WorldExecutivesDigest.com | by Angelica CG, Correspondent | What Small Business Enterprises Should Do to Survive the Effects of the Pandemic | As COVID-19 moves from a health crisis to an economic crisis, we are trying to anticipate how small businesses in our country will weather this storm and where we need to focus our efforts. The epidemic COVID-19 is hurting enterprises globally especially in the Philippines’ local market scene. And the socioeconomic pressures are particularly severe in developing countries, where resources are limited and economic activity is weak, and small businesses frequently are the backbone of growth.
The impact of the pandemic will be more damaging to small businesses since large firms are more resilient than SMEs in times of recession. Small businesses have been scaling down and temporarily closing as consumers stay home to stem the spread of the highly infectious virus, COVID-19. Without incoming cash, many small businesses need to cut staff or shut down for good since many of these businesses, their daily cash flow is their lifeblood. The pandemic threatens to throw economies into recession and push tens of millions of households back or even deeper into poverty.
ITC or digital transformation works with a startup business, small, and medium-sized enterprises (MSMEs), primarily in the developing world. The typical small business we work with employs between 10-20 workers, is close to is already export-ready, and wants to grow internationally. These MSMEs represent 60-70% of jobs in developing countries and around half of the economic activity.
In the Philippines, the enhanced community quarantine is done as a response to mitigate the spread of the deadly virus that has brought economic activity to stand still. Although policymakers’ immediate priority is to resolve the public health crisis, it is also essential to construct the right set of policies to pave the road to recovery and avert possible socio-economic turmoil. SMEs play a vital role in the Philippine economy, accounting for over 99% of all firms and almost two-thirds of employment. In the Philippines, startup businesses and small enterprises face a plethora of challenges, such as credit constraints, especially during periods of economic downturn. According to a recent study that used data from 480 SMEs in Metro Manila and CALABARZON (Cavite, Laguna, Batangas, Rizal, and Quezon) estimated that there are over 40% of SMEs might lack access to finance informal credit markets. According to digital transformation expert Philippines Homer Nievera, “Regardless of the presence of a crisis, a considerable percentage of SMEs may lack the necessary funds to pay their workers and respond to emergencies, more so adapting to any digital transformation work to make them more competitive.”
In 2018, the Rizalino S. Navarro Policy Center for Competitiveness of the Asian Institute of Management surveyed 114 SMEs to understand the purpose of loans for the respective groups. Results show that over 41% of SMEs applied for a loan to respond to emergencies. In addition to that, there are over 83% applied for a loan to fund day-to-day operations, which includes wage payments, and this survey was conducted pre-crisis. The financing needs of SMEs are even greater during an economic downturn. If the enhanced community quarantine persists and economic activity remains stifled, it would be very challenging for some small businesses without adequate access to financing to stay afloat. The International Labor Organization recommends that for the survival of the COVID-19 crisis, SMEs need better access to finance and working capital to help their short-term cash flow. This could come in the form of grants, affordable loans, or temporary tax exemptions.
It is still a bit early to estimate how deeply the pandemic has affected our core constituency. Small businesses are already or will soon face a liquidity crisis, which could wipe out whole segments of the economy. In the next few months, they will face a range of challenges that will depend, to a large degree, on how policymakers react to the crisis today. Some sectors will suffer more than others, with the travel, accommodation and food services sectors being hit particularly hard. Businesses themselves are likely to travel through a four-phase process: shutdown, supply-chain disruption, demand depression, and recovery. The severity and disruption caused by each stage of the process will depend on the policies adopted by governments. We are all aware of the severity of the impact; what we do not know is how long this crisis will last.
Quick recovery of these businesses can mitigate the direst consequences. But beyond the immediate recovery, we need to ensure the medium to the long-term survival of small businesses by removing impediments to their growth. It’s important that small businesses across any country, particularly the Philippines weather the pandemic. They-we-are vital to the nation’s economy. But how are we going to put things together in such an incredible crisis? Here are some ways entrepreneurs can protect themselves in times of the pandemic coronavirus.
Find new opportunities to grow
Like organisms that often respond to upheaval by leveraging opportunities for growth, the business ecosystem is also changing significantly. That means big adjustments for SMEs, but also opportunities for growth – if entrepreneurs are willing to move outside their usual boundaries and think more broadly. In today’s crisis, several restaurants are emphasizing delivery, food manufacturers are focusing on most in-demand core products, talents are offering freelance jobs online, and other small players expand their business through hiring freelance jobs online. Small businesses, might grow by using existing infrastructure in new ways.
Shut down and strengthen
Even when some organisms appear to be devastated by natural disruptions, they have systems in place that let them thrive again and are similar to entrepreneurs that need to remember that they have a strong root system that they have built over the years, even if they don’t realize it. As individuals, they have knowledge and skills, trained employees, and regular customers. Businesses with money to spare in this crisis should consider investments to preserve those core strengths as much as possible and make it easier for the company to spring back to life once the crisis has passed. That might mean investing in employee training to boost morale and efficiency, or doing volunteer work in their communities to build loyalty.
It is also important for entrepreneurs to keep their roots in mind if they’re forced to close permanently. They aren’t going to forget what they know because their business closed – they may even end up wiser and more prepared to launch another business.
Look for leftovers
Crisis offers the opportunity to do a form of bargain hunting – scavenging. Crafted small business ideas have many opportunities right now, such as tapping into skilled workers who have suddenly become unemployed, negotiating more generous terms to get into an ideal space, or looking for better prices with suppliers.
Launching new business ideas
For individuals with entrepreneurial small business ideas, a crisis could be the spark they need to take a chance for their business ideas to launch that they wouldn’t have taken when jobs or customers were plentiful. In the Great Depression, many small groceries opened in homes or abandoned storefronts, as there were very few jobs available. Individuals were able to start their business by buying a small stock of perishable goods, and lived off the unsold inventory if needed.
“Now is the perfect moment to set-up your business for a series of slingshot strategies catapult you ahead of the pack,” Nievera reveals.
He noted that “In the aftermath of the Asian financial crisis in 1997, there was a dotcom boom until 9/11. After the 2007 sub-prime crisis and the 2008 global banking crisis, there was boom in technology investments that lasted for about 10 years.”
With a decrease in revenue, businesses are running short of working capital. At the same time, banks and other financial institutions are reluctant to lend, in part because they predict some businesses will not survive and the loans may never be repaid. Nonetheless, lending can be encouraged in several ways. For private banks, more funds can be provided by the central bank for on-lending to businesses. The government can also encourage the delay of payments on existing credit. Such a mid-tenure grace period means that interest and principal can be deferred for 3 to 6 months, taking some pressure off businesses. This measure will no doubt impinge on the liquidity of banks. They can be encouraged through extra liquidity provided to them, moral suasion, and the idea that delayed payment is better than no payment should the business collapse. Tax breaks or deferments for banks will also ease liquidity constraints.
Reduce business transfers to government
Payments remitted by businesses can be deferred by governments. This includes taxes on income, property taxes, excise duties, employers’ contributions to social security programs, and others. This will help to conserve needed operating capital in the short run.
The government along with chambers of commerce should encourage enterprises to maintain employment, where possible. Certainly, quarantine restrictions and government-mandated lockdowns will leave businesses shuttered and people unable to get to work. Where businesses can remain in operation, firms might reduce work hours but still allow workers to earn some income. For example, if the enterprise reduces operations by 50% it would be better to reduce the work hours of all workers rather than laying off half of them and keeping the others all full hours.
Some of these measures will be costly for the government and lenders. The number of nonperforming loans, even with a grace period, will rise. Banks will become more highly leveraged. Payouts on credit guarantees will increase and the credit guarantee fund likely needs replenishment. Government revenues, from income and other transfers, will tighten. This is to be expected as the government has a role to play in the intertemporal reallocation of resources to cushion the effects of an economic crisis. The idea is to reduce the severity of the slowdown on households and businesses during the pandemic by shifting some of the support costs to the post-pandemic period. Businesses, banks, and governments will be better able to bear those costs as the economy revives. For its part, the central bank can allow some regulatory forbearance in terms of loan classification.
It is important for an economy that businesses survive during a temporary crisis. When businesses collapse, assets are sold off, and workers are let go. An entity that generates output and employment is lost. The loss of value has a scarring effect on the economy as there is an element of irreversibility in the loss of business investments, and liquidations are costly to the broader economy. It is also costly to reconstitute businesses after the crisis, not only for firms themselves but also for their employees. Workers face costs in finding jobs and may need to be retrained. Avoiding bankruptcy will help recovery and give it a better chance to be v-shaped instead of u- or bathtub-shaped.
Evidence from either local or global financial crisis showed that business support can be a valuable investment. While costly during the crisis, it allows many firms to continue operating and then fully reboot once the crisis is over. Equally important is the fact that business support measures are valid instruments of social protection. They can protect workers from the loss of employment and the coincident loss of income to support their families.
There is little doubt that many workers will be displaced as a result of the slowdown and many businesses will collapse. But support to businesses gives some of them a fighting chance to weather the storm.
The greatest leverage for small businesses will be the use of technologies as basic as a website. Maximizing whatever resources they have today, they have a better chance of catapulting them to triumph despite the crisis.
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