This Policy Insights was developed by Anthony O’Sullivan, Partner and Director, Whiteshield Partners.

How can government leaders avoid the negative scenario for their small and medium sized enterprises?


SMEs face a 'death valley' of liquidity as a result of the COVID-19 pandemic. COVID-19 is disrupting all businesses around the world with a particular impact on small and medium-sized enterprises (SMEs) which represent on average 70% of employment and between 50 and 60% of economic value-added in OECD countriesi. On the supply side, many smaller businesses have temporarily shut down, their supply chains disrupted and their workers disabled by sickness or lockdown constraints. Moreover, overall demand is weaker due to lower incomes, higher unemployment, depreciating short term assets, and reduced consumer mobility. The sectors most directly affected are travel, entertainment, construction, as well as non-essential retail products and services. With revenues at or near zero, SMEs in non-essential sectors have limited resources to cover wages and other short-term liabilities to stay alive until the economy emerges from lockdown.

While the largest firms and multinationals can rely on their war chests and direct support from financial institutions to weather out the crisis, this is much less the case of SMEs which are looking at a "COVID-19 death valley" in liquidity (Figure 1).

Figure 1: The COVID-19 death valley of liquidity for SMEs

Source: Whiteshield Partners

Note: current liabilities typically include salaries, accounts payable, taxes, short term debt, and accrued expenses. QR refers to Quick Ratio. Source: Whiteshield Partners

The quick ratio – also referred to as the acid test – measures whether a firm has the working capital to cover short term liabilities. When the quick ratio drops below one, a firm is at risk of running into default. The average small business typically carries 20-30 days of cash reserves before its quick ratio falls below one, and it is no longer able to cover its short-term liabilities without additional revenues or debtii.

Policymakers can keep SMEs alive through six actions

Governments around the world have generally reacted positively in providing financial relief to firms and citizens impacted by COVID-19 under a lockdown and life support scenario.

However, a further analysis of the policies implemented to date highlights a general lack of coherence, coordination and sequencing in policy responses. We have six recommendations to get right for SMEs:

  1. Stop the bleeding: Ensure fast financial relief

Many governments have announced impressive measures of financial support but not given enough thought as to how it will be delivered to make the difference. As we highlighted in Figure 1, the difference between life and "Death Valley" for an SME can be just a matter of days. Yet too many measures involve complex application procedures, long processing times, delays in reimbursement or depend on the voluntary compliance of third parties such as commercial banks. Canada has an effective response to loans disbursements: small business loans of up to CAD 100 000 can be obtained online in as little 48 hours from the time of approval. The Netherlands limits reimbursement delays by providing up to 80% of wage cost relief in advance.

  1. Specifically target jobs

Loans are not enough. Specific incentives must also assist in maintaining employment levels. Most European countries have dedicated funds allocated to compensate for shorter working hours or temporary "technical" unemployment – inspired by the German Kuzarbeit system known to have been effective in saving jobs during the 2008-2009 financial crisis. In this case firms are typically reimbursed 70-100% of salary costs.

  1. Support the most vulnerable enterprise segments

Macroeconomic measures or policies to support the broader economy will be insufficient in a crisis context. Targeted steps to increase cash availability are necessary to support the smaller firms which face a real threat of bankruptcy with the decline of activity. The increasingly important segment of the self-employed must not be forgotten. For instance, the Netherlands provides the self-employed with non-reimbursable income support for three months through a fast track procedure.

  1. Enable innovation as a crisis response

A crisis provides an opportunity for firms to innovate, especially in the early on before panic takes over. Singapore, Korea and Ireland have been exemplary in helping their firms “go digital” in the early stages of the Covid-19 crisis through coaching and consulting services. Enabling firm innovation is one the least costly and most sustainable responses to a crisis as successful firms emerge a stronger and more competitive players

  1. Leave nothing off the table: Use the full arsenal of defensive and offensive measures

Countries hesitate to deploy their entire arsenal of policy options, including different forms of tax relief, subsidised loans, credit guarantees, direct grants, relief in procurement penalties, monetary policy and innovation support. Supporting small businesses with offensive measures to innovate in times of crisis is particularly important to reduce the taxpayer burden and better prepare for tomorrow. Training and redeployment of workers is another underutilised measure. New Zealand and Portugal have allocated funds for rapid training of workers from the hardest-hit sectors (e.g. tourism) to areas with additional labour needs (e.g. food retail and agribusiness).

  1. Act first and ask questions later: Balance short term trust with fraud containment in the longer run

The critical need for financial relief in a crisis such as COVID-19 is such that there is no time for complex vetting procedures in the short term. Small companies and the self-employed in sectors directly hurt by the crisis (such as tourism) need rapid relief to escape the death valley. However, these early relief policies must also be limited in scope and time.

Longer-term loans and more substantial schemes must incorporate the right vetting mechanisms to ensure that they reach the enterprise segments that need them the most – and not to firms that may abuse public sector support.

Three levels of SME support in response to COVID-19: light stimulus, strong stimulus and life support

SME support in response to COVID-19 includes an array of defensive and offensive measures which vary in the level of intensity based on the crisis faced (see Table below).

Table 1: Defensive and Offensive measures to support SMEs according to different policy stages

Source: Whiteshield Partners; OECD

Under a light stimulus scenario (D3), the emphasis should be on sector-specific measures (e.g. tax deferral, subsidised loans) to support SMEs in sectors directly affected by the pandemic. Broader offensive measures are also required, to help smaller firms adapt and innovate in the event of a more severe lockdown.

Extended measures under a strong stimulus scenario (D2) include a broad array of policies. These policies include low-interest loans, expanded credit guarantee schemes, more flexible labour arrangements (including subsidised part-time work and temporary layoffs), expanded tax deferrals (covering trade duties, VAT, payroll taxes), deferrals in procurement penalties and lower interest rates from the Central Bank.

Finally, the most extreme lockdown and life support policy scenario (D1) can further include direct government grants to the most vulnerable SMEs and self-employed, 100% reimbursement of temporary layoffs or part-time work as well as further measures to lower the Central Bank lending rate. It is in this most extreme scenario that the six above recommendations are most relevant and applicable.

These three scenarios for SME support in response to COVID-19 are part of a broader set of scenarios that were modelled by Whiteshield Partners under a staged response to a pandemic. The scenarios, which are consistent with the DEFCON (defence readiness condition) alert levels used by the US Armed Forces and with the WHO phases of pandemic alert, can be adapted to different economies and types of pandemic.

Mitigating the potential negative social and economic consequences of COVID-19, which are significant, requires carefully crafted and well-sequenced policies targeted at SMEs. It is important to tap into the full policy arsenal, including offensive means of worker redeployment and support in business model innovation. Finally, the most effective policy responses will provide immediate relief while at the same time, building the longer-term resilience of SMEs, which are the backbone of our economies.