signature=107c6db1ffb19fa20401bea629ddead4,When the rainy day is the worst hurricane ever: the effec...

Table 2 presents the results on the entire sample for the tree scenarios: ordinary scenario (expected situation without COVID-19), scenario that includes the impact of COVID-19 and the scenario that considers UK government intervention aid policies. We start by analysing the expected EBITDA and residual cash available for each SME. In the ordinary scenario, we find that the average expected EBITDA is positive (£1,77 million), suggesting that the average SME is able to generate enough margin to support its operations. The survival rate (that is the percentage of SMEs generating positive EBITDA) is 75%. Besides, those SMEs that are not able to cover the current operations and the related cash outflows with the cash inflows (that is, those SMEs that are burning cash) have on average 164 days of cash to cover the operations (ordinary scenario, rows 1–3).

Table 2 Results for the entire dataset

Next, we focus on the two scenarios that include the shock/disruption. First, we estimate SMEs’ EBITDA according to the shock on sales at industry level as generated by COVID-19 (no government mitigation). Second, we estimate the EBITDA by including the two government mitigation policies (CJRS or BBLS). Focusing on the SMEs under COVID-19 scenario (rows 4–6), we find that the average firm in the sample is burning cash (EBITDA: − 1,05 million GBP) which is reflected via the dramatically lower “survival rate” that drops from 75 to 41%. Besides, the residual life for those SMEs that burn cash is now on average 139 days. When we include the government mitigation policies (rows 7–11), we find that the average EBITDA is still negative (− 621,000 GBP). Also, and as a direct result of government intervention, “residual life” for SMEs that burn cash increases to 183 due to CJRS, or (by also including BBLS) between 189 and 194 (depending on the amount of loan taken). All in all, the government intervention has two positive effects: (1) it reduces the number of SMEs with negative EBITDA by 10% (50.30 vs 41.41%), and (2) it extends the survival days of those SMEs with negative EBITDA (SMEs that are burning cash) by 50 to 60 days. Our results reflect what has been found in Germany (Block et al., 2020).

Lastly, we investigate the effects on the number of jobs that are at risk as a result of the economic shock. We estimate this by looking at the number of jobs associated to SMEs with negative EBITDA in different scenarios. We find that due to COVID-19 the number of jobs at risk in our sample increases to 24,843 (from 10,461 in ordinary scenario) but when the CJRS is taken into consideration so that labour costs are partially covered by the government, the jobs at risk decrease to 20,650 (17% decrease).

Further evidence of the effect of COVID-19 and the policies implemented by the UK government emerges from Fig. 1A, B, and C.

Fig. 1

Distribution of the EBITDA under different scenarios. A Distribution of EBITDA in the ordinary scenario. B Distribution of EBITDA in the COVID-19 scenario. C Distribution of EBITDA with government mitigation policies scenario

COVID-19 moves the distribution of the expected EBITDA to the left, increasing dramatically the negative tail of the distribution. The government mitigation policies readjust the distribution moving it to the right. However, EBITDA distribution after the government intervention is more concentrated around the zero than the distribution without COVID-19.

Our next step is to explore the effect of COVID-19 on the vulnerable SMEs, that is SMEs with negative EBITDA in the ordinary scenario. The results are reported in Table 3.

Table 3 Weak firms – firms with expected negative EBITDA

In fact, these SMEs are expected to burn cash irrespective of COVID-19 and consequently to be at greater risk and have a shorter residual life. The average EBITDA of these firms in the sample is − 2,85 million GBP. Considering the cash holdings these SMEs have, their average expected residual life is 164 days (ordinary scenario, rows 1–3). During COVID-19 scenario (rows 4–6), the EBITDA goes down further (− 3,75 million GBP), so that the residual life reduces to 119 days (4 months). When we account for the government mitigation policies (rows 7–11), the average EBITDA improves and goes back to levels very close to those of ordinary scenario level (− 2,84 million GBP). Besides, the survival rate improves to 8.3%. Consequently, the residual life increases to 186 days due to CJRS, or via BBLS between 191 and 194 days, depending on the amount of loan taken. As far as jobs at risks are concerned, there is no difference between ordinary and COVID-19 scenarios (and this is expected as these SMEs have jobs at risk regardless). Thus, the only expected impact would be via CJRS for which the job losses decrease to 9584: by supporting weak SMEs, the governments’ mitigation policy allows SMEs to retain 877 jobs (protecting 8.4% of potential job losses)

We also estimate the impact on SMEs with a positive EBITDA (Table 4) in order to be able to compare the effect of the policies for strong and weak SMEs.

Table 4 Solid firms – firms with expected positive EBITDA

In this case, the EBITDA under COVID-19 is marginally negative − 162,000 GBP. A closer look at the distribution of earnings shows that around 53% of the SMEs have negative EBITDA. The expected residual life of strong SMEs is 162 days. The government mitigation policies improve the EBITDA to positive 160,000 GBP, and the number of SMEs with positive EBITDA increases to 65%. In addition, the residual life of the SME with negative EBITDA is between 180 (CJRS only) and 193 days (CJRS and BBLS at 50,000 GBP). However, not all the firms that would have been profitable without COVID are profitable under the two governmental schemes since around 35% maintain a negative performance.

To further explore the SMEs’ capability to survive the pandemic, we perform two additional checks, focusing on different regions and on different industries (these results are shown in Tables 5 and 6).

Table 5 EBITDA effects of the COVID-19 in different regions

Table 6 EBITDA effects of the COVID-19 in different industries

In our ordinary scenario (columns 3–5, Table 5), out of all the regions, SMEs in Wales have the lowest expected EBITDA (£1,06 million) with a survival rate of 69.5% and 154 days of available cash. SMEs in Midlands have the highest expected EBITDA (£1,91 million), while SMEs in South East have the highest survival rate of 77.4%. During COVID-19 scenario (with no government intervention, columns 6–8), SMEs in Scotland are the hardest hit on average with EBITDA of − 1,36 million GBP and a survival rate of 33.6%, while SMEs in Northern Ireland have the least cash days available (127 days). SMEs in London have the highest survival rate, 45.1%, and the longest expected residual life of those SMEs burning cash (154 days). Focusing on the government mitigation policies (columns 9–13), we find that both the EBITDA and the survival rate improve, when compared to the ordinary scenario. Survival rate improves across all regions with improvements between 9 and 13%. More specifically and focusing on CJRS only, SMEs have between 9 and 42 extra days, even compared to pre COVID-19 levels. The only exception here is Northern Ireland, which starts with 178 days of cash (during ordinary scenario) but ends with 148 days even after considering for CJRS. When considering the BBLS, the residual life increases further from CJRS only scenario from 4 to 9 days or 9 to 16 days (depending on the loan option taken by the SME). It is also clear from the analysis that the biggest beneficiaries of government intervention are South East and London, while worst hit areas are Scotland and Northern Ireland.

Table 6 shows the results of EBITDA effects of the COVID-19 for different industries.

In our ordinary scenario (columns 3–5, Table 6), SMEs in construction industry have the lowest expected EBITDA (£614,000) and a survival rate of 59%, while shortest residual life is in agriculture industry. SMEs in trade industry have the highest expected EBITDA (£3,04 million) and the highest survival probability of 78.4%. Manufacturing is the industry with the longest expected residual life for those SMEs burning cash (179 days). During COVID-19 scenario (with no government intervention, columns 6–8), construction industry continues to be the worst performer and hardest hit on average with EBITDA of − 2,22 million GBP and survival probability of 31%, while SMEs in the trade industry now hold only 108 days of cash. This finding is in line with the latest report from Bank of England on the expected impacts of COVID-19 by industry (Bank of England, 2020), where it is argued that consumer-facing businesses and non-food manufacturing and construction were the most affected sectors. Focusing on the government mitigation scenario (columns 9–13, Table 6), we find that both the average cash burning rate and the survival rate improve, and they are similar to the ordinary scenario. Survival probability improves across industries between 2 and 12%. More specifically and focusing on CJRS only, SMEs now hold between 16 and 48 additional days of cash, compared to COVID-19 levels. When considering the BBLS, the days of additional cash increase further compared to CJRS only scenario between 4 and 16 days (depending on industry and the loan option taken by the SME). We can also observe from our analysis that the biggest hit industries are agriculture and construction, while the biggest beneficiaries are SMEs in service industry.

Robustness test

As a robustness check, we redo the analysis reported above using a smaller sample of 18,626 SMEs that have financial information for the year 2019. Results are reported in Table 7.

Table 7 EBITDA effects of the COVID-19 – 2017–2019 sample

The analysis based on more recent dataset suggests that the average EBITDA moves from the expected 2,128,000 without COVID-19 to − 3,320,000, and the number of firms having a positive EBITDA decreases from 77 to 22%. Also, the life expectancy for firms burning cash reduces from 171 to 121 days. Government intervention improves the average EBITDA that, nevertheless, remains in the negative. Besides, governmental intervention reduces the number of firms with negative EBITDA but only 41% of them have an expected positive EBITDA. If anything, the results based on more recent data suggest even a harsher effect of CONVID-19 as in the case of firms that turn to have a negative EBITDA (those with positive EBITDA used to be 41%), a smaller positive effect of the governmental intervention (the results using 2016–2018 data suggests that around half of the firm have a positive EBITDA). However, the differences are not statistically different.

All in all, the fact that the results of the robustness test are qualitatively similar to those of the original analysis confirms and reinforces our results in terms of huge negative impact and relatively reduced mitigation impact generated by the government intervention.