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Small Businesses Currently Staving Off “Debt Apocalypse”

  • The share of small businesses that are behind on their payments is not substantially higher than pre-pandemic levels, according to a recent report
  • PPP loans, forbearance, and expense reductions have helped businesses stay afloat
  • Report cautions that debt concerns could remain if steps taken in response to the COVID-19 pandemic constrain future growth

Summary by Dirk Langeveld

A feared “debt apocalypse” among small businesses has so far failed to materialize, according to a recent analysis of how well these companies have been keeping up with their payments. However, the report also warned that steps companies took in response to the COVID-19 pandemic could inhibit future growth.

The pandemic resulted in major revenue losses for many businesses due to shutdown orders, business restrictions, and diminished consumer traffic. The situation also raised concerns that businesses would be unable to keep up with debts due to revenue shortfalls and challenges in acquiring financing.

The Urban Institute, a nonpartisan think tank, analyzed Dun & Bradstreet data for small businesses in several cities across the United States and found that 18.3 percent were past due on business payments in January. This was up only marginally from a pre-pandemic report in February 2020 showing that 17.7 percent of small businesses were behind on their payments. Debt situations were slightly more common in New York and San Francisco with increases of 2.5 points and 4.3 points, respectively, compared to pre-pandemic data.

The report said small businesses have been able to keep current on payments and maintain strong credit ratings due to forbearance or other leniency offered by lenders and landlords, cuts to expenses and payrolls, and federal aid including forgivable loans offered through the Paycheck Protection Program. A JPMorgan Chase Institute report found that PPP loans had a significant effect in boosting companies’ cash balances, which were up 41 percent in August and remained up by 35 percent in September.

A new round of PPP loans is currently underway, and is likely to be extended through May after the House of Representatives overwhelmingly supported a bill to push back the deadline for applications. Small businesses have also expressed more optimism about the potential effects of COVID-19 vaccine distribution.

The Urban Institute report cautions that small businesses could still face elevated debt concerns in the coming months as lenders, landlords, and others become less likely to offer leniency. Steps taken during the pandemic such as downsizing staff or moving to a smaller commercial space could also constrain companies’ growth potential, limiting their revenues and making it harder to keep current on payments.

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