Small Businesses Are on the Brink

As the coronavirus pandemic continues, everyone agrees: Small businesses need help, and they need it now.

National Federation of Independent Business research shows that 50 percent of small businesses can’t survive for more than a month or two under the current conditions. Congress has already created and expanded two loan programs to help small businesses, but the programs have been plagued by problems from the start, and are now notorious for providing large forgivable loans to bigger companies with strong relationships to large banks. If this isn’t fixed immediately, millions of small businesses will close, leaving tens of millions of American without jobs. 

The problems start with the Paycheck Protection Program, the centerpiece of the bipartisan legislation enacted in late March and on track to be further funded this week. The program initially contained $349 billion in partially forgivable loans to small businesses that use the money to keep their workers employed, pay utilities, and cover rent, leases and mortgage interest costs. 

This initial funding wasn’t nearly enough. The PPP ran dry after only 13 days. By then, three quarters of small businesses submitted an application for a loan, according to NFIB research. Yet 80 percent hadn’t received a deposited loan. They don’t know when, or if, they’ll get the relief they need.

Where did the money go? It turns out that big businesses somehow raided the program. According to the Small Business Administration, 45 percent of the approved funds went to 4 percent of the applicants. Some of these are companies with thousands of employees and cozy relationships with big banks. Some are even publicly traded. That’s not who the Paycheck Protection Program was supposed to help.

It’s a similar story with the Small Business Administration’s Economic Injury Disaster Loans (EIDLs) and Emergency Grants. Also included in the bipartisan legislation, these programs were supposed to offer immediate grants of up to $10,000 and loans of up to $2 million.

These programs are also popular. According to our survey, 40 percent of small business owners successfully submitted an application for an EIDL with most requesting the $10,000 Emergency Grant. Yet as of Monday, a mere 10 percent of applicants received the grant and only 1 percent had received the loan.

Not only that, the promised benefits appear to be a mirage. Small businesses have read widespread reports that initial loan disbursements will be limited to $15,000 per business and Emergency Grants limited to $1,000 per employee. As with the Paycheck Protection Program, small businesses are getting cut out of a program they need to survive.

These problems need to be solved, fast. Small businesses are a huge part of America’s economy, and account for nearly half of America’s jobs. But it is this part of the economy that is in most danger of failing. The vast majority of small businesses in America are truly small, with fewer than 20 employees. They don’t have an army of lawyers and accountants to process their paperwork, nor do they have piles of reserves or huge lines of credit with financial institutions to weather the crisis. They are hardworking Americans from all walks of life and backgrounds. They need help to survive and take care of their employees due to government shutdown and stay-at-home orders in response to the pandemic. 

It is refreshing that Congress seems to be overcoming unrelated partisan squabbles and appears ready to pass an additional $310 billion in funding for the Paycheck Protection Program and $60 billion in funding for the Economic Injury Disaster Loan program.

Although a preferable plan would have been to reserve half of the new funding for companies with 20 or fewer workers, the provision in the bill directing $60 billion to community banks and credit unions will help some, as that is where most small businesses who found success in securing PPP funds choose to bank. The additional funding for the EIDL program is also welcome news. It is crucial that the SBA communicate clearly about the status of these grants and loans.

Going forward, there is still much that the administration and the bureaucracy can do to improve the programs and help more small businesses. The most pressing need is to lower the current SBA requirement that 75 percent of PPP loan proceeds must be used for payroll costs in order to have the loan forgiven. This requirement was unilaterally imposed by the executive branch, and may prevent many of the smallest businesses from receiving forgiveness. Many Main Street businesses with just a few employees have payroll costs that are only 15 to 20 percent of their operating costs. The government should not be penalizing them for this.

Additionally, the Federal Reserve has announced it will be rolling out its Main Street Lending Program. This is designed to help businesses with up to 10,000 employees, and has indicated that the minimum loan size under this program will be $2 million. Yet this will exclude the vast majority of American small businesses from this much-needed program. The Fed needs to lower the minimum loan amount dramatically. Allowing businesses to access loans as small as $10,000-$20,000 would give small business owners who are shut out of the PPP another option to help their employees and save their businesses.

Brad Close is the president of the National Federation of Independent Business.

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