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Economic Development and Human Capital

Shock, grief and opportunity: the emotional roller coaster of COVID-19 in the small business community

Emily Ryder Perlmeter

As the COVID-19 pandemic became a national economic crisis in March of 2020, millions of businesses across the country had to close their doors or drastically change operations. For small businesses, the economic situation turned especially dire.

Small firms struggled more than large ones in the Great Recession, and they suffered more from credit constraints and declines in consumer demand during that time. Additionally, a 2020 Federal Reserve report found that just 14 percent of small employers had the cash reserves to continue normal operations if faced with a two-month revenue loss. Given that small businesses employ nearly half of all private sector workers, their struggles directly impact both the well-being of workers and the broader economy.

To understand how the crisis is playing out for small business owners in Texas, the Dallas Fed spoke with agencies and associations that work directly with them during the April 2 to April 8 period. This mix of organizations, called small business intermediaries (SBIs), includes Small Business Administration (SBA)-funded centers, local governments, chambers of commerce, microlenders and nonprofit membership associations from across the state. These SBIs exist to support business owners in planning, marketing, training, networking, hiring and accessing capital. Although the SBIs say each owner’s experience is unique in many ways, clear themes emerged from these conversations.

The need for funds and information

According to the SBIs, the two greatest needs for small businesses are working capital and information. Across the board, they spoke of getting money into the hands of owners as quickly as possible as the best solution to keep firms afloat.

“The No. 1 ask is financial assistance,” said Marsha Murray, director for the Office of Business Opportunity at the city of Houston. She said that a citywide survey of Houston businesses revealed that 93 percent suffered significant revenue loss during the first few weeks of this crisis. A city of Dallas survey showed similar findings: 90 percent of respondents anticipated needing financial help as a result of the crisis, and the most common funding requests were for payroll or rent.

A variety of local and federal resources have been made available in recent weeks, including the SBA’s Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP), which just secured its second round of funding. Texas Gov. Greg Abbott also released phase I of a multiphase plan to lift restrictions on certain businesses, which could benefit small businesses if they can safely operate and generate revenue while meeting occupancy restrictions. However, many businesses do not have the clarity to know how to proceed.

Navigating the options is a critical concern identified by SBI interviewees, most of whom were interviewed prior to the announcement of the second round of federal funding.

Raquel Valdez Sanchez, chief operating officer of Business and Community Lenders of Texas, says that while the small firms face different challenges, “regardless of tenure or size, they have difficulty understanding the federal programming.” Federal programs include the EIDL and PPP as well as SBA Express Bridge Loans.

“I have a tremendous amount of faith in small business owners.”

Her comment mirrors sentiments from others, including Mary Peters, associate director of operations for the South-West Texas Border Small Business Development Center (SBDC) Network. “The greatest need is information in an environment that is constantly evolving,” she said. “Rules and regulations are developing, and businesses want to understand how to complete applications from multiple sources.” She explains that SBDC advisers are helping small firms understand the landscape of financing options and suggests that firms stay abreast of what their local communities are offering.

Many municipalities are creating their own emergency loan funds, administered through associations or microlenders. One microlender, LiftFund, recently partnered with Goldman Sachs, Gov. Abbott’s office and other CDFIs to administer a $50 million forgivable loan package for Texas small businesses. These additional resources can be critical for local firms.

Even when factions of local government cannot offer financial resources, they act as a clearinghouse for information on navigating the crisis. The cities of Houston and Dallas have each helped digitally streamline information for constituents, while the city of Lubbock partnered with other sectors to offer the Hub City Small Business Triage hotline that firms can call for assistance.

Paycheck Protection Program: pluses and minuses

When asked specifically about the $350 billion PPP, SBIs were largely supportive, but cautious. They agree that the PPP loans, particularly the forgivable components, will be an important form of relief. But many also had concerns. One critique is the information lag to small firms, which may have trouble understanding how to apply for the loans or how long they must wait to receive funds. Another concern involves the delivery of funds through banks: Banks often prioritize existing clients with lines of credit in the application process. Yet, prior to this crisis, just 44 percent of small firms had used banks as a source of funding within the prior five years.

As Edwin Cruz, certification and sourcing manager at the Dallas/Fort Worth Minority Supplier Development Council, explains, “Often, banks want to do business with people who already have loans with them. If a business doesn’t already have a relationship, they’re going to struggle.” This can especially hurt minority-owned firms, which were more likely to have challenges accessing credit before the COVID-19 crisis.

From their perspective, banks point to requirements they must follow—in particular, the anti-money-laundering rule that makes it more burdensome to lend to new customers. Some banks also cite capacity and liquidity concerns. In response, the Federal Reserve launched the PPP Liquidity Facility to provide liquidity to participating banks.

Finally, SBIs point out that demand far outweighed supply, at least for the first round of this program. “The PPP sounds great,” Lupe Mares of LiftFund El Paso said after the first round was announced. “But the whole nation is applying.” The second round of funding appears to be lasting longer than the first, with average loan sizes much smaller than in the first round. The PPP received an additional $310 billion of funding on April 23. As of May 5, there was an estimated $135 billion still available.

An emotional experience

The COVID-19 economic crisis came as a shock to small business owners, according to the SBIs. The intermediaries likened taking calls from devastated business owners to “grief counseling.” Many of the callers pointed to laying off staff as the biggest emotional challenge.

“Their employees are like family members,” said Annie Spilman, Texas state director of the National Federation of Independent Business. “The peak of sadness I have heard is when they describe letting their people go. You can hear their voices shake. It’s really hard.” She added that firm owners are worrying that employees who have been let go will be unable to wait to be rehired and will look for jobs with larger companies, leaving their firms with workforce gaps when it’s time to reopen.

“By nature, business owners are resilient and creative.”

Although small businesses are reeling, there is also hope. Spilman said she saw palpable relief in the community after the announcement of the first round of the Paycheck Protection Program, which offers the potential of low-interest forgivable loans for small firms to pay payroll and mortgage expenses. “For the first time, they felt they could breathe a sigh of relief,” she said.

However, due to high demand for the program, banks that administered the first round of PPP loans hit capacity very quickly. Small business owners started feeling hopeless again “when they heard banks were out of money, Spilman said: “It’s been an emotional roller coaster.”

Creativity, resilience and the ‘new normal’

“By nature, business owners are resilient and creative,” said Murray, of the city of Houston’s Office of Business Opportunity. Multiple manufacturers, previously producers of athletic wear, plastic products or flags, have pivoted to making masks and other personal protective equipment. Food suppliers and restaurants have partnered with grocers or started delivering to local hospitals and food banks. Across the spectrum, many small firms have taken their businesses virtual.

“Those who survive and thrive will pivot their business model to incorporate online platforms,” said Peters, of the South-West Texas Border Small Business Development Center.

SBIs, too, have reinvented themselves. They have begun conducting their programming virtually or altering services to meet present-day needs. Longer term, SBIs are looking to modify more of their programs to address resilience. “With small-business financial coaching, we are focusing on continuity plans, being prepared and change management,” said Valdez Sanchez, the Business and Community Lenders of Texas COO, adding that the center will “continue to push this narrative even when things are back on track.”

“COVID revealed how much we can do virtually.”

City governments feel the change as well. “COVID revealed how much we can do virtually,” said Murray. “We spend money mailing things that we may not need to mail anymore. This situation has shown the opportunity to leverage technology more to continue to be an effective organization.”

The future for small businesses remains unclear because the economic impact of COVID-19 is still unfolding. As more resources become available, firms look to SBIs to help navigate the options. For those businesses that survive, emergency savings and contingency planning will become a priority in the coming years.

Despite the obstacles, SBIs remain inspired by the firms they serve. “I have a tremendous amount of faith in small business owners,” said Mark Langford, director of the Dallas SBDC Network. “Right now, they just need to be given a real chance.”


Emily Ryder Perlmeter

Emily Ryder Perlmeter

Perlmeter is a community development advisor at the Federal Reserve Bank of Dallas.

The views expressed here are those of the author and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. The information provided does not constitute an endorsement of any organization or program.

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