Moneybox

The Coronavirus Bailout Is Really Going to Screw Over Mom and Pop Businesses

WOODSTOCK, ILLINOIS - APRIL 06: A sign on the front door of Jimmy's Music explains why the business is closed on April 06, 2020 in Woodstock, Illinois. Most of the small businesses in the town remain closed after the governor ordered residents to shelter-in-place in an attempt to curtail the spread of the coronavirus. Woodstock, about 50 miles northwest of Chicago with a population of around 25,000, was once home to filmmaker Orson Welles and was the setting for the 1992 movie Groundhog Day. (Photo by Scott Olson/Getty Images)
Jimmy’s Music, a store in Woodstock, Illinois.
Scott Olson/Getty Images

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Right now, financially battered small businesses are relying on two different government rescue programs in order to survive the coronavirus crisis. Both are experiencing serious problems. But Congress only appears to be interested in fixing one of them. As a result, truly small businesses might be about to get an extremely raw deal.

The first of these programs is the ever-chaotic Paycheck Protection Program, the $349 billion rescue effort that has commanded most of the public’s attention on this front. It provides businesses with low-interest loans to cover payroll and some other expenses like rent and utilities, which the government will forgive as long as the borrower doesn’t lay off its workers. Even before Donald Trump signed the CARES Act into law last month, it was abundantly clear that Congress had not appropriated nearly enough cash to meet all of the demand from desperate business owners. Since the loans are first-come, first-served, small-business owners have been in a panic about losing out ever since the program had its extremely rocky rollout last week. By Monday, Bank of America alone said it had received 178,000 applications requesting $32 billion—suggesting the money evaporated fast.

Thankfully, both the White House and Congress have recognized the need for speedy action. According to Politico’s Jake Sherman, it looks like Republicans want to approve an additional $250 billion for the program by unanimous consent.

This is a positive development. But while Congress is moving quickly to keep the Paycheck Protection Program from running dry too soon, another part of the small-business bailout appears to be in equally significant trouble.

For many years, the Small Business Administration has offered loans to help businesses that suffered from natural disasters, like hurricanes or floods. These Economic Injury Disaster Loans can be worth up to $2 million each, have a low interest rate, and have maturities of up to 30 years, so the monthly payments can be pretty low. In normal times, they usually take about a month to get approved.

The CARES Act was meant to get some of that money out faster. Under it, businesses that applied for a disaster loan were supposed to be eligible for an emergency grant worth up to $10,000 that would arrive within three days of their request, and which they would not have to pay back even if their full loan application was eventually rejected. Congress set aside $10 billion for this purpose, which should have been enough to help at least 1 million businesses. For the smallest proprietors struggling with rent or other immediate expenses, it looked like a pretty important bit of aid.

But even though businesses have been applying for these grants for more than a week, there is no sign that a single dollar has actually gone out the door yet. Unlike the Paycheck Protection Program loans, which are government-backed but made by private banks, the economic disaster program is handled directly by the Small Business Administration. I’ve asked SBA twice now whether it has distributed any grant money. Both times, a spokeswoman has said she would respond, then never followed up.

In the meantime, Reddit’s small-business channel, which has become a touch point for business owners trying to navigate the bailout, has filled up with posts from people still waiting to hear back about the grants and who are convinced that none has gone out. Not one small-business owner I have talked to in the past week says they have received the cash yet, either. A spokeswoman for the Main Street Alliance, a small business group, told me in an email that “anecdotally based on what we’ve heard from our members—no one has received any money.” On Twitter, frustrated small-business owners even started a hashtag about the situation, #EIDLHOAX.

Once businesses do start receiving money, many are concerned it could be far less than what they anticipated. The SBA now says it will provide up to $10,000 for each applicant. And in an email bulletin sent Monday and posted to Reddit, the SBA’s Massachusetts field office announced that businesses would only receive $1,000 per employee and $10,000 max per grant. (It also said money would start being distributed this week, suggesting none of it had gone out yet.) I asked the SBA press team to confirm whether the information in the email is accurate, but they did not respond.

The part about $1,000 per employee is new—and significant. If that is how the program is ultimately structured, it will be a severe blow to the very smallest businesses that have seen their sales flattened by this pandemic.

Here’s why. As you might guess from its name, the Paycheck Protection Program is mostly an incentive for employers to keep their workers hired, rather than dump them onto state unemployment programs. The loan amounts are based on the size of a business’s payroll. And last week, the Treasury Department and the Small Business Administration officially told borrowers that they would be required to spend three-quarters of their loan proceeds compensating staff. As a result, the PPP is not very helpful for businesses that don’t have a lot of workers but do have a lot of other expenses like rent. It’s those businesses that really have to rely on the disaster grants to cover immediate fixed costs while they are shut down. (See, for instance, the Dairy Queen franchise owner I wrote about earlier this week.)1

But if these grants are doled out based on how many workers a business employees, it means that a lot of especially small restaurants, fitness studios, and fast-food franchises won’t be able to get much help from either the Paycheck Protection Program or the EIDL. They’ll get doubly screwed over. And while they might eventually receive a disaster loan from SBA, nobody knows how long that will take—given that, again, those usually take a while to happen even in normal times.

To put it another way, the government’s small-business rescue may be perfectly calibrated to deny aid to America’s actual mom and pop shops.

So far, members of Congress seem less troubled by this than the fact that SBA isn’t getting the money out faster. When I asked Sen. Marco Rubio, chair of the Senate Small Business Committee, for comment, his staff sent the following statement:

Chairman Rubio was resilient during negotiations of the CARES Act to ensure there was an option through banks because historically, SBA has been unable to meet the demands in their direct disaster lending. This is an unprecedented crisis and the fastest way to get money out is through our nation’s lenders through the Paycheck Protection Program who have already been approved to disperse billions in lending, saving thousands of American jobs.

Translation: We always knew this agency was incompetent, which is why we thought the major bailout should be managed by the private sector. Meanwhile, Sen. Ben Cardin, the ranking Democrat on the same committee, basically said the SBA needs to try a bit harder:

I have heard far too many of my constituents in Maryland expressing frustration and confusion about the status of SBA’s direct disaster loan and grant programs. Because small businesses need funding as soon as possible, the CARES Act included a provision included at my request to provide small businesses with an upfront grant of up to $10,000 that is to be dispersed within three days from when an application is submitted. We know standing up a new grant program is an enormous task for SBA, but its communication with small businesses must improve dramatically so that owners can make informed decisions.

Getting these grants out faster would be good. But they should also offer real help to the smallest businesses. Right now, it appears they won’t. Sorry, Mom and Pop.

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1 In that piece, I wrote that while the owner, Rocco Fragolleti, was still waiting for his grant, he had “heard” about other business owners getting the money within two days. I checked back with him on Tuesday, and he said he was now starting to suspect that what he’d heard was “bullshit.”