The deepening economic divide: How the pandemic has hurt small businesses | Business
SEATTLE — In a big gravel lot near South Seattle’s South Park Bridge, a handful of small businesses might get a second chance to survive the pandemic.
Rocio Elizabeth Arriaga Briones, president of the South Park Merchants Association (SPMA), hopes to turn the 0.8-acre parcel into a temporary commercial plaza, built from cargo containers, for local small businesses that have been dislocated or shut down by the pandemic.
The plaza is still only a plan on Arriaga Briones’s laptop. Among other things, she needs permission from the Seattle Parks Department, which owns the land. But if approved, it could be a welcome break for small business owners after months of setbacks. Many “have lost everything,” Arriaga Briones says. “They need a new start.”
Arriaga Briones could be speaking for many of the more than 600,000 small business owners in Washington state.
Although businesses of all sizes have struggled under COVID-19, the pandemic has been especially hard for smaller firms, especially those with just a few employees and modest revenues.
Many operate on the thinnest of profit margins even in normal times, which left them far more exposed to pandemic-related disruptions, says Jeffrey Shulman, a professor of marketing at the University of Washington Foster School of Business who has surveyed small Seattle-area businesses. When it comes to business size, Shulman says, COVID-19 is “creating haves and have-nots.”
Those disparities often were even more pronounced among smaller companies in communities of color, where owners and workers also had to cope with those communities’ higher incidence of COVID-19 cases.
In effect, COVID-19 has put up a “medical layer” that minority business owners often must “get through in order to even run or participate in a business,” says William Bradford, professor emeritus of finance at the UW Foster School and an expert in minority-owned businesses.
Recessions are extra hard on smaller companies. With small cash reserves — often, just the owners’ personal savings — and difficulties getting bank financing, they can be devastated by even a few months of low or no revenue, says Laura Clise, a Seattle-based entrepreneur whose company, Intentionalist, connects consumers to small businesses in underserved communities.
Indeed, smaller companies, especially those that are family-, immigrant- or minority-owned, often are already “living hand to mouth, and are dependent on consistent streams of revenue,” which left them vulnerable to even a brief dip in sales, she says.
COVID-19 heightened those disadvantages. Modest cash reserves, for example, also made it hard to pivot to other products or markets to replace revenue lost due to the pandemic.
When gyms had to shut down last spring, Rainier Health & Fitness, a South Seattle nonprofit that caters to low-income residents and communities of color, had to invest “a lot of manpower and extra expenses” to get gym classes online, says director Alicia Haskins. “What it felt like was starting a whole new gym,” adds Haskins. And having to do that without a big cash reserve “was difficult for us.”
Further, because smaller companies frequently are narrowly focused on a single product or market, pandemic pivots often weren’t a realistic option.
Rebecca and Brian Grant, owners of the Twin Willow Gardens wedding venue in Snohomish, had few alternatives to generate income when COVID-19 crashed last year’s wedding season. Pandemic-related cancellations erased half their expected revenue for 2020 and have already taken a big bite out of 2021. “We were a year ahead and now we’re a year behind,” Rebecca says.
Likewise for Bellevue-based Spotless Cleaners, where proprietors Boon and Yang Seo had few options when most office workers began working from home last spring and largely stopped needing dry-cleaning. Even a year later, business is down nearly 60% compared to before the pandemic, says Boon. “Who knows about tomorrow?” she says.
Deeper still were the impacts for businesses tied to a single location. In dense commercial districts such as downtown Seattle, scores of restaurants and tourist shops lost most of their customers virtually overnight. “These businesses didn’t just see a downturn; they saw a complete disappearance of business,” says economist Debra Glassman, a professor of finance and business economics at the UW’s Foster School.
In fact, state tax records show that Washington’s smaller companies likely took a larger financial hit early in the pandemic than did their bigger counterparts or the state economy as a whole.
During the second quarter of 2020 — April, May and June — as businesses were absorbing the first wave of pandemic-related restrictions and consumer anxieties, the gross income (total revenue minus cost of goods sold) reported by all Washington firms fell 17.5% compared with the same period in 2019, according to the state Department of Revenue.
But for smaller firms — those with gross incomes of less than $250,000 in 2019 — the average decrease was 24.3%.
Policymakers tried to fill in these disparities with pandemic aid. The federal Paycheck Protection Program, for example, has channeled nearly $17 billion in forgivable loans to well over 10,000 small businesses in Washington alone since last spring.
Yet the program also illustrates the disadvantages smaller firms typically faced.
Where a large firm could’ve turned to its in-house financial expertise and strong banking relationships to manage the complicated PPP loan process, smaller ones typically don’t have those resources, Glassman says.
“I used to have an accountant but we can’t afford that anymore,” says Joyce Poon, founder and CEO of Noir Lash Lounge, an eyelash parlor with four locations in Washington and California. That left Poon to handle the often-frustrating loan process while also struggling with a 75% revenue decline due to the pandemic and restrictions.
Where some smaller firms simply gave up on PPP loans, however, Poon says the $176,000 loan is crucial to keeping her business afloat until the economy fully reopens. “If we can just hang on just a little bit more, we’re going to be OK,” she says.
Similarly, even though many smaller brick-and-mortar retailers were desperate to move online to replace lost in-person sales, they often couldn’t afford professional technical expertise.
For Pamela Morales, owner of the Simple Life boutique in downtown Seattle, that meant either closing her doors or learning how to launch an online sales operation. “I did it myself,” says Morales, who had little technical expertise before the pandemic. But “it was almost three months of hard work.”
For many owners, these disadvantages ultimately proved too burdensome. Some of the small businesses that closed temporarily because of early COVID-19 restrictions didn’t have enough capital to reopen when restrictions lifted. Others refused to drain their remaining savings trying to reopen when they could only operate at partial indoor capacity.
“What gets lost on many folks is that just because you have the ability to legally be open, doesn’t mean that your business hasn’t been absolutely decimated,” Clise says.
Statistics on business closures and bankruptcies due to COVID-19 are incomplete. But according to Womply, a commerce platform that tracks small business credit card transactions, the number of open small businesses in Washington has declined by nearly 28% since January 2020.
COVID-19’s challenges have been even larger for businesses in communities of color, says the UW’s Bradford.
Black- and Latino-owned businesses, for example, historically have been less likely to get bank loans than have white-owned companies with similar credit scores, Bradford says. And minority business owners also have had lower credit scores than white-owned companies, he adds. So when COVID-19 struck, Black- and Latino-owned businesses were even less likely to have the reserves to weather losses or to pivot to new products, Bradford says.
Worse, they also likely had less access to business expertise that lenders typically provide to small-business borrowers. At the very moment that minority-owned small businesses needed expertise, “that layer of advice and oversight is [often] missing,” Bradford says.
Those disparities extend well beyond the areas of finance and expertise.
For example, because Black and Latino communities have suffered disproportionately high rates of COVID-19, workers from those communities may have been more likely to miss work, which can challenge employers with small staffs.
“If I have a lot of employees of color, there’s more likelihood that they will get sick or someone around them will get sick,” says Kristi Brown, a Black woman and owner of the restaurant Communion in Seattle’s Central District. “If I’m already a small business, when those people call out, I don’t have anybody to replace them.”
Similarly, because pandemic-related job losses fell heaviest in certain sectors — such as restaurants, construction and housekeeping — that employ large numbers of Black and Latino workers, companies that rely on those communities for customers often saw a big hit in sales.
At Chavez Auto Repair in Burien, business has fallen by 40% during the pandemic because a lot of customers, many of them Latino families, “haven’t been working,” says owner Jose Chavez.
He says it’s worse than during the Great Recession, when people still brought in their cars for repair and paid in installments. Now, Chavez says, many “are not coming in at all.”
Chavez has been able to hang on, in part by working longer hours. “Now that we’re going to have more daylight, I’ll work until 10 at night,” he says. But some smaller companies haven’t been able to cover rent or other basic expenses.
Burien Mayor Jimmy Matta and other local officials have scrambled to help struggling local merchants with measures such as expedited permits for outdoor restaurant seating.
But even as the broader economy steadily improves, Matta, who owns a small construction firm, worries that some policymakers may not realize that thousands of smaller companies still lack the resources to join the recovery.
“If we don’t get it right, we’re going to lose more businesses in our communities,” he says.
For now, at least, small businesses are getting a lot of attention.
A second round of federal PPP loans, including more than $4 billion already approved for Washington small businesses, is underway, and Congress just extended the application deadline to May 31. The new round reserves some funds for businesses in marginalized communities, and eligibility rules improve access for the very smallest companies and sole proprietors.
Starting this week, owners can also apply for a fourth round of Working Washington grants of up to $25,000 from the state commerce department.
Help is coming from other places, too. Universities and business organizations are sharing financial and other business advice with small businesses. Community groups are stepping up.
In South Park, for example, the SPMA has raised $20,000 for its temporary business plaza project and has a contractor ready to modify the cargo containers, says Arriaga Briones. She hopes to keep rents at $300 or less per month.
Although the SPMA still needs approval from the Parks Department (which is “preparing a detailed response to the SPMA proposal,” a department official says), demand for the venture is already high.
Many merchants “are ready to get into the space,” says Arriaga Briones, who had to temporarily close her own firm, a business consultancy, in August after some clients could no longer afford to pay.
Sometimes, help has come from unexpected quarters.
Haskins, at Rainier Health & Fitness, says a large number of gym members kept their memberships active even when the gym closed — and one member donated $10,000 “just to make sure our staff was taken care of.”
Another example comes from Carol Xie, a community engagement coordinator and case manager for a Seattle housing nonprofit whose family runs the Purple Dot Cafe in Seattle’s International District.
After learning that the restaurant was struggling last year, Xie, who is also a freelance photographer, put her social media skills to work. “I knew how to garner engagement and interest on social media platforms,” the 26-year-old says. “I was just thinking, ‘well, if I can get X amount of people interested in my personal life, let me try it for the restaurant.’”
The strategy paid off. Soon after Xie revamped the restaurant website and launched an Instagram account, her father, Jason Xie, reported that new customers came because they saw the restaurant on “in gram,” as he called it.
The strategy also helped Xie reconnect with her family’s business — a pattern she also has observed with some of her local peers.
Small business owners who are immigrants often prioritize the education and career goals of their children, who often aren’t so involved in the family business, Xie says.
The pandemic has changed that. Among Xie’s peers, many of “the kids that didn’t have much interaction or involvement with their families’ businesses are now stepping up to help them,” she says.
It’s “one of the silver linings out of this whole situation.”