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It’s only been a few days, but the government’s effort to save America’s small businesses from the coronavirus crisis is already looking wobbly. To understand why, it helps to talk to someone like Rocco Frattaroli, who owns a Dairy Queen franchise in a mall food court in Salinas, California.
The Dairy Queen isn’t Frattaroli’s main source of income—the franchise hasn’t been profitable since he bought it in 2017, and he runs his own IT and computer repair company (he also has a real estate license on the side). But the franchise is his big source of anxiety right now. The Northridge Mall is still charging him rent. And when it shut down right before California issued a stay-at-home directive, Frattaroli wasn’t able to unplug all of his appliances before closing up, so he’s also stuck paying a pricey utility bill, even though a lot of his supplies will have rotted anyway by the time he’s allowed back. The soft serve, the Orange Julius mixes, the cookie dough and hot dogs and chicken patties—they’ll all have to be tossed. “I lost about eight grand worth of food in the store there,” he told me.
At first, Frattaroli tried setting up a GoFundMe page, but that only raised $20. So, like most other small-time business owners in the country at the moment, he’s counting on help from the feds—including through the $349 billion Paycheck Protection Program, which Congress created as part of the CARES Act, its broad coronavirus rescue bill.
Just applying for the aid has been a confusing mess. And it’s clear that even if it comes through, it won’t be enough to keep Frattaroli’s business afloat. So he’s applying to a second federal disaster loan program, which comes with its own set of uncertainties.
These loans—the Paycheck Protection Program and the Economic Injury Disaster Loan program—are where the plan to rescue America’s bars, restaurants, stores, gyms, and other “nonessential” businesses will succeed or fail. Neither will be enough on its own. And it’s possible that even if both do their jobs, we still won’t be able to save communities and livelihoods from being deeply scarred by the ongoing economic catastrophe.
Let’s start with the Paycheck Protection Program, which has gotten far more attention. When Congress created it as part of its $2.2 trillion bailout in March, the loan plan was billed as the main effort to help small businesses survive while cities and states remained on lockdown to slow the coronavirus’s spread. It offers borrowers a low-interest loan to cover eight weeks of payroll and other expenses, like rent—but the government will cancel the debt, effectively making it a grant, if employers don’t lay off their staff or cut pay by more than 25 percent. (If they do, forgiveness is reduced proportionately. If a business already laid staff off, they get credit for hiring them back). It’s essentially an incentive for firms to keep people hired rather than dumping them onto the already overwhelmed unemployment rolls, which have been inundated with more than 10 million claims. Friday was the first day to submit an application for one of these loans.
The rapid rollout has been a bit rocky. While the program is administered by the Small Business Administration, it relies on private banks to actually make the loans, which are then backed by the government. This was done for speed; nobody seemed to think that the underfunded SBA had the capacity to process the sheer amount of borrowing that would be necessary, so it would be better to let people work with their regular lenders. But up until the last minute, thousands of banks were threatening not to participate over concerns about legal liability and whether they would actually be able to make money on the loans. The Treasury Department didn’t release the program’s full rules until Thursday night, less than 24 hours before it was supposed to be running, giving bankers little time to digest them. “What I thought was a brilliant plan is turning into a quagmire of quicksand,” the president of one small lender, First Community Bank in Corpus Christi, Texas, said in a woeful and apologetic letter that a customer sent to Slate.
When Friday morning rolled around, some financial institutions decided they weren’t ready to take applications yet. Many others said they would only accept ones from established clients. (A major reason why, I was told by more than one source, is that banks are still required to abide by anti–money laundering rules under the program, which is simpler for a business they’ve previously worked with.)
Because of all this, Frattaroli spent much of his Friday morning driving through Manteca, California, a town nearby his home in Stockton, fruitlessly looking for a lender. Bank of America, where he kept his small-business accounts, said it would only take applications from clients with a previous loan or credit card from them. He had neither. Wells Fargo, F&M, Chase, Bank of the West, and the local Bank of Stockton all turned him away, too. “Every bank said that unless you have an account with us, we won’t make a loan,” he told me. Frattaroli did eventually find a lender willing to take his application—Sunwest Bank—but only after I mentioned during our interview that I’d heard it was accepting applications from new clients. (On Saturday, Bank of America changed course and said it would make Paycheck Protection Program loans to its small-business checking customers, as well.)
Frattaroli’s drive-about illustrates one of the apparent problems with the Paycheck Protection Program: To benefit from it, you might need to get lucky. The loans are available first-come, first-serve, and almost nobody believes Congress has appropriated enough money to meet all the demand. By the end of Friday, Bank of America alone said it had received 85,000 applications requesting $22 billion. With limited cash to go around, businesses could come up empty if it takes them a while to apply, or if their bank moves slowly, or if every bank they ask for a loan kicks them to the back of the line. I’ve talked with JPMorgan Chase customers who have yet to hear back from a customer rep about their applications. Meanwhile, Live Oak, one of the country’s most active SBA lenders, told me it expected to start disbursing money by Friday night. Again: luck.
All of this could be fixed if Washington had actually set aside enough funding for this program. It almost certainly didn’t. Until it cuts a bigger check, a lot of small businesses are in a mad dash for rescue money. Making matters worse, even if hard-up businesses do get their share, it might not be enough to keep them alive through the crisis if they’ve been shut down.
One issue is simply the size of the loan: It’s only meant to cover eight weeks of costs. What are businesses supposed to do if shutdowns last longer? Nobody’s sure.
Then there are the limits on how businesses can actually use their loan proceeds. As it was originally written into law, the Paycheck Protection Program seemed like it would give businesses a fairly flexible pot of free money to use on their various expenses. But by the time it made it through the administrative wringer, regulators had narrowed its terms so that more of its funds would flow to, well, paychecks. Under the program, businesses are eligible for a loan worth up to 2.5 times monthly payroll costs. Under the official rules the Treasury Department released on Thursday, 75 percent of that money must be spent on payroll costs. Only the remaining quarter can go to other expenses like rent, utilities, or mortgage interest. “If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud,” the Treasury’s guidance warns. In its end form, the program looks similar to wage subsidies that countries like Denmark are leaning on to keep people employed. But it’s not really shaped to keep some businesses alive through the crisis and after.
For businesses that spend the vast majority of their money on salary wages, it’s an excellent deal. “This is a perfect program for us,” Brett Snyder, president of the travel blog and concierge service Cranky Flier told me. The key is that his firm doesn’t have much of a rent burden, and other than staff pay, it just covers some things like server space. “If we get this, then salaries get restored and the people who had to cut back hours will be able to come back. That will handle everything.” For an operation that’s still running but in a diminished capacity, like a sit-down pizzeria that does a lot of takeout, it’s also a boon. But for businesses that pay a lot of rent and have seen their revenue sink, or have been shut down entirely, it’s much less of a lifeline.
Consider Frattaroli’s Dairy Queen. Frattaroli told me his payroll costs typically run $7,000 to $8,000 a month. Meanwhile, he pays about $8,200 in rent and $1,400 for utilities. That means he’s eligible for a loan of up to $20,000, of which he’s required to spend $15,000 on wages, with $5,000 left for everything else. Meanwhile, he’s still on the hook for more than $16,000 over the eight weeks covered by the loan in rent alone.
As a rule, the more rent a business owes relative to its payroll, the less the Paycheck Protection Program will help. A cavernous bar with minimal staff doesn’t fare well. Yoga and other fitness studios run into trouble because most of their teachers tend to be independent contractors and the program doesn’t let businesses count 1099 workers as employees. Midsized restaurants, which often spend 30 to 40 percent of their revenue on payroll, and around 10 percent on rent and occupancy, do better, though the law doesn’t let them use the money to cover other key fixed costs, like insurance. And some owners feel a pang of guilt keeping their staff on payroll just to stay home when those same workers could make more money on the expanded unemployment program Congress passed.
So what is a fast-food franchisee in a shuttered mall supposed to do about rent? Like a lot of other small-business owners right now, Frattaroli is also applying for an Economic Injury Disaster Loan, or EIDL, through the Small Business Administration. This is another longstanding program that is usually meant to help businesses in hurricane or flood zones. As part of its coronavirus aid efforts, Congress jazzed it up a bit while relaxing some of its usual requirements. EIDL offers low-interest, long-term loans of up to $2 million that borrowers can use on a variety of expenses, including rent. Ordinarily, it takes the government about 18 to 21 days to process and pay out these loans, but under the CARES Act, applicants are eligible for an immediate $10,000 advance they don’t need to pay back. Congress set aside $10 billion for those grants, meaning they could help about 1 million businesses.
The EIDL loans are a pretty decent deal. Aside from the emergency grant, they do have to be paid back. But they carry an interest rate of 3.75 percent for for-profit businesses (that’s set by law) and have maturity dates of up to 30 years. A restaurant could borrow $60,000 to cover a few months of rent and pay it down at a rate of $277 a month. A $16,000 loan comes out to about $74 a month, with a 30-year payment plan.
But there are also reasons to worry about how well the EIDL program will work. For one, it’s run directly by the SBA—without banks or other intermediaries—and while that keeps costs down, it’s not clear the agency actually has the manpower to process these loans en masse right now. Again, that’s a big part of why Congress decided to run the Paycheck Protection Program through banks. Frattaroli told me he hasn’t heard back about his grant application yet, though he’s been told that other people have gotten the $10,000 in their accounts within two days.
It’s also a bit concerning that the government’s plan to save a large share of small businesses requires operations like Frattaroli’s to go into debt. That might make sense for a contained disaster, but not for one that afflicts the entire country. Even if the payments are manageable for most, leaving debt overhang on small businesses will be bad for the economy in the long term, since the money they spend paying back Washington is money they won’t be investing. And it will add to the already steep costs of revving a business back up once the pandemic is over. (Like, you know, buying a few thousand dollars of Orange Julius mix and ice cream.) When I asked Frattaroli about the prospect of borrowing money to pay expenses while the mall was closed, he sounded despondent. “No matter what debt that I incur, we have to pay that back at some point. Well, we didn’t make any money for the last two months or three months in the business. Then we have to start back up again and pay all the regular expenses. You’re never going to get out of debt again.”
Again, these are not unfixable issues. Congress could knock a couple percentage points off the interest rates on these loans to make them even more affordable and have the SBA hire an army of contractors so that they have the manpower to get money out the door. Moreover, Congress should be capable of going back to make sure its rescue plan actually works; the CARES Act was put together with admirable speed, but hasty pieces of legislation are never perfect. In a functioning country, the government could iron out the kinks.
Keeping small businesses alive is absolutely one of the most important tasks in front of the government right now, because allowing more employers to permanently go bust will lead to a longer economic hangover when the public health crisis is done. Making sure the bars, retailers, and Dairy Queen franchisees of America can keep paying their employees for the next eight weeks won’t mean much if their businesses eventually go bankrupt trying to pay back rent.
Do you own a business that’s struggling because of the coronavirus pandemic? I’d like to hear from you.
Update, April 6, 2020: This post has been updated to clarify that Manteca, California, is nearby Frattaroli’s home.