Have government policies helped small firms cope with coronavirus?

Small firms around the world have been hit hard by the Covid-19 crisis. While governments have mobilised substantial resources in support, many measures have had limited effect, in part due to smaller enterprises struggling to access information on relief loans.

The Covid-19 crisis has severely affected firms of all sizes, but small and medium-sized enterprises (SMEs) have been hit the hardest. These firms tend to be concentrated in sectors directly affected by health measures (for example, retail and in-person services); they are more likely to be credit-constrained; and they often have lower levels of sophistication compared with larger firms. This is especially worrying considering that SMEs account for a large fraction of firms and employment in many countries, notably in middle and low-income countries.

Governments around the world have rolled out a variety of relief packages targeted at SMEs, many of which amount to a substantial share of national GDP. Evidence suggests that:

There have been significant problems of policy design and implementation.
SMEs have faced difficulties acquiring and processing information about policies designed to help them – what economists call ‘information frictions’.
The interaction between these two factors has resulted in the smallest firms being less aware of and less likely to apply for the programmes specifically created to help them.

On the bright side, results from research in progress indicate that providing personalised information to small business owners about the availability of policies can have substantial impacts on their awareness and likelihood of applying for and receiving aid.

This is important, as the evidence also indicates that successfully accessing relief during the coronavirus crisis has sizeable positive effects on firms’ outcomes in terms of employment, revenue and survival.

What do government programmes to help small businesses look like?

The magnitude of the economic policy response to the pandemic has varied substantially across countries. In Latin America, for example, efforts have ranged from less than 1% up to 15% of GDP, while in the United States, these resources totalled 3.2% of GDP (Covid-19 International Small Business Study, 2020). Packages intended to help SMEs represent a substantial fraction of these resources and typically include one (or a combination) of the following:

Subsidised low-interest loans.
Furlough programmes or policies aimed at financing firms’ payroll.
Direct cash transfers to the most vulnerable individuals.
Policies to defer taxes and other payments.

While some countries implemented many of these policies, the majority tended to emphasise some form of subsidised loans combined with programmes targeted at preserving formal employment (such as furlough schemes). This was the case in the UK, which had two main loan schemes – the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) – in addition to the Coronavirus Job Retention Scheme (CJRS), which allowed employers to furlough workers for a minimum of three weeks and was available to all firms, with no particular emphasis on SMEs.

The United States launched one of the largest packages for SMEs – the Paycheck Protection Program (PPP) – which provides loans focused on covering payroll costs and additional fixed expenses during the pandemic. Four key aspects unique to the design of PPP are worth highlighting:

The loans were only forgivable if employers maintained the number of employees and salary levels at pre-crisis levels (or restored them by 30 June 2020).
Loans are fully backed by the federal government and imply zero risk to the private financial institutions that acted as intermediaries.
It had a ‘first-come, first-served’ feature with a fixed budget. The PPP started receiving applications on 3 April 2020 and the initial $349 billion budget was exhausted by 16 April 2020 (Humphries et al, 2020).

As discussed below, these features had direct impacts on the effectiveness of the programme and provide important insights into adequate policy design during an acute economic crisis.

How were small businesses affected by the Covid-19 crisis?

A major challenge when addressing this question is the need for almost real-time data on small businesses’ outcomes. Even when high-quality administrative data are available, they are only rarely available for analysis straight away. This is why many researchers have been directly collecting survey data or partnering with private sector firms that have information on these businesses.

The majority of this type of evidence comes from US firms, but it is possible to complement it with results from the Covid-19 International Small Business Survey in Latin America. This is an international collaborative project conducted since late March, covering more than 50,000 firm owners in 12 Latin American countries as well as the United States.

Despite the obvious differences between the economic and institutional landscapes in the United States and Latin America, it is possible to see remarkable similarities in some of the data patterns. Conversely, the differences between firms in Latin America and the United States provide several insights:

Expectations about the future are generally negative and they deteriorated over the weeks after the PPP started receiving applications in the United States (Humphries et al, 2020). Firms in Latin American countries show a similar pattern of worsening expectations as the crisis unfolds, despite the numerous aid policies launched in the region. Figure 1 illustrates this point by comparing the evolution of the probability of bankruptcy in the United States and Peru.
Despite similar trends, small businesses in Latin America report higher expectations of laying off workers in the next two months, but slightly higher expected probability of recovering in the next two years (see Figure 2).
Firms reported that many layoffs and closures had already occurred just weeks into the crisis (Bartik et al, 2020), and firms continued to report layoffs throughout May (Humphries et al, 2020).
The negative consumer spending shock was driven by high-income households, and was concentrated in goods produced by small, local businesses such as restaurants. As a consequence, revenue and job losses were largest for small businesses located in the most affluent zip codes of the United States (Chetty et al, 2020).

Figure 1: Evolution of the expected probability of bankruptcy, United States and Peru

Evolution of the expected probability of bankruptcy (USA)

Evolution of the expected probability of bankruptcy (Peru)

Figure 2: Firms’ expectations – United States and Latin America compared

Figure showing firms' expectations

What does economic research tell us about the effectiveness of government programmes in helping small businesses?

A regularity found in both the United States and Latin America is that the smallest businesses (those with fewer than ten full-time equivalent employees) were much less likely to know about any government support programmes than larger firms (10-50 employees) from the onset of the crisis.

In the United States, despite large initial information differences, businesses with between five and ten full-time employees quickly catch up and reach awareness levels similar to larger firms. In contrast, businesses with fewer than five employees report much lower awareness when PPP applications opened, and never close the gap relative to larger firms. Given the ‘first-come, first-served’ nature of the programme, information asymmetries early on may have resulted in the smaller firms missing out on the first round of PPP loans.

The smallest firms were also less likely to apply for relief loans and, conditional on applying, they applied later, waited longer for their application to be approved and were less likely to receive approval. These patterns, in particular longer waiting times, are also consistent with frictions in the application process, such as differential access to or differing existing relationships with the banks that made a larger number of PPP loans (Granja et al, 2020).

This lack of access seems to have important implications. Businesses that received a PPP loan report more employees, lower probabilities of closure or bankruptcy, and higher probabilities of recovering in the next two years (Humphries et al, 2020).

A comparison of US and Latin American firms reveals that the latter were much less aware of policies and less likely to apply for aid in their respective countries. These findings are not driven by differences in the types of firms, nor in business owners’ characteristics. Given the substantial resources devoted to helping SMEs in the United States and most Latin American countries, these findings raise concerns about policy design and implementation.

How can the next round of economic relief packages help small businesses more effectively?

These results suggest that information frictions played an important role in determining differential access to PPP resources between smaller and larger businesses. In the case of the PPP, these frictions might be associated with, for example, uncertainty about the eligibility criteria, the application process or the forgivable aspect of the loan.

This is consistent with additional evidence from a survey of 5,800 US businesses conducted during the same time period (Bartik et al 2020). This survey shows that the majority of US firms planned to seek funds through the CARES Act, but anticipated problems with government bureaucracy and eligibility.

These frictions are more likely to hurt small businesses for a number of reasons:

First, small firms tend to be less sophisticated, which could imply greater difficulties in accessing and processing information.
Second, larger firms typically have better human resources, which can also reduce the cost of acquiring information.
Third, there are fixed costs in the application process, which are more likely to be binding for smaller businesses. For example, access to banks that participated heavily in PPP lending varied across firms and may have been an important determinant of access to the programme (Granja et al, 2020). Furthermore, the ‘first-come, first-served’ nature of the programme may have magnified the potential impacts of these frictions since a timely application was integral to quickly receiving a PPP loan.

It is nevertheless hard to identify the importance of information frictions in preventing SMEs’ access to government aid. The need for a controlled experiment is especially clear in a context of high uncertainty and the several simultaneous shocks caused by the Covid-19 crisis. In our research, we designed and implemented a ‘randomised controlled trial’ in five Latin American countries to determine the importance of providing small businesses with personalised information about the available relief programmes in their countries.

Early results from this experiment indicate that information frictions played an important role in shaping SMEs’ lack of access to government policies. ‘Treated’ businesses with more than five employees were more likely to be aware of, apply for, and report receiving aid. In addition, these firms report substantially improved expectations about survival and layoffs, as well as lower revenue losses and probabilities of closure or bankruptcy.

These results are promising evidence that a targeted, relatively ‘light touch’ informational intervention can significantly increase the effectiveness and reach of public policies aimed at small businesses.