The Small-Business Die-Off Is Here - The Atlantic

The Small-Business Die-Off Is Here - The Atlantic

The Small-Business Die-Off Is Here - The Atlantic

Posted: 04 May 2020 12:32 PM PDT

Outside of Boston, a marketing company is struggling to figure out how to cover its bills. In Indiana, a dance studio is waiting on three emergency-loan applications. In Baltimore, a deli is closed and desperate for help.

The government is engaged in an unprecedented effort to save such companies as pandemic-related shutdowns stretch into the spring. But Washington's policies are too complicated, too small, and too slow for many firms: Across the United States, millions of small businesses are struggling, and millions are failing. The great small-business die-off is here, and it will change the landscape of American commerce, auguring slower growth and less innovation in the future.

Small businesses went into this recession more fragile than their larger cousins: Before the crisis hit, half of them had less than two weeks' worth of cash on hand, making it impossible to cover rent, insurance, utilities, and payroll through any kind of sustained downturn. And the coronavirus downturn has indeed been shocking and sustained: Data from credit-card processors suggest that roughly 30 percent of small businesses have shut down during the pandemic. Transaction volumes, a decent-enough proxy for sales, show even bigger dips: Travel agencies are down 98 percent, photography studios 88 percent, day-care centers 75 percent, and advertising agencies 60 percent.

This deep freeze has posed a singular policy challenge: The government has never before been tasked with figuring out how to put a majority of the country's businesses on life support. "We know how to support the financial system. It goes all the way back to Walter Bagehot," Satyam Khanna, of the Institute for Corporate Governance and Finance at NYU's School of Law, told me, referring to the 19th-century British thinker. "There's a playbook to follow. What we don't know how to do, or had no idea how to do, is provide direct support to your local coffee shop at scale."

Congress and the Trump administration came up with a $350 billion plan to provide forgivable loans to small businesses, now amplified by a second tranche of $320 billion. The Small Business Administration's Economic Injury Disaster Loan initiative provides small grants to small firms; its Paycheck Protection Program has small firms apply to retail banks and credit unions for loans of up to $10 million, intended for expenses such as rent, insurance, utilities, and wages. The PPP loans become grants, provided that employers retain their employees and spend 75 percent of the money on payroll.

Since it went live in early April, this rescue effort has been beset with implementation problems. Banks were unclear on what information to collect and were overwhelmed with applications. Small businesses had difficulty figuring out where to put in their paperwork, and what was available to them to begin with. Millions of massage therapists and cupcake makers and furniture companies were left adrift. A survey by the National Federation of Independent Business showed that four in five applicants to the two emergency programs were unsure whether they would receive help when the first tranche of money ran out.

Pedestrians pass by temporarily closed businesses in the Carroll Gardens neighborhood of Brooklyn, New York. (Craig Ruttle / Redux)

Even successful applicants describe the process as a mess. Jackie LaVana owns a marketing firm in the Boston area. "It's small but mighty," she told me. "Me at my kitchen table," plus a team of subcontractors who help her create online advertising campaigns. "I was having my best year ever" before the coronavirus pandemic, she said. But her company has since taken a 25 percent hit to revenue, if not higher.

LaVana watched the congressional rescue process closely and spent hours on text and email threads, talking with friends in the accounting and legal trades and with other small-business owners. Everyone had questions. What version of the program did they need? Who would even let them apply? Did they qualify? Would they meet the requirements? "It was complete confusion," LaVana told me.

The Village Bank in Wayland, Massachusetts, where LaVana's company has an account, initially said it could process her application, then told her it could not help her, because her company did not have a commercial loan. Other financial institutions told her that she needed an account with them to apply, or did not respond to her queries. She had finally managed to move forward with a small bank in western Massachusetts, before her own bank got back to her and said it would, in fact, be able to help.

The money would be enough to "keep the lights on," she told me. One of the worst facets of the crisis, she feels, is that so many small businesses in her community are ailing together, and so many have not received help: "This is spiraling," she said. "My ability to run my business allows my home day-care [provider] to get paid, and they're also seeking a disaster loan. I want to support the businesses that sustain me, but I feel like I need support to do that."

The problems with the relief package run far deeper than a flubbed rollout. For one, banks have been prioritizing applications from bigger clients; some have even developed "concierge treatment" options for wealthy firms. Even after some congressional fixes, the small-business plan, in that way, has helped big small businesses over small small businesses, and established small businesses over new small businesses, as the approval of loans to brand-name companies such as Shake Shack, Ruth's Chris, the Los Angeles Lakers, Potbelly, and others has demonstrated. (Under public pressure, these companies have returned the funding.) Much of the help has gone to the companies that need it the least, among them firms with employee counts just under the SBA caps, franchises of major chains, and publicly traded firms, which are by definition able to raise money from investors. As structured by the federal government, "it was inherently regressive," Khanna said.

Indeed, loans of $1 million or more soaked up half of the initial $350 billion allocated by Congress. Whiter, less populated states got more loan money per capita, with Vermont, North Dakota, and Minnesota overrepresented and Nevada, Florida, and California underrepresented. Researchers found no evidence that money went to the places and industries hit hardest, as measured by business closures and declines in hours worked. The accommodation- and food-services sector accounted for two in three jobs lost, but received just 9 percent of federal aid dollars.   

The program is generating inequality in other ways too. One of the businesses that has applied but not yet received aid belongs to Jessica Yang's parents, who sell sandwiches and groceries at a deli in Baltimore. The shop has closed, unable to make a takeout-and-delivery model work with no notice: The deli had no online presence before the shutdown, and services such as DoorDash and Uber Eats charge such large commissions that it would "never break even on an order," Yang told me. The SBA was its only hope. "I heard that we would hear back in three to five days," she said. "My parents keep calling me and asking if I'd heard anything. Then we read in the news that the program reached its limit. I wonder if that has anything to do with it. Maybe there's just no money to go around."

Yang said that her parents' ages and backgrounds complicated the application process: Her father is in his 60s; her mother is in her 50s and does not speak English fluently. "For first-generation Koreans, how are they getting accurate information?" Yang asked. "I don't want people like my parents to miss out on these opportunities because the process of applying is complicated."

They are, and it is. Although the government is not collecting or releasing data on the racial makeup of SBA-aid recipients—leaving think tanks and advocacy groups to fill in the gaps—the Center for Responsible Lending has estimated that 95 percent of black-owned businesses, 91 percent of Latino-owned businesses, 91 percent of businesses owned by Native Hawaiians or Pacific Islanders, and 75 percent of Asian-owned businesses have "close to no chance" of getting an emergency loan through a mainstream financial institution. Even with congressional tweaks, the program is amplifying existing racial disparities.

In other ways, the SBA programs are too little, too late. John Lettieri of the Economic Innovation Group, a Washington, D.C.–based research and advocacy organization, explained to me, "If you have a short-duration crisis that causes a lack of liquidity across small businesses, followed by a quick return to normal, PPP is going to help a lot of businesses. But does that sound like what we're facing? Not to me."

Among the issues that EIG and other advocates are pointing to: The program is not big enough, because businesses likely require an estimated $1 trillion in relief. The maximum loan size, at $10 million, is too small for many firms to cover payroll and other expenses. The program disadvantages companies with high overhead costs, such as businesses that need to pay rent in expensive cities. It requires employers to keep workers on the books, when many would financially benefit from being laid off and receiving enhanced unemployment-insurance payments. Finally, its timetable is far too short, given that formal shelter-in-place orders are expected to last for months, and the consumer economy is expected to remain weak for a year at minimum.

Facing mounting bills and absent revenue, many businesses are closing permanently, rather than drifting further and further into insolvency. "When responding to something like this, you're not just dealing with dollars and cents. You're dealing with toxic and pervasive fear and uncertainty," Lettieri told me. "I can't take for granted that Congress will extend this program, and that I'll have a business worth running in three months. I'm going to burn through the cash I have in pocket, so why not cut losses now?" Surveys indicate that one in four small businesses does not expect to survive; an additional one-third are uncertain of their potential to withstand the cataclysm.

The short-term effects of this disaster are clear: When businesses liquidate, they lay off workers, who spend less in their local economies, making other businesses weaker, necessitating further layoffs. Business failures thus act as an accelerant in a downturn, making temporary damage permanent. This is a central reason why many economists do not expect a sharp, V-shaped rebound to the current recession, but a long, slow, U-shaped recovery.

But the decimation of American small businesses will inflict more insidious, long-lasting harm too. "We are seeing a complete wipeout of a cohort of entrepreneurs and young firms," Lettieri said. "And there's nothing coming up behind them." The pandemic will mean the triumph of franchise chains over mom-and-pop shops, of C-suite executives over entrepreneurs working in their basements. It will mean town centers filled with banks and 24-hour pharmacies rather than bookstores and nail salons and takeout counters. It will also mean fewer start-ups competing with incumbents.

Ultimately, this means a less competitive American economy. New companies and small businesses drive net job growth in the U.S. They generate more productivity growth than bigger and established businesses. The great small-business die-off will fuel industry consolidation, which will both depress wages for workers and increase prices for consumers. More inequality, more sclerosis, and a smaller GDP: These are some of the legacies the coronavirus pandemic is leaving.

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Measure would provide state dollars to NJ's hospitality, alcohol businesses - NJBIZ

Posted: 04 May 2020 02:26 PM PDT

Restaurants, cafes, bars and other hospitality businesses that have seen their revenues plummet amid the COVID-19 outbreak and the Murphy administration's response might have a new lifeline from the state.

Under a bill that passed through committee on Monday, the state would create a $5 million "NJ Hospitality Emergency Loan Program," within the New Jersey Economic Development Authority for certain smaller businesses.

The measure – Assembly Bill 3959 – was approved at the Assembly Appropriations Committee on Monday morning, the State Legislature's first-ever committee hearing conducted remotely in a bid to promote "social distancing" and starve the virus of potential new hosts.

Meanwhile, Assembly Bill 3965 – also approved Monday – would make local alcohol producers and shops eligible for another small business loan program under the NJEDA, in order to cover operating expenses such as payroll and utilities during the pandemic.

The loans spelled out under A3959 would have the same terms as another small business loan program within the NJEDA, meant to prop up struggling businesses that have been ordered to shutter their doors, or have seen steep drops in their customer base.

It's not as if an effort isn't being made, but if you consider the demand being made against the normal infrastructure … it's not balanced because you can't possibly be prepared for what we're undertaking here.
– Assembly Appropriations Chair John Burzichelli

Many patrons across the state have opted to not leave their residences either because of bans on nonessential travel, or to avoid the risk of exposure to the virus. And, amid soaring joblessness, many residents have simply opted to spend less money.

Demand soared for the NJEDA's $10 million small business loan program, with 3,260 businesses appling for a combined $228.7 million from the state's much smaller pot of money.

A $5 million grant program ran out of money just over an hour after applications opened, with more than 32,000 businesses vying for funds.

In addition, the Casino Reinvestment Development Authority approved a $2 million grant program in mid-April, which in coordination with the NJEDA will be awarded to Atlantic County and Atlantic City businesses.

"The amount of applications they received in both of those programs was simply huge," Assembly Appropriations Chair John Burzichelli, D-3rd District, said Monday.

"It's not as if an effort isn't being made, but if you consider the demand being made against the normal infrastructure … it's not balanced because you can't possibly be prepared for what we're undertaking here."

Under the bill, loans would be capped at $10,000 "per business per month" to cover "immediate, unavoidable expenses," other than payroll, that arise during the existing public health emergency. Eligibility would be capped at $2 million for businesses in operation at least a year, or $1 million for those that have been around less than a year.

Applicants would have to provide copies of the bills they would use the loan money to pay. Businesses that have been in operation for less than a year would also have to show they have kept up with their payments.

Like with the existing NJEDA loan program, businesses would hash out a 10-year payment plan. Loans would be interest-free and payments would be deferred for the first nine months.

"If we want our vibrant hospitality industry and its many employees to make it through this crisis, we must give these small businesses the tools they need to weather the pandemic until we can safely come together to once again enjoy all they have to offer," one of the bill's sponsors. Assemblyman Raj Mukherji, D-33rd District, said in a Monday statement.

Bottoms up

A3965 meanwhile, is meant to provide relief to smaller-scale alcohol businesses, such as breweries and wineries, as well as retailers with up to 10 employees.

The money would come out of the EDA's existing non-emergency business assistance loan programs. Interest rates would be set at the prime – or lowest possible rate – or up to three points above.

"This pandemic has brought our economy to a near halt, putting a strain on our growing small business industry and, as the summer fast approaches, is threatening to severely impact New Jersey's busiest season for tourism," reads a statement from the Assembly Democrats Office.

"The dense concentration of bars, micro and craft breweries, wineries, and distilleries, who rely on taproom revenues and in large part complement the Jersey tourist experience, are no exception to the financial hardship we're seeing.

‘It’s been a struggle’; Small-business owners try to navigate government supports - BarrieToday

Posted: 04 May 2020 10:09 AM PDT

Are you a small-business owner confused about what federal and provincial supports are available to you to help you through COVID-19?

Your bank could help you with that, and it may not cost you a dime.

"To try to read between the lines to figure out how they even calculate them... it's been a struggle. You almost have to be an accountant, I think, to figure it all out," Anita Stacey, president of Cowden-Woods Design Builders in Barrie, said with a laugh.

"It's a little bit confusing to know what is the right program to apply for, because everyone's circumstance is different," she added 

Stacey applied for a CEBA (Canada Emergency Business Account) loan through Meridian Credit Union and will use the $40,000 in funding to help extend operations when the downturn hits.

"After the application was filled out, it was a matter of days and we had the funds in our account," she said. "It was a relief that happened so quickly. It was really helpful for us and I'm sure it would be helpful for a lot of small to medium-sized businesses."

The general contracting company has been in business in Barrie since 1983.

"Construction is a little bit different in that, we have not been impacted immediately by COVID-19," said Stacey. "We've been fortunate that a few of our projects have been deemed essential through the provincial guidelines, so we've been able to continue to work. Where it's going to impact us fairly soon is... some projects were put on hold. For now, we can maintain.

"In about five or six weeks, we will not have projects to go to because they've shut down," she added.

When COVID-19 supports for small businesses started to be announced through the federal and provincial governments, Stacey said she was relieved to have a financial advisor to help her company navigate them.

Jason Teal, vice-president of business banking for Meridian in Barrie, says banks across the country are bracing for multiple waves of COVID-19 impacts, with businesses currently in the first stage.

"What we're hearing from businesses today is there is an evaporation, or slow down, of revenue. In some cases, businesses have had to shutter that had previously been fully operational, but many have had to scale back their business," said Teal.

In many cases, businesses are also working to evolve and innovate.

"There's a very rapid switch in how you do business and interact with your customers," he said. "Also, looking at your supply chain and (determining) where the risks are you may not have had before."

Teal says business owners should be looking at their own business needs and being able to clearly define them to assist a financial advisor in suggesting an avenue of action.

"Then you can work through a worst-case and best-case scenario of how things may unfold over the next 12 to 18 months," said Teal.

Teal says different programs have different criteria, so asking a financial advisor for help can be beneficial in navigating those criteria. Also, most banks offer the services of their financial advisors for free if you already have a business account with them.

"Now more than ever, there's so much information out there that it's not reasonable for these business owners to understand it all, and it might not be an efficient use of their time to invest the energy in understanding it," said Teal. "We have resources internally that can get you up-to-date information, and we encourage full disclosure."


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