As the pandemic restrictions press into its eighth month, small businesses are feeling the squeeze the most. There has been a 22% reduction in business activity nationwide (NBER), that’s 3.3 million inactive American business, some of which have closed permanently due to COVID-19 restrictions and the economic fallout that followed. And according to estimates from the weekly U.S. Census Small Business Pulse Survey, roughly 50% of businesses report experiencing significant negative impacts from the COVID-19 pandemic and only 15% – 20% of businesses have enough cash on hand to cover 3 months of operations. As a franchise business owner, it’s important to get a clear birds-eye-view of what is happening right now and how this situation of pandemic restrictions may develop in the coming months.
Cash Infusion Keeping Workers Afloat
Up until now, large cash infusions in the form of extended unemployment payments, low-interest business loans such as PPP and EIDL have made it possible for workers and active small businesses to operate close to normalcy, especially if they have a rainy day fund on hand. But at some point, this financial assistance may be significantly reduced or stopped completely. Businesses may be forced to lay off employees and workers may begin tightening their spending, especially on services and products deemed discretionary.
Consolidation of Economic Power
As the economic consequences of this pandemic become more apparent, franchise business owners must be prepared for what might be described as a consolidation of economic power. Small businesses that cannot adapt and continue to operate with a comparable level of quality experience for customers may find themselves squeezed out by larger operators who can weather tough times much longer because of their access to large cash reserves and credit lines. For the small franchise business owner, it’s imperative to develop and implement strategies that allow you to operate at an optimal level even as the pandemic continues.
Some examples of adaptation helping some franchisees thrive include:
- Offering easy online and (masked/distanced) face-to-face orders.
- Accepting only credit card payments and installing equipment that makes ordering seamless.
- Using self-checkout systems to minimize health risks to employees.
- Investing in safety and hygiene protocols and equipment.
- Contactless delivery.
And some franchisors are offering pertinent and localized data about the markets in which they operate so that franchisees can implement appropriate strategies to stay in business. Ask your franchisor about these educational opportunities.
Some Businesses Not Returning
It’s become clear that a significant number of small businesses will not survive this pandemic. So far, we’ve seen a 26% increase in business bankruptcy filings in 2020. This has included big names such as Chuck E. Cheese, Hertz, and J.C. Penny but that number also includes many small businesses that have employed dozens or hundreds of people. This has mostly impacted the retail and restaurant business, but there will be a domino effect with some sectors also feeling the impact as fewer people purchase products and services because they have become more cautious with spending.
Trade Credit Insurers Wary
Small suppliers are finding it more difficult to secure trade credit insurance. In a recent article in the Insurance Journal, a family operated sock maker is forced to decide what it will do with $12 million of merchandise orders as they are unable to secure insurance. This is becoming a nationwide issue as some trade credit insurers refuse to insure smaller businesses. If this persists it may become more difficult to get certain supplies as sellers must become more discerning about who they sell to, and some of those suppliers may close shop completely.
Opportunity Still Strong
This pandemic has shaken the very foundations of the economy but many small businesses are still thriving. Even as consumers reduce spending in some areas, there are other areas where demand is growing. People still need essential goods and services but they may prefer that they are delivered or that the service come to them. For franchise business owners facing pandemic restrictions, it’s important to identify how your customer’s needs have changed and how your business can help fulfill those needs better than your competitors and in a way that is profitable.
Pandemic restrictions are squeezing franchise business owners. If you have any questions, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 724-0846 to discuss your situation.