spared from major COVID 19 outbreaks return to near normal patterns of behavior. The CARES Act successfully supports SMBs of all sizes.
Pessimistic Case: The pandemic continues into July and the economy doesn't start to reopen until the fall. Q2 GDP is -34%, Q3 +5% and Q4 +12%. Parts of the country are still experiencing outbreaks over the summer and a 2nd wave of outbreaks occurs in the late fall. Consumer concerns about new outbreaks lead to a very slow recovery for the travel, restaurant and entertainment industries as well as other industries where social distancing is required. The impact of the small business provisions of the CARES Act is mixed. Larger SMBs are able to access the loans and grants on a timely basis, but small SMBs struggle to do so.
