The federal government doesn’t understand how small businesses work
There is no doubt the impact of the coronavirus is felt among the smallest small businesses as well as their largest siblings. Although the Paycheck Protection Program (PPP) did provide value to a lot of them, it hasn’t served every small business well. Part of that may be because the federal government doesn’t really understand how the smallest small businesses operate.
A small business with several hundred employees was able to benefit from the PPP because it helped them keep employees on the payroll (It also helped the federal government keep them off of unemployment). This allowed companies, with a lot of employees, to free up working capital for paying other overhead expenses to survive the shutdown caused by COVID-19. It didn’t work the same way for many of the businesses across the country with only a handful of employees—or just themselves.
To really help the smallest small businesses – the 79 percent who have under ten employees, you need to understand how they operate, how they interact with the banking industry, and what they really need to keep their businesses alive in such a challenging time.
Three Things the Federal Government Doesn’t Understand About Small Businesses
After several weeks of watching the Paycheck Protection Program in action, it’s safe to say a one-size-fits-all solution, like the PPP, was never going to serve the needs of all businesses very well. This wasn’t a surprise to the lending industry, small business advocacy organizations, and local chambers of commerce all across the country—we knew better. There were three things the federal government wasn’t considering, but should have, when it crafted a relief package for American small businesses.
Tying the PPP to employee payroll doesn’t help the smallest businesses. Although most small businesses don’t relish the prospect of laying off employees, what they really needed was working capital to buy materials, pay suppliers, meet their business mortgage obligation, make their lease payments, service other business debt, and make payroll. Payroll isn’t the biggest concern they may have had to keep their business viable. Tying PPP funds to their payroll basically tied their hands because that’s not necessarily how they would have used the aid to keep their businesses alive. Broader use of funds would have been easy to regulate—the SBA already defines what 7(a) loans outside of the PPP can be used for—but legislators chose a much more narrow path.
Tying loan forgiveness to payroll in an eight week period creates unfair burdens. If these smaller small businesses use their PPP loan funds for payroll in this short window to gain forgiveness, they may likely need to close their doors before this is over anyway. It is unclear how long businesses will suffer, and that isn’t what they need the capital for. If they forgo forgiveness, or worse, expect it and don’t get it, they will be saddled with more debt they don’t want and might not be able to repay. Not being able to repay creates a whole other large set of issues. Defaulting on an SBA loan will make borrowing in the future very hard, and they will be totally cut off from SBA loans, which are generally the lowest-rate loans on the market.
Big banks aren’t interested in the smallest small businesses. These businesses just aren’t profitable enough for the bank. It’s just math. They can be the same amount of work and support to underwrite a $50-$100K loan as a $1MM to $5MM loan, but the bank gets a much smaller return. . That’s why the first round of PPP funding saw bigger businesses with stronger banking relationships move to the head of the line. These smaller businesses also aren’t borrowing millions of dollars, which makes them less appealing to the biggest banks. Because these smaller businesses don’t find success at big banks, they tend to gravitate toward community-focused banking, non-bank lenders, and fintech firms that better accommodate their needs.
Although the second round of PPP funding appears to be more focused on smaller lenders, and smaller loan amounts, much of that is due to the needs of the larger firms already being met. Including fintechs and non-bank lenders has helped, although most of them still relied on banks for processing. The bigger issue is the guidance from the SBA, and the Treasury isn’t friendly to a shopkeeper who doesn’t have a legal staff or a team of CPAs to help him or her ensure they take the right actions to guarantee forgiveness. And if your business is lucky enough to have a CPA or legal adviser, many are saying “buyer beware.” The ambiguous guidance from the SBA, especially on forgiveness, makes these loans too risky.
There are rumors of another round of aid coming to help small businesses at some point, but it should take a different approach than the PPP and should better reflect the real needs of the businesses you and I rely on to maintain our cars, clean our shirts, and provide an evening out. These businesses need working capital that isn’t tied to how many employees they have or arbitrarily dictate how the funds should be spent.