Small Businesses Are Those Left Behind

 

 Small Businesses Are Those Left Behind


The world has fought its battle against the corona-virus pandemic for 11 months now. Huge expansions of central banks balance sheets, zero/negative interest rate policies and government spending programs were implemented to dampen the economic damages that government imposed lockdowns and social distancing measures caused. 

As a result of the low interest rates environment companies have loaded up on huge amounts of debt in 2020. Since 1995 the median debt to assets of US restaurants have fluctuated somewhere around 15 and 35 percent. According to a Crescat Capital Chart in July it has skyrocketed to around 70% this year:


Additionally, restaurants suffer from an implosion of revenues because of government imposed lockdowns and restrictions on the one hand and on the other hand because of people cutting back on restaurant visits. Those additional loans were made possible because of government guarantees - instead of the bank who makes the loan the risk is now transferred to the government. 

But even with these measures in play, banks are cautious to lend money to smaller businesses as their business model will like stay at risk throughout the following year. As bigger companies have easier access to credit, SMEs fall behind:


Another problem is that the government programs that initially were created to support small and medium enterprises totally missed its goal. More than a quarter of the Fed's PPP (Pandemic Purchase Program) money went to only one percent of the recipients. The top 5 percent received more than half of all loan value:  

All optimism during the summer where covid-cases have been much lower has been washed away by reimposed lockdowns and restrictions. The recent numbers of small business employment clearly shows this.  

Everytime when the central banks and governments offer free money, everyone who qualifies for receiving it will apply for it even though if they do not need it. As soon as the stimulus package was introduced, hedge funds and other trading firms realized that they may be able to participate: 

 Because of all those things more and more businesses have got skeptical about the future. According to a survey 40 percent of small business owners did not think that their businesses would survive which is about 8 percentage points higher than it was in April. 

Even though the situation changed since then we are still far away from returning to normality and the new mutated version of Covid has not changed the situation  for the better. Additionally liquidity injections do not solve the problems that businesses are facing and therefore only create the illusion of security. 

In Europe the situation is not any better as many companies struggle to adapt to the new normality: Nearly all European countries have implemented the german "Kurzarbeit"-model where workers cut back on hours worked and governments subsidize a huge part of the wage paid. While this undoubtedly helps to keep workers from being laid off the longer the program is implemented it hinders structual change. 

There will be a point in time when this crisis ends and all the fiscal aid to businesses will be cut off but businesses will have to bear much more debt which they have to deal with. The will have to cut costs to be able to pay it back and the first thing they will do is that they will lay off workers. If demand remains weaker than before even that is not enough and many of them will have to go out of business. 

If this tsunami of bankruptcies is unleashed, the real problems will begin...


Disclaimer: This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity.

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