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When the United Nations declared June 27 Micro-, Small and Medium-sized Enterprises Day less than three years ago, it was to celebrate their role in sustainable development. But under the cloud of COVID-19, these small companies may not be able to sustain themselves. Massive job losses at giant firms such as Lufthansa, British Petroleum or Renault attract the headlines, but it is the local businesses like cafes, hairdressers and boutique hotels that urgently need the attention and support.

In the European Union, SMEs—small- and medium-sized enterprises—represent 99 per cent of all businesses and account for two-thirds of the private sector employment. With the European economy shrinking at an alarming rate because of the pandemic, these businesses have been hit hard by both supply and demand shocks. Disruptions—such as staff absences because of illness or caring responsibilities, lockdowns, and social distancing rules—limit production on the one hand, while spending and consumption have dropped on the other.

At the same time, SMEs are less prepared than big companies to weather the shutdown. They have limited resources, are particularly sensitive to staff absences, and often rely on informal systems and procedures. They may lack managers who can adapt operations to the continually changing government guidelines, restrictions and social distancing rules. Some changes, such as moving to remote working or re-designing of premises, are costly.

SMEUnited, a trade association for small businesses in Europe, reported that COVID-19 has affected 90 per cent of its members. SMEs also expect about a 50 per cent loss in sales revenue (PDF). According to the Organisation for Economic Co-operation and Development (OECD), surveys of SMEs across countries broadly show that about half of owners fear their business will fold within three months.

In each EU country, the duration of COVID-19 restrictions, depth of changes in demand for goods and services, and the speed at which policy relief is provided will determine how many SMEs will collapse.

Even in the best of times SMEs struggle to access finance; fixing this will be crucial to reducing the pandemic's damage. The International Labour Organisation has called for targeted lending, financial support for specific sectors, and tax relief. OECD countries have also adopted income and profit tax deferrals, loan guarantees and direct lending, and wage subsidies to help SMEs.

The European Commission meanwhile made liquidity measures available and mobilised financial support through COSME, an EU programme for the competitiveness of small businesses.

Taking such measures is just the first step, however. RAND Europe's research on SMEs also points to a number of ways that policymakers could help SMEs take advantage of help:

• Reduce the administrative burden and time required to apply for relief measures.
• Clearly communicate the benefits and costs (including time and resources) involved with each programme, and help SMEs navigate the requirements to encourage participation.
• Support SMEs proportionately to their size: the smaller they are, the more capacity and time constraints they face.

In normal times, SMEs are more agile and quick to respond to change than large companies—but these are not normal times. Policymakers will need to take that on board and recognize that immediate action is needed that focuses on helping SMEs to survive.

Joanna Hofman is an associate director at the not-for-profit research organisation RAND Europe, leading research on SMEs, skills and employment.

Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.