Why Congress’ Plan to Save Your Favorite Restaurant Might Fail

The small-business bailout could determine whether America’s cities and towns are recognizable when this crisis is over.

A dark, empty bar sits closed in New York on March 16.
Closed for coronavirus. Spencer Platt/Getty Images

Will your favorite burger joint survive the coronavirus crisis? How about that little bookstore on the corner that also had to shutter, or the bar you and your co-workers used to hit after work before everyone started telecommuting, or the yoga studio you’ve been going to for three years? Are they going to make it through this ordeal?

Is the city or town or suburb you live in going to look remotely recognizable when this is all over?

The answer to those questions may hinge on the aid package for small businesses that the Senate passed Wednesday as part of its $2 trillion economic rescue bill.

Although it received relatively little attention during negotiations compared with other, sexier pieces of the coronavirus legislation (such as direct cash payments to families or the bailout fund for larger corporations), the proposal to help small businesses may have the most direct impact on American life. Its success or failure could be the difference between whether hundreds of thousands of restaurants, shops, and other businesses survive long enough to reopen or have to shutter permanently. If we want the places we live, shop, and eat in to reemerge intact, it rides on this.

And at the moment, I’m worried that the help that Congress is offering is simply too small. There may not be sufficient funding to go around for all the mom-and-pop shops that need it.

Under the relief plan, small and medium-size businesses (as well as nonprofits) harmed by the outbreak will be eligible for special low-interest loans to cover their major operating expenses—loans the government will cancel as long as borrowers don’t cut their payrolls. If a business slashes staff, the amount of forgiveness will be reduced proportionately. But given the program’s design, there’s a strong chance that the vast majority of business owners who receive these loans won’t be required to pay them back.

In short, Washington will essentially hand your favorite bakery or coffee shop money to keep its people on rather than laying them off. (If a business already let workers go, as many have, it will be eligible for forgiveness as long as it hires them back after receiving the loan.) The hope is that this will help keep firms from dumping their workers onto the state unemployment rolls, which are already getting overwhelmed by the number of applicants, while keeping small businesses alive through the thick of this crisis.

But there are reasons to be concerned about how well the plan will work. Some are logistical. For the sake of speed, Congress chose to build on an old program run by the Small Business Administration that guarantees loans made by private banks. (Why would banks make loans the government will probably just wipe away? Because they’re getting paid commissions to do the underwriting.) This may be a faster way to get money out the door than creating a new lending program from scratch, since most small businesses already have some kind of banking relationship. But it’s still not entirely clear how quickly the effort will scale, and if it takes too much time, many restaurants and shops risk failing while they wait for help; according to the JPMorgan Chase Institute, only half of small businesses have enough cash to survive for 27 days without new revenue.

The biggest cause for worry, however, might simply be the insufficient sums of money available through the program.

First, the loans aren’t that large. Businesses will be permitted to borrow amounts up to 2.5 times the size of their average monthly payroll. They can spend that cash on wages, salaries, rent, mortgage interest, or utilities and still qualify for forgiveness, so there’s flexibility to cover key costs. But it’s only a couple months’ worth of help that won’t be enough to tide them over if this crisis lingers.

Second, the overall pot of money just isn’t that big. The government can make $349 billion in loans under the main program. Including the bill’s other help, the total help available to small businesses is $377 billion. As George Washington University economist Steven Hamilton and others have pointed out, that’s about half of what would be required to cover 2½ months of payrolls for every business in America with fewer than 500 employees, which are the program’s main targets (some larger firms, like midsize restaurant chains, are eligible too).

Realistically, not every small business in America will need this aid (plenty of small companies are still operating and making money right now). But since these loans are first-come, first-served, there’s a real chance that the cash will run out before everyone who needs a lifeline gets one.

One wild card in all of this is the Federal Reserve. The central bank has said it plans to create a “Main Street Business Lending Program” to complement Congress’ efforts. But the Fed hasn’t publicized any details of what the program will look like. It might be a helpful backstop; it might not. We don’t really know.

It is possible that when the small-business rescue runs out of funding, Congress will just go ahead and appropriate more. It might make the loans larger or offer different relief options. (Personally, I think proposals for long-term, zero-interest loans that still need to be paid back might be more effective.) But in the end, that’s pure speculation. It would have been better to spend more upfront, especially given that helping small businesses is one of the most politically popular things Congress can do. The fact that it didn’t is especially dismaying given that the coronavirus bailout program for large corporations—which includes a large lending program from the Federal Reserve, as well as some large tax breaks—will likely keep big companies afloat for much longer than two months.

Given all the uncertainty around this rescue effort, it would probably be smart for more places to follow the lead of cities like New York and Los Angeles, which have put a moratorium on commercial evictions. That will give small businesses time to apply for aid and hopefully stabilize themselves. Local governments could halt other debt collections. A federal freeze on small-business debt might have been a good idea too, but unfortunately never really seems to have been on the table.

But in the end, pausing debt payments isn’t a permanent fix—it just pushes the immediate financial burden onto landlords, among others, who have their own debts to pay. Congress needs to find a longer-lasting solution that will prevent droves of local businesses from going bust across the country. Failing to do so will be devastating, not just for the cultural fabric of communities but for the wider economy. The more small businesses fail, the harder and longer it will take for employment to recover after this downturn ends, since there will be fewer employers around to hire. Each and every empty storefront will be a hole in the economy that will take time to fill. We’re only a couple of weeks into this, and Washington already needs to do more to keep small-business owners from closing up shop for good.