Can American Small Businesses Survive Coronavirus

With the worldwide economic downturn caused by the Coronavirus outbreak and subsequent national shut-down, much of the economic anxiety is surrounding the future of small businesses. Rightfully so, and may I add, about time. After going virtually ignored in the fallout of the 2008 financial crisis, lawmakers and large industries are finally acknowledging that small businesses, non-profits and independent contractors are integral to the American economy. That is why they have been the target of relief packages like the CARES act. But just weeks after being passed, we are seeing that this relief is not enough. Mant businesses are facing closure, and wondering if they can survive this pandemic. If they can’t the future of the US economy may be in jeopardy.

While large industries may make up the bulk of the stock market and worldwide economy, small businesses actually employ a huge portion of the American workforce. According to the US Census Bureau, small businesses employ 48% of all American workers. And the SBA reports that small businesses account for 45% of American GDP. That means that just under half of the US economy, and roughly of the workers in America, depend on small businesses.

That number surely goes up in urban areas, where there are significantly more small industries, from resteraunts to non-profits to cleaning services, that employee millions of residents, all of whom depend on those businesses and in many cases live paycheck to paycheck. These cities are also being hit harder by the pandemic, and will likely face longer shut-downs. This all explains $350 billion of the $2.2 trillion CARES act passed last month was dedicated towards small business relief. Yet we are already seeing that will not be near enough.

Under the emergency packages passed by congress there are two main proframs devoted to relief for small businesses. The first is the Employment Insurance Disaster Loans (EIDL) which already existed to offer small businesses relief in the face of natural disasters like floods or hurricanes. In addition to low-interest loans dispersed by the Small Business Association (SBA) congress has added a $10,000 grant program to EIDP, which is supposed to provide a grant to businesses when they apply, whether or not their application is approved.

Ideally, this should provide direct relief to small businesses that may not survive a months-long application process. However the grant money is rolling out slowly and partially. Just this week businesses that applied at the beginning of the shut down are beginning to receive grant money. And late clarification by the SBA has stipulated that businesses will receive “up to” $10,000, only providing $1,000 per full-time employee. Not only will this be a significant disadvantage for very small, local businesses with few employees, but it will not benefit the businesses at all if they are forced to lay-off employees while waiting for relief to come through.

No money has been appropriated from actualy EIDL loans as of yet. And what’s more, businesses can no longer apply for them. According to the SBA website, due to a lapse in appropriations, they are no longer accepting EIDL applications. Meanwhile, some businesses that have applied are reporting that the SBA is puling their credit reports multiple times, negatively affecting their credit score.

The SBA is notoriously slow when it comes to loan applications, and all of the funding alotted for grants may be claimed by the time it starts to trickle out. This is why the second relief program, the Payroll Protection Program, is being allocated through private banks. This is the program with $350 billion funding behind it, which offers low-interest loans to businesses if they keep employees on the payroll. Funds from these loans can only go to very specific costs, such as rent and payroll. The loans are also partially forgiveable if at least 75% of the loan money is spent on payroll. Again, this will disadvantage truly small businesses with fewer employees, who may spend more on rent and utilities in dense urban areas than the do on a relatively small labor force.

These businesses are also put behind the curb when it comes simply applying for PPP loans. Banks are being inundated with requests for PPP loans and receiving confusing and piece-meal guidance from the SBA about how to process or handle these requests. This has created a massive back-log of applications of millions of businesses applying for loan relief. Banks are reportedly giving preference to existing customer with lending history, which makes sense from the perspective of a private bank with customer relations to consider. However it leaves many small businesses that don’t have established relationships with SBA backed banking institutions hanging. According to the website covidloantracker.com which gathers self-reported data from small businesses about crisis relief loans, the overwhelming majority of businesses that have been approved for PPP loans had a pre-existing lending relationship.

With funding for PPP relief programs reportedly already running out, it is a serious question as to whether the businesses that have do not have established relationships, have not received EIDL grants, and cannot support keeping employees on the payroll, will receive any support at all. Just this week it seems the funding for both loan programs was exhausted, with over 1.5 million loans approved for a total of $324 billion from the original $350 billion funding package. Agencies are now reporting they can no longer accept new loan applications or new lenders into the program. While most legislators seem prepared to pass increased funding for PPP, it remains a question as to how much and when that will eventuall go through.

Meanwhile. those 1.5 million businesses that have been approved for loans are still waiting to see the money. According to the Covid Loan Tracker, of 15,000 businesses surveyed, only 574 have received any PPP loan money. It also shows that for businesses requesting under $500,000, a much larger portion are receiving less than they requested. That means that larger small businesses requesting more money to stay afloat, are having their requests granted in full much more often than smaller businesses requesting small amounts.

While these businesses wait to receive loans they need to stay afloat, or in many cases wait to see if they will receive any support at all, they are still having to cover costs like rent, utilities and insurance. That is not to mention any lost costs they have from closing including food waste, cleaning and safety practices to prevent against infection, or legal and accounting fees to help navigate government stimulus programs. Many small businesses simply cannot survive that these kind of costs. Most will have to lay-off employees or cut their hours, wages and salaries. If they do that, they will not be eligible for loan forgiveness, and then will be saddled with a massive amount of debt as they come out of this economic crisis.

These factors have left many businesses facing the reality that they will not survive this crisis. While major industries like airlines, cruises and casinos are being bailed out and stock futures are rising, nearly half of the American workforce are wondering if they’ll be able to make a living once this is all over.

The outlook it is not hopeful. Last week Small Business Labs put out “Closure Scenario” projections based on industry analysis. The optomistic projection is that 14% of small businesses will close this year, with a worst-case scenario as high as 34% closing. That is a range of anywhere from 800,000 businesses to almost 2 million. While it is difficult to make employment projections based on these numbers, as small businesses could employ anywhere from four to four hundred workers, the rough math says that those closures could leave anywhere from 7% to 17% of Americans unemployed.

Living in Chicago I can attest to the fact that much of our cities workforce and economy depends on very small-scale business, including my own economic well-being. The majority of my friends and loved ones work for family-owned resteraunts, small non-profits or run their own small-scale business. All of us are left in limbo, having to navigate these complex, underfunded and poorly rolled-out relief programs like our lives depend on them, because they really do. I’ve personally spoken to several small business owners who are putting themselves and their families at risk, staying open as long as they can just to cover the cost of rent. Many are afraid that if they do close down, they won’t be able to open up again.