Small business confidence crashes, revealing more Main Street carnage may lie ahead

Small business owners across the U.S. are in an impossible situation: They fear that their firms may go under in a matter of months if state lockdowns caused by Covid-19 don’t end, and yet many also are worried that reopening business too soon may result in the same fate.

The Main Street bind is borne out in a dramatic new survey finding: Small business confidence has crashed, from a reading of 64 in the first quarter to 48 in the second quarter 2020. It’s the first time since CNBC started its Small Business Survey over three years ago that Main Street sentiment has been net negative. 

The threat is existential. Thirteen percent of small business owners say they can survive less than a month in an extended period of lockdown; 31% say their business would last “a few months or less.” Just a little over one-third (35%) say their business could survive more than a year. 

While the confidence drop is not surprising, it should not be overlooked, said Molly Day, vice president of public affairs for the National Small Business Association. Her group’s recent survey data also finds an all-time low in confidence has been hit, and it is now well below where it bottomed during the Great Recession.

“This is a unique kind of hurt,” Day said. 

“The totality of the plunge in expectations from just a dozen weeks ago to now is staggering, with small business owners representing every industry, firm size and political affiliation all reporting the same reversal in sentiment,” said Jon Cohen, SurveyMonkey chief research officer.

The CNBC|SurveyMonkey Small Business Survey for Q2 2020 was conducted from April 21–27 among 2,200 small business owners across the U.S. Ninety percent of all respondents were business owners with 20 employees or less. Only 2% had over 100 employees on their payroll. These individuals run businesses across a broad spectrum of industries — from food service and restaurants, finance and real estate to transportation and retail.

The survey reveals the extent to which that small business boom has not just been stopped by the coronavirus but may forever be changed by it: 72% of all small business owners say the outbreak is likely to have permanent effects on the way they run their business.

“Most small businesses were in rapid growth mode in January. … 2019 was roaring for lots of small businesses,” said Marilyn Landis, who runs small business consulting firm Basic Business Concepts and spent decades working as a small business lender for commercial banks.

Now the survey finds 62% of small business owners saying demand for their products and services has decreased in the past two months, with 42% saying demand decreased “a lot.”

“They are not quite sure if their customers can pay, or what customers will look like, what buying habits will come out of this, if their product will have the same appeal,” Landis said.

For some the permanent change could be bankruptcy. One of the biggest failings of the federal Payroll Protection Program, say small business experts, is that it has exacerbated a loss of confidence among many entrepreneurs on Main Street rather than help boost it.

Only 45% of small business owners applied for these loans, according to the CNBC survey, and the survey echoes the data showing that larger firms had the most success in being approved and receiving funds. 

“The PPP, while well intentioned, has not produced a sense of certainty,” said Amanda Ballantyne, executive director of the Main Street Alliance, a grassroots policy organization that represents over 30,000 small businesses.

The loan program has saved many jobs, and there are business owners who received funds within a matter of days without any problem, but even among those who have had success with the PPP, there is a sense that it cannot be the difference-maker in their own business confidence. 

Aaron Seyedian, founder of home-cleaning company Well-Paid Maids in the Washington D.C area, received a PPP loan through online lender Kabbage after giving up on attempts through his traditional bank, Capital One. But he said the $78,000 in loan money to help pay employees doesn’t increase his business confidence. “It’s like having enough money to pay the rent for one month after losing a job. It’s just so temporary,” Seyedian said.

On Sunday National Economic Council Director Larry Kudlow said the White House has made no decision on providing further funding for the emergency loan program for small businesses impacted by the coronavirus pandemic, but said a third round might be necessary. 

“I think we will see waves of bankruptcies that parallel waves of unemployment … and then more unemployment when state budgets constrict and then supply chain disruptions,” Ballantyne said.

Small business bankruptcies in the next month or two will be a result of an owner’s calculation that they are better off in bankruptcy than in structural debt.

“The loss of small business will have a multiplier effect. We will not just burn through the vulnerable businesses and then be fine,” Ballantyne said. “There will be a second wave of small businesses burned, unless we get better policy in place, there will be another wave, and it will be more painful and impact people who thought they were recession-proof.”

Radically reduced expenses will be required for small businesses that do make it past the next few months. “Getting through the next year, it’s not business like it was … it’s a skeleton,” she said.

Revenue has decreased in the past two months for 69% of firms, according to the CNBC|SurveyMonkey Small Business Survey, with 49% indicating that sales had decreased “a lot.” Eighteen percent of small businesses say they have been able to maintain the same level of sales; only 11% indicate a recent revenue increase.

More troubling, though, is where these businesses see revenue going from here: Only 38% expect revenue to increase over the next 12 months, according to the survey, with almost an equal percentage (37%) expecting a decrease. Twenty-three percent expect revenue to remain at the same level. 

Sarah Piepenburg, owner of specialty food shop Vinaigrette in Minneapolis, which sells olive oils and vinegars in its retail location and also has an order and restaurant businesses, said being in specialty grocery allowed her to remain open when other businesses were forced shut. Initially, there was excitement around support from customers, but even with large orders placed earlier during the crisis, it has not been enough to stop a massive drop in sales. From January to April, Vinaigrette’s business has declined by 65%, and that leaves Piepenburg scared about what will occur over the next three to six months.

The economic reopening from state to state remains a source of uncertainty rather than confidence for many small business owners.

Landis, whose business is based in Pennsylvania, said businesses in neighboring states fear that staggered reopenings could create competitive imbalances in hiring, supply chains and market share. Ohio is already reopening in stages, and sooner than Pennsylvania. That means a Pennsylvania firm could see workers poached and supply contracts as well as market share permanently taken away. 

“The unknowns in the rolling reopening is really hard, and really taking a toll on confidence,” Landis said.

Small business owners also fear that bigger companies will be in a better position to take advantage of the reopenings. “There are big warning signs about consolidation,” Ballantyne said.

This leads business owners to worry about exacerbating a second wave of Covid-19 cases, reopening under conditions which will inevitably include both high-risk workers and customers.

“I am pessimistic in terms of economic activity getting back to anything approaching normal,” Seyedian said. “We’re still clearly in the first wave.”

The thought of bringing back workers by June 30, a requirement of the PPP for loan forgiveness — though many small business advocates say Congress will need to considering revising that requirement — only to be be forced into laying them off again at a later date, is going to hold small business owners’ back from greater confidence.

“If you don’t have people who want to buy you don’t need employees,” Day said, adding, “The June 30 date seems optimistic.”

Small business experts caution that reopening is fraught for small business owners because there are many costs associated with it, including advertising, marketing, hiring and ramping up buying of supplies, and it is difficult to make investments in this environment. Then if there is a second wave of cases, there will be costs associated with that, including another round of layoffs.

Reopening too soon may also set up a standard where employers willing to gamble on employee and customer health have a first-mover advantage.

Seyedian, who voluntarily closed his business, even though cleaning services are deemed essential, to protect his own employees — and was paying their health care premiums from his own savings before his PPP loan came through — said competitors in his local market remained open and are “gobbling up” market share now. 

“This job is not safe and I can’t send them back out. … I know them and I cannot say go gamble with your life. This job is not worth dying for,” Seyedian said.

“I have no interest in opening and closing again,” Seyedian said. “There are costs, almost similar to like when we started as a business. “To be in operation for a few months just sets up another costly reopening,” he said.

Piepenburg’s Minneapolis shop Vinaigrette makes a third of its annual revenue in the holiday period between November and January, and now has to contemplate the risk of one-third of annual revenue being lost.

“Every measure of business health or optimism took a nosedive this quarter, and it’s hard to imagine as swift an ascent given the uncertain and choppy re-opening ahead,. The rise is surely to be uneven as well,” SurveyMonkey’s Cohen said.

Only 15% of small businesses expect staff to increase over the next 12 months, according to the CNBC survey, with 63% expecting their staffing level to remain the same, and 21% forecasting a decrease.

Fifty-two percent of the businesses that have laid off or furloughed employees expect to hire all of them back once things return to “normal.” Another 37% say they will hire some of them back, while 9% say the jobs are lost forever.

“There’s a general understanding that the economy won’t flip on like a light switch,” Day said. “The consumer will be scared and schools closed,” she said, and the latter, alongside the shutdown of many day care operations, will make it difficult for many workers to return to their jobs.

“It’s gotten progressively slower, but none of our bills go away,” said Vinaigrette’s Piepenburg. “The landlord still expects payment even if they waive the late fee and are willing to make payment arrangements,” which she said has been the case so far.

She has her “fingers crossed’ about getting a Payroll Protection Program loan from Bremer Bank, a smaller local financial institution she applied through after she gave up on her existing bank, Wells Fargo, which told her multiple times she did not have enough employees, at least 10, to have her application reviewed. “We’re looking for $25,000,” she said.

“As bad as things have gotten, at least when I have a $20 day, with that I can feed my family. I’m not going to pay my mortgage, but we can eat,” Piepenburg said. ”We never intended to be millionaires. We just wanted to be supported, and the business has supported us for 10 years. I have an employee who has been with us for 10 years, and his daughter is working for me now too, so they are supported by our business.”

Piepenburg is hopeful that individuals will see the importance of supporting their local small businesses, but finds it hard to be confident as the online retail giants dominate during the outbreak.

“You can get everything from Amazon, Target and Walmart, and that’s what is happening,” she said. ”I could be the business owner who has to go to work at Target to support my family.”

She said her business’s courier, which it has been using for a decade, just “pushed us to the back of the line” after signing a $3 million contract with Amazon.

Amazon told shareholders last week it would invest its expected $4 billion second-quarter profit in coronavirus-related efforts, including buying personal protective equipment for workers and building its own testing capability.

Even if Vinaigrette were to have a big sales increase, the broader situation has changed dramatically in a short period of time at every step of the supply chain. In addition to her courier being co-opted by Amazon, Piepenburg said her bottling supplier is running at only 50% capacity, and prices for bottles, which come from China, have tripled from the pre-coronavirus period. She can’t assume she will even have the cash to lay out for bottling orders when the doors come back open. 

But even desperate for a sales increase, the Vinaigrette owner, who lost her brother-in-law to Covid-19 three weeks ago, cannot imagine reopening.

“We know the reality, and the idea I could get this from a customer or give it to them is terrifying,” Piepenburg said. “People come into my store to taste all kinds of oils and vinegars. We have thousands of touch points. We already have a higher level of cleanliness we adhere to for food-safety reasons.”

For Seyedian’s Well-Paid Maids, the future is similarly difficult to assess in ways he never before would have had to consider. Cleaning is an intimate job that requires having employees go into others’ homes where both employees and patrons could easily come into contact with the virus. In a post Covid-19 world, with risk of novel virus contamination part of a new normal, people may be more likely to pay for cleaning services, or more likely to be wary of letting anyone into their homes.

When Seyedian’s company was just getting off the ground, it didn’t have the funds to buy a fleet of vehicles, so he used rideshare services like Uber and Lyft and reimbursed employees. It worked so well, rideshare is still the model today, but that may not be possible if it means putting employees at risk in those cars.

Seyedian hopes that clients remember that his firm shut down to protect its own employees, but in a deep recession, cleaning becomes a luxury service and that does not necessarily favor a company charging top market prices. Well-Paid Maids’ business model was built using a living-wage calculator developed by MIT, which incorporates rent and food and other costs, but in a deep recession, the gap between a living wage and minimum wage could diminish, and “then our differentiation in the client’s mind evaporates,” he said.

The National Small Business Association’s Day stressed that lack of confidence now is not total loss of confidence in the future. “They fear we will never come back, but while confidence is down and they are feeling crummy now, there still is an inherent belief in the future and what they can do.”

Even before the Covid-19 shutdown, Seyedian had thought of expanding his living wage business model into home health care, where wages are terrible. “But could I do that during a pandemic? Not really. I don’t see many good avenues to pivot,” he said. “But I am hopeful things can return to some semblance of normalcy and I am willing to wait.”

Vinaigrette’s Piepenburg said if the business had the next three months of rent, bills and payroll covered that would free her up to think about restructuring the business, possibly pivoting to another model without a retail store, but that is not a luxury she has in “worry time,” and she can’t think about taking out a loan even with the SBA offering special economic injury loans, when she does not know what will happen in three months. “How can I take on debt no matter how great the interest rate is?” she said.

The CNBC small business survey found that 71% of small businesses said they did not apply for an SBA economic injury loan. Sixteen percent who did apply for economic injury loan and are still waiting for response, according to the survey, and only 2% applied and were approved and received funds.

“Being a small business owner is tough, but we’ve always made it through,” Piepenburg said. “We have had cash flow issues over the course of 10 years. … We will white knuckle until the end. We worked too hard for this to just let it go, and I just don’t know. I still have sales today, but if I have a few days with $20 sales, you know, the doubt starts creeping back in.”

“I’m scared,” Piepenburg added. “If we don’t survive, it will change the neighborhood too. I do have a long-term kind of fear of what Main Street will look like.”

The CNBC|SurveyMonkey Small Business Survey for Q2 2020 was conducted across 2,200 small business owners between April 21-April 27. The survey is conducted quarterly using SurveyMonkey‘s online platform and based on its survey methodology. The Small Business Confidence Index is a 100-point score based on responses to eight key questions. A reading of zero indicates no confidence, and a score of 100 indicates perfect confidence. The modeled error estimate for this survey is plus or minus 2.5 percentage points.