A previous Liberty Street Economics post found that minority-owned small businesses in the Federal Reserve’s Second District have been particularly vulnerable to natural disasters. Here we focus on the aftermath of disasters (such as hurricanes, floods, wildfires, droughts, and winter storms) and examine disparities in the ability of these firms to reopen their businesses and access disaster relief. Our results indicate that while white- and minority-owned firms remain closed for similar durations, the latter are more reliant on external funding from government and private sources to cope with disaster losses.
How Often and How Long Do Small Businesses Close after Disasters?
As in the previous post, we consider small businesses in three states in the Second District (New York, New Jersey, and Connecticut, omitting Puerto Rico and the U.S. Virgin Islands due to limited data availability), using data from the Small Business Credit Survey (SBCS) for the period 2021-22. The SBCS asked disaster-affected firms: “Did your business temporarily close because of this natural disaster?” For the firms that responded yes, the survey posed a follow-up question asking for an estimate of the length of time for which they were temporarily closed. These responses likely represent lower bounds for closure since a firm that closed temporarily at the time of survey completion may end up remaining closed for longer than reported.
Sixty percent of small businesses overall in our sample that reported natural-disaster-related losses were forced to close temporarily because of a disaster. Fifty-five percent of minority-owned firms were temporarily closed as compared to about 65 percent of white-owned firms (see the left panel of the chart below); minority-owned firms were closed for similar durations as white-owned firms, with 90 percent of businesses shut down for three months or less (see the right panel of the chart below). A firm is defined as minority-owned if at least 51 percent of the firm’s equity stake is held by a minority (that is, an Asian, Black, Native American, or Hispanic) owner. A firm is defined as white-owned if at least 50 percent of the firm’s equity stake is held by non-Hispanic white owners. Race/ethnicity categories are not mutually exclusive.
Minority- and White-Owned Firms in the Region Remain Closed for Similar Durations
Firm temporarily closed
This result seems surprising given the finding in the previous post that losses from natural disasters make up a greater share of total revenue for minority-owned firms, a fact suggesting that minority-owned firms were more likely to be closed longer. In contrast, in the national sample, we find that minority-owned businesses were disproportionately likely to be closed for more than three months. One explanation may be that different minority businesses were closed for different lengths. Indeed, in the national sample, Black-owned and Hispanic-owned businesses were closed for longer than white-owned and Asian-owned businesses, consistent with results in a 2022 post. Because we aggregate across minority groups due to the small sample sizes in the data, we may be unable to identify those minority businesses in the sample that were particularly adversely affected by disasters and forced to remain closed for extended periods of time.
What Funding Sources Do Small Businesses in the Region Access for Disaster Relief?
Greater access to financial relief following a disaster may mitigate the need for small businesses to remain closed for an extended period following disasters. The SBCS asked respondents that reported disaster losses to indicate the source(s) that they relied on to cope with their losses. Firms could select from multiple options as shown in the table below. A similar fraction (16 percent) of white- and minority-owned firms relied on disaster insurance funds. Among disaster-affected firms, minority-owned businesses disproportionately relied on government relief funds (such as, Federal Emergency Management Agency (FEMA), Small Business Administration (SBA), or other agencies). Thus, 20 percent of minority-owned firms relied on federal relief and 17 percent on state/local relief (versus 15 percent and 12 percent of white-owned firms, respectively). They were also more heavily dependent on donations, crowdfunding, or nonprofit grants: 17 percent of minority-owned firms rely on these sources as compared to just 1 percent of white-owned firms. Minority-owned firms also depend on non-government loans: 24 percent relied on private debt as compared to only 8 percent of white-owned firms. The national sample also indicates the greater reliance of minority-owned firms on external funding, whether from government or private sources (with the exception of private insurance).
Disparities in Funding Sources to Assist with Disaster
|Share of All||Share of White-Owned Firms||Share of Minority-Owned Firms|
|Funding Sources(s) Relied On:|
|Federal disaster relief funds (e.g., FEMA, SBA)||0.17||0.15||0.20|
|State/local government disaster relief funds||0.14||0.12||0.17|
|Donations, crowdfunding, or nonprofit grants||0.07||0.01||0.17|
|Debt/loans (other than gov’t loans)||0.14||0.08||0.24|
|Did not rely on external funds||0.55||0.63||0.41|
Notes: This table includes only firms in the sample that reported disaster-related losses. The SBCS asks firms reporting losses: “Which of the following sources of funding did your business rely on to cope with these losses? Select all that apply.” The options are listed in the left column of the table. For each race/ethnicity category, the table reports the fraction of firms that relied on a particular source of funding. The columns do not sum to one because survey respondents had the option to select multiple sources. A firm is defined as minority-owned if at least 51 percent of the firm’s equity stake is held by a minority (that is, an Asian, Black, Native American, or Hispanic) owner. A firm is defined as white-owned if at least 50 percent of the firm’s equity stake is held by non-Hispanic white owners. Race/ethnicity categories are not mutually exclusive. An observation is excluded from the sample if it is missing a response to the question or if the owner’s race is not observed. The sample pools employer and nonemployer firms. Responses by employer and nonemployer firms are weighted separately on a variety of firm characteristics to match the national population of employer and nonemployer firms, respectively. To construct a pooled weight, we use the employer (nonemployer) weight if the firm is an employer (nonemployer). The surveys were fielded between September and November of 2021 and 2022.
While minority-owned firms disproportionately relied on external funding sources to cope with disaster losses, a higher fraction of white-owned firms did not rely on any external relief, consistent with their lower share of disaster-related losses in total revenues and their larger cash reserves.
White- and minority-owned owned firms in the region remain closed for similar amounts and durations following disasters. However, minority-owned businesses are more likely to depend on external funding, both government and private, whereas white-owned firms are able to draw on internal reserves. These results underscore the importance to minority businesses of accessing affordable and timely relief after disasters. The following post considers this differential impact of natural disasters on more at-risk populations by studying how low- and moderate-income renters New York City are impacted by flooding.
Asani Sarkar is a financial research advisor in Non-Bank Financial Institution Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
How to cite this post:
Asani Sarkar, “Small Business Recovery after Natural Disasters in the Fed’s Second District,” Federal Reserve Bank of New York Liberty Street Economics, November 16, 2023, https://libertystreeteconomics.newyorkfed.org/2023/11/small-business-recovery-after-natural-disasters-in-the-feds-second-district/.
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).