Are Philadelphia’s Small and Midsize Businesses Financially Equipped for the Pandemic?

Timeliness in paying bills before COVID-19 may be a strong indicator

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Are Philadelphia’s Small and Midsize Businesses Financially Equipped for the Pandemic?
A customer pays for coffee at a neighborhood coffee shop in Philadelphia.
Lexey Swall/The Pew Charitable Trusts

During and after the Great Recession of 2007-09, small and midsize businesses in Philadelphia struggled   to pay their bills more than their peers in other cities, a sign that has potential implications for how they may fare in the wake of COVID-19.

The pandemic and the measures to slow it, including social distancing and ordered closures, have kept many businesses from earning the cash they need to pay wages and bills. This critical lack of liquidity can be especially perilous for smaller businesses, which typically have thinner financial cushions than larger companies.

The Pew Charitable Trusts sought to understand the potential liquidity of local small (defined as up to 99 employees) and midsize (100 to 499 employees) businesses and how they might fare during tough financial times like the current COVID-19 crisis, as well as how they might compare with companies in other cities. To do this, Pew collaborated with Drexel University professors Amelia Hoover Green and Richardson Dilworth to analyze Dun & Bradstreet’s Paydex ratings—a measure of a company’s timeliness in paying bills—for nearly 120,000 businesses with 499 or fewer employees in Philadelphia and 12 other cities. The ratings are contained in the National Establishment Time Series, a proprietary dataset of tens of millions of U.S. businesses that covers the years 2007 to 2014. (Researchers did not have access to more recent comparable data.)

The analysis showed that Philadelphia’s firms had a lower average payment rating than the median rating of the cities studied, meaning that Philadelphia’s small and midsize businesses were generally less liquid and more vulnerable to an economic downturn. The other cities examined were Baltimore; Boston; Denver; Indianapolis; Jacksonville; Lexington, Kentucky; Nashville-Davidson, Tennessee; New York City; San Francisco; St. Louis; and Washington. (See Figure 1.) Because business data is largely collected on a county basis, these large cities were chosen primarily because their populations match or nearly match those of their counties based on 2017 census data.

In addition, Philadelphia’s small and midsize businesses generally had lower on-time payment ratings than did the city's large businesses, especially in the years after the recession. Those that took longest to pay bills on average in the 2007-14 period were in transportation (averaging 18-22 days late) and manufacturing (averaging 15-18 days late), both of which tended to be late in other cities, too. Those that paid fastest, although still late, were in finance and professional services (both averaging 8-12 days late), industries that were also fastest to pay in the other cities.

A history of late payments is an indicator that a business might not fare well or could collapse during tough times. Research by the Federal Reserve Bank of St. Louis has found that businesses of any size that were 30 or more days past due on bills, on top of carrying high debt, were the ones most likely to have shut down during the Great Recession.

In March 2020, the likelihood of a new liquidity crunch for small and midsize businesses as a result of the COVID-19 pandemic led local, state, and federal governments to significantly ramp up emergency grants and loans. Philadelphia’s emergency funding is targeted to small firms with less than $5 million in annual sales. It remains to be seen whether or how this assistance will help these businesses survive in the coming months.

Larry Eichel is a senior adviser and Thomas Ginsberg is a senior officer with The Pew Charitable Trusts’ Philadelphia research and policy initiative.