Managing the workforce is also important in reducing operating expenses and easing liquidity pressures. SMEs tend to adopt measures on both the intensive and extensive margins (i.e. increasing the intensity of the response, or trying something different) but are only able to focus more on the former. This is aligned with evidence from other markets: firms in Ghana and Senegal for example mostly reducing hours or pay, while firms in Bangladesh and South Africa more likely to lay off employees.<sup>19</sup> In India, most SMEs are not laying off their workers, but up to 25% of them (depending on the size category) are unable to pay salaries (Buteau and Chandrasekhar 2020). Naturally, all firms are found to have decreased working hours, given broad-based lockdowns in many countries. Firms that do increase working hours are most likely involved in the essential healthrelated sectors. On the extensive margin, while more firms reduced than increased their permanent workers, larger firms are found to be more capable of utilizing temporary workers to quickly adjust the size of their workforce.

# 3.2 SMEs have limited avenues amid severe financial constraints

A key concern for most firms experiencing a sudden drop in sales is liquidity constraints. Both cash inflows and outflows require careful management, without which businesses become highly susceptible to permanent closure. Firms generally cope with an abrupt economy-wide contraction in liquidity is by utilizing payment facilities on credit terms or ceasing payments altogether and facing the risk.

Yet, larger firms have generally better access to credit. In limiting immediate cash outflows, smaller firms are found to be less able to engage with their suppliers on credit terms. A general decline in creditworthiness is observed for these firms across all countries, where the declines in purchases via credit are larger or at least as bad as those among large firms. For SMEs with greater capacity, changing the credit terms with suppliers has been crucial in protecting their balance sheet, while also preserving their existing relationships (Corporate Finance Network, 2020).

SMEs prefer grants or equity to loans - they tend to rely more on equity financing and government support to tackle cash flow shortages (Figure 7). This preference is not only due to uncertainty over repayments; in China, for example, SMEs have been reported reluctant to borrow from banks due to the complicated process, limited flexibility on loan terms and because they lacked the acceptable collateral and/or standardized financial statements required. They also preferred midand long-term loans with tenor above 1 year with concerns that “due on demand” loan tenor could make them vulnerable to loan reduction or rescission (CAFI 2020).

Grants however are scarce in many lower-income countries, where SMEs receive<sup>20</sup> or expect little assistance from the government. In addition to low state capacity in some Eastern European and Sub-Saharan African countries, awareness of the existence of assistance programs may also be lacking among SMEs. In other countries, limited assistance that reaches SMEs could also reflect disillusionment with the typically complex application process and complicated eligibility rules associated with government assistance, also evident in the United States (Bartik,

> 19 Based on the World Bank’s COV-BPS.

> 20 For instance, almost 95% of nearly 2,000 Nigerian SMEs surveyed in April had yet to receive any business support.

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