Can Federal Economic Relief Save Small Businesses?

What it will take to spare small businesses and float households through the COVID-19 crisis

April 3, 2020
Entrepreneurship, Finance

Some experts believe the U.S. economy could rebound relatively quickly once the worst of the COVID-19 crisis is behind us.

Finance professor David T. Robinson of Duke University’s Fuqua School of Business is not as optimistic.

He shared insights on the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) act, which includes more than $350 billion in aid for small businesses in a live broadcast via LinkedIn. The full video is included at the top of this post, with selected clips below.

A lot of economists and politicians are telling us to expect a U-shape or V-shaped rebound, in other words, a rapid bounce back to offset the major contraction that we've experienced -- a bounce back that would bring us back, more or less, to the level where we were before things started. I disagree with this assessment,” Robinson said. “I think this pandemic is going to cause a continued drag on the economy, long after it is safe to travel, long after life sort of returns to life as normal.”

Robinson listed several reasons for this, including what $350 billion means in the context of the roughly 5.6 million small businesses in the U.S. Half of total employment in the U.S. is in firms with 500 employees or fewer, Robinson said.

“If you take quarterly payroll for all firms with fewer than 500 employees, that amounts to about $600 billion,” he said. “So on the small business side, this is actually not a large stimulus relative to the size of the problem. And while these loans will have forgiveness built into them, they're going to have to be paid back. … And this debt overhang is going to affect investment.”

Most small business owners are “massively under-diversified,” Robinson said, because a lot of their wealth is tied up in their businesses. This becomes more problematic when you consider that a quarter of new businesses in the economy are also started by people age 55 and over who are going to need their retirement savings in the near future, Robinson said, and those retirement investments have already taken a huge hit as a result of COVID-19, just in our first couple of months dealing with what is likely to be a long battle ahead.

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