Theory to Practice is an occasional blog series that explores the intersection of economic development research and current issues of debate within the practitioner community. In this post Jason Sabatelle (Research Fellow), Adonis Caramintzos (Research Fellow), and Jamie McCall (Vice President of Policy and Research) look at a new CSBDF analysis on how affordable lending can help small businesses during this time.
Over the past year CSBDF has tracked how COVID-19 is impacting North Carolina’s small businesses. Our early estimates indicated almost 142,000 firms and 1.4 million jobs were at risk. As state and local governments imposed restrictions last year, non-essential small businesses were devastated by stay-at-home orders. While we know such restrictions are necessary, it’s important to realize the impacts from this will reverberate for many years. The patchwork policy response to the pandemic – mainly in the form of grants and loans that have (for the most part) ended – has made underserved entrepreneurs particularly vulnerable.
At this point we all tire of hearing that the pandemic is “unprecedented.” But from a policy perspective it truly is unique. The scope and scale of COVID-19 means we know little about what types of community development interventions might be effective in helping entrepreneurs. The closest corollary is what has worked in previous disasters. Yet we know this is problematic because research around disasters (natural and manmade) tends to deal with things that are episodic and short-term in nature. How you help small businesses in hurricanes and wildfires may not have much use in a global pandemic.
Pandemic Response Programs Have Multiple Goals
We have argued there is a need for innovative policy solutions. As a loan fund we have an obvious interest in financing interventions (though CSBDF also recognizes the importance of other options, including cash grant aid). Throughout the pandemic we have engaged in multiple loan programs via partnerships with state and local governments. In a new report we are providing, to our knowledge, some of the first evidence of CDFI lending intervention effectiveness during COVID-19.
The short-term goal of COVID-19 lending programs is to cushion small businesses against negative COVID-19 induced economic shocks. Grants also do this, but grants alone usually cannot provide cash infusions at the needed level (in North Carolina, most COVID-19 grant programs were capped at $10,000). Over the longer-term, larger amounts of capital are needed to preserve entrepreneurial networks, bolster trust in community institutions, and foster small business financial stability. How small businesses access larger capital pools will vary, but one of the main options is loans.
Some Firm and Community Level Factors Matter
In the middle of a global pandemic, measuring the effectiveness of emergency lending programs is hard to do. But we’re proud to transparently analyze our own data and present the results. We want to be as effective as possible with our COVID-19 policy interventions. In a new report, we take a look at 175 CSBDF loan transactions occurring between April and July of 2020. The goal is to see what types of business-level and community-level factors explain variance in social capital, community trust, and financial stability. Business-level factors are things that describe the business – for example, whether it is owned by women or minorities. Community-level factors are the demographic and macroeconomic characteristics of the zip code where the firm operates. For more information about how we measure these constructs, see this part of our website. The table below summarizes the results:
A green check mark indicates the listed characteristic appears to influence social capital, community trust, and/or firm financial stability when holding all other variables constant. The red x’s indicate the effect of the variable on social capital, community trust, and financial stability does not appear to be material. It is important to note that this doesn’t mean these variables don’t matter – just that they did not reach the threshold (statistical significance) needed for us to be sure that their effects are real and not just due to random chance. Why is that? It could be for a variety of reasons – we may not have enough data points, or we may not have accounted for factors that are influencing these outcomes.
Overall, the findings for social capital and community trust are inconclusive. Though certain firm and community-level characteristics seemed to influence these outcomes, the overall impact was extremely small. It could be that COVID-19 is acting as an endogenous force on these two outcomes. Social distancing culture varies at least partially upon the severity of stay-at-home restrictions imposed by local governments. This could directly impact social capital and community trust, but it is difficult to account for such external variables in the models.
The best performing model is firm financial stability. At a high level, certain firm-level (future hiring plans, whether the business is minority-owned) and community-level (unemployment, Black population) characteristics effect an entrepreneur’s ratings of their financial stability. Minority-owned businesses in CSBDF’s COVID-19 lending programs tend to be more likely to report higher projected levels of financial stability. This is important because it suggests we are achieving the short-term goal of cushioning small businesses against financial troubles.
Small Businesses Need More Targeted Assistance to Survive
While our results are promising, they also suggest the need for additional stimulus for North Carolina’s small businesses. Most programs for smaller firms have expired or contain so many restrictions that they are not accessible. General cash relief payments and enhanced unemployment benefits (via the recently passed federal stimulus bill) may provide some help. But more targeted assistance is needed both in the short and long term. Even once the population becomes vaccinated and life returns to some sense of normalcy, the economic impact of COVID-19 on small businesses will last for some time.