The New Small-Business Challenge: Surviving the Recovery

The COVID-19 pandemic is the most serious threat to American small businesses since the Great Depression. Quick action by Congress, most notably in the form of the Paycheck Protection Program, blunted the damage unleashed by the pandemic and bought many small employers valuable time. 

But this early success — and the improved economic data now reflecting it — should not fool lawmakers into thinking their work is complete. Millions of businesses remain vulnerable to permanent closure, and the initial infusion of emergency relief that kept many of them intact will soon run out. 

After surviving the first phase of the crisis at great cost, we must not now forfeit the recovery by allowing a tidal wave of insolvency to wipe out businesses that will be key to rebuilding a vibrant economy in the years ahead. Avoiding this fate will require a new phase of relief designed to help small businesses adapt to a slow and difficult return to normal.

The economic crisis has affected nearly every facet of the U.S. economy, but the most face-to-face dependent sectors have borne the brunt of the damage. For example, even with roughly 82 percent of small businesses in food services and accommodation reporting they received a PPP loan, the census data found that over one third still had less than a month of cash left. Those cash-short companies alone represent three million workers whose jobs are at high risk. 

But the problem goes beyond the next month. According to the census data, fully half of all small businesses think it will be more than six months before things return to normal, if they ever do. For those in food services and accommodation, this rises to over 70 percent. The same is true in the arts, entertainment and recreation industry. The tidal wave seems headed straight for these and other sectors that had steadily grown as a share of the U.S. economy for decades prior to the crisis.

So what can be done?

Some have suggested simply extending the Paycheck Protection Program. This would be a mistake. While PPP has provided vital relief to many borrowers, it was designed as a short-term response to what was then perceived as a short-term crisis. What businesses face now is not a temporary shutdown, but instead a long and uncertain recovery likely to be marked by low consumer demand and continued operational disruption until a vaccine is widely available. This calls for a different form of relief.

To that end, Congress should enact a program tailored specifically for the protracted transition from catastrophe to recovery. And in crafting such a program, lawmakers should follow the playbook of 1980s action movies: big, bold and uncomplicated. That means federally insured, zero interest, long-term loans that can be used to cover a variety of operating expenses and key investments — the core elements of what we are calling the Small Business Recovery Program

Unlike PPP, which was hampered by complex and narrow terms of use, a Recovery Loan would be simple and flexible, enabling businesses to address immediate needs — such as payroll, rent and utilities — as well as adapt to an evolving and uncertain economic environment. With appropriate guardrails to prevent abuse, small business borrowers could draw loans equivalent to two years’ worth of annual operating expenses, providing the financial runway needed to navigate a prolonged period of disruption and lost revenues.

A simple numerical exercise demonstrates how a Recovery Loan would help a business dramatically improve its long-run viability. Consider a small business with a $400,000, five-year loan at 7.5 percent interest. Each month, its payments total roughly $8,000. But if they are able to refinance this debt using a 30-year Recovery Loan at no interest, those payments fall to $1,100 per month. Likewise, a business could also use a Recovery Loan to buy a building or equipment they are currently renting. 

Taking such steps will allow small businesses to considerably reduce their fixed expenses, thereby improving their balance sheets and enabling them to survive at far lower levels of demand. In this way, Recovery Loans directly address the longer-run challenge businesses will face in the period ahead. And because these loans will eventually be repaid, using a long-term, zero-interest structure allows the federal government to deliver much greater relief and much lower cost to taxpayers than, for example, a grant-based approach. Stop-gap loans or cash grants can of course help, but they are insufficient for the task at hand.

The economy will not return to pre-pandemic levels of consumer demand as long as the virus remains a clear danger to public health. It is both fair, and in the country’s economic self-interest, that lawmakers respond with relief that matches the scale of the threat to our country’s small employers. A Small Business Recovery Program would provide just such a lifeline to those willing to double down and reinvest — to bet on themselves, their workers and the U.S. economy.

Adam Ozimek is the chief economist at Upwork and a small-business owner. John Lettieri is the president and CEO of the Economic Innovation Group.

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