Coronavirus crisis has hit small businesses particularly hard

• New analysis by KfW Research on crisis impact and resilience patterns
• Businesses with international activities and those with a weak credit rating have also been hit harder
• Innovative and digital SMEs are weathering the crisis more successfully

The coronavirus pandemic has left visible traces in many of the 3.8 million small and medium-sized enterprises in Germany. However, the crisis has not affected all SMEs equally, and its effects are more prominent in certain segments. KfW Research has explored crisis impact and crisis resilience patterns in a new study. According to the analysis, small businesses are more heavily impacted by the crisis than medium-sized SMEs, for example. Furthermore, the crisis is more likely to have hit companies that already had a low credit rating before the outbreak of the coronavirus pandemic, businesses with foreign operations and sectors that were not able to shield themselves from the impact of the pandemic as others were able to due to increased demand in their industries.

KfW Research used turnover losses and the development of the equity ratio during the coronavirus crisis as key indicators of the impact of the crisis on a company or of its resilience. The latter is a reflection of turnover losses that could not be offset but led to a depletion in the company’s equity base or forced it to borrow money to secure liquidity. A deterioration in a company’s equity ratio has negative consequences beyond the current crisis phase, for example by reducing its potential for obtaining finance.

In May 2021, 39% of SMEs were still struggling with losses in turnover. At the beginning of the crisis in April 2020, that share was 66%. In May 2021 approx. one fourth (24%) of Germany’s SMEs reported a deterioration in their equity ratio in the course of the coronavirus pandemic.

A closer look reveals the following patterns:

• Small businesses with fewer than five employees are most likely to suffer from the impact of the crisis, with 41% still struggling with losses in turnover and 24% reporting a lower equity ratio
• Among the main economic sectors, retailers are most likely to suffer losses in turnover (57%), while construction firms are least likely to be affected (9%). Manufacturing and services are in mid-range, with 40% and 38% affected. These different levels of impact, however, affect the development of the equity ratio only in part, for example where companies were propped up by state support measures and were able to reduce their running costs. Construction is the only sector that very rarely reports a deterioration in the equity ratio (7% compared with 25% and 26% in the other economic sectors).
• SMEs that do business outside Germany were more severely affected by the crisis than companies that do business exclusively on the domestic market, with regard to both turnover losses (46% vs. 37%) and the development of their equity ratio (29% vs. 22%).
• Businesses whose credit rating was already weak before the pandemic are also more likely to have been hit harder by the crisis. The share of enterprises that suffered a deterioration in their equity ratio ranges from 39% in the category with the lowest credit rating to 20% in the category with the highest rating score.
• The rating score is also an indicator of the quality of the business itself. For example, it reflects the quality of the management, because the past and long-term business success of a company – on which a good credit rating is based – would not be achievable without high management quality. Pronounced management skills in particular are likely to have helped identify and successfully implement solutions to the problems that arose in the course of the crisis.
• Higher crisis resilience can also be identified for enterprises that carried out innovation and digitalisation projects before the crisis and have thus built up capacities and a high degree of digitalisation. At 22% and 20%, they exhibit lower equity ratios much less often than the average.

“Although every crisis is different, some of our insights from the current coronavirus crisis can be applied to other crises. One of them is that small businesses are more vulnerable. Because of their smaller size, they generally have fewer options for building up sufficient reserves to overcome crises”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. Economic policy approaches can be derived from the finding that certain business segments are hit harder by crisis situations than other business groups owing to structural and immanent disadvantages. “Many of these enterprises play an important role in the economic process. They occupy market niches, take on the role of efficient suppliers of large enterprises and thus operate profitably when there is no crisis. Losing such enterprises to a crisis would damage the economy”, said Fritzi Köhler-Geib. “Economic support measures as an immediate crisis management tool should therefore be expressly regarded as necessary. The fact that digital and innovative SMEs got through the pandemic more successfully provides a tailwind for economic policy to set the right course now and provide greater incentives for forward-looking investment in digitalisation and innovation as well as climate action. One important element is to provide a consistent framework, such as a reliable and predictable, rising CO2 price signal for climate action and environmental protection. Others include financial incentives such as loans coupled with subsidies in order to provide all enterprises with greater incentives to invest in climate action, innovation and new technologies. In order to come out of the crisis stronger we will also need economic policy measures aimed at enhancing crisis resilience, making even better use of our international integration and strengthening the European Union.”

KfW Research has written a position paper with proposals setting out how this can be achieved. Along with the current analysis on crisis impact and resilience, it can be retrieved at:
www.kfw.de/KfW-Research