The American economy is in free-fall, with unemployment insurance claims reaching astonishing highs (PDF). Though necessary from a public health perspective, measures to slow the spread of COVID-19, like social distancing and city and state lockdowns, are hitting small businesses and their employees hard. A wave of bankruptcies will follow, absent robust help or quick resolution to the pandemic.
Client-facing sectors like retail, lodging, and food services—some of the most affected by the crisis—are among the top three industries (PDF) for small businesses in terms of employment. In a recent survey, 76 percent of small business owners reported having been negatively affected by the coronavirus.
In response, the Senate and House have passed and the President has signed a relief and emergency recovery package (PDF)—the largest in modern history—that will inject roughly $2.3 trillion into the economy.
Key elements for small businesses include both loans and grants:
- $350 billion of 100 percent–guaranteed, low-interest (capped at 4 percent) Small Business Administration (SBA) loans through its existing 7(a) program, which will also be available through private entities
- $17 billion in relief for six months of principal and interest payments on SBA-backed loans
- $10 billion for emergency advances of up to $10,000 for small businesses who apply for Economic Injury Disaster Loans
- $265 million for grants in the SBA entrepreneurial development program to assist affected companies with accessing other federal resources
The $350 billion in SBA’s 7(a) loans can be used to cover payroll costs for businesses for up to two and a half months, with a maximum amount of $10 million. The principal from these loans can be forgiven if the borrower uses it for operational costs, including payroll, rent, and health benefits, and the employer continues to employ its workers or rehires them when they reopen for business. This forgiveness will not be considered income for tax purposes. In addition, terms include long-term repayments with no recourse for nonpayment, no subsidy recoupment fee, no prepayment penalty, and no collateral or personal guarantee required.
Beyond these SBA efforts, expanded supports are also likely to reach small businesses via sizable resources for the Economic Development Administration, the Minority Business Development Agency, and the Department of Housing and Urban Development’s Community Development Block Grant.
National and local efforts offer substantial support
It is important that the stimulus package includes not only (forgivable) loans, but also forms of cash assistance. Cash flow challenges from this pandemic have much more to do with industry exposure than business-planning acumen.
Other countries are responding in similar ways. Denmark is offering to compensate firms at risk of laying off 30 percent or more of their staff. If eligible and committed to not laying off its workers, the company receives 75 percent of total salary expenses. In the Netherlands, employers can receive compensation for up to 90 percent of the wage costs of three months, depending on the extent to which they have been affected.
Some local governments are also offering cash assistance. Washington, DC, is issuing Recovery Microgrants for small, local businesses, independent contractors, self-employed people, and nonprofits, worth a total of $25 million. New York City, San Francisco, and Denver are also taking the grant route.
At the state level, Michigan has decided to support its small businesses with both loans and grants worth a total of $20 million.
Corporations and philanthropy are also stepping forward, including Facebook’s $100 million in cash grants for small businesses.
Expanded cash support, expanded reach, and quick and targeted action are key for success
Now that the the bill is passed and signed, its resources need to be deployed as soon as possible. Half of small businesses have less than 15 days of cash liquidity as a buffer. (It was only 15 days ago that the United States crossed 1,000 confirmed COVID-19 cases, and social distancing measures began to be applied in most large cities.)
Implementation should also consider equity so that the most vulnerable businesses are not left out. Disparities in small business financial health, such as cash holdings, are stark between businesses in majority white and majority black and Hispanic communities, which makes the benefits all the more urgently needed in these communities.
Furthermore, the SBA loans will be issued by SBA itself and some private institutions, but many small businesses are not well served by SBA lenders or even by community development financial institutions (CDFIs). Deliberate efforts to reach vulnerable communities are necessary.
Additional and expanded cash grants will be needed—for both short-term and longer-term needs. We have studied a new program in Chicago, the Neighborhood Opportunity Fund, that could be scaled nationally. It provides sizable cash grants to be accessed in combination with loan capital to lower debt levels for businesses and reduce risk for lenders.
The government could also buy existing small business loans from CDFIs, which disproportionately serve the smallest, most vulnerable businesses.
The COVID-19 recession will be different from past recessions, as it is driven by depressed activity in the service sector. To get small businesses—and their owners, employees, and communities—back on their feet quickly, it is critical that our solutions take into consideration how small businesses will be able to grow after the threat to public health passes. Loan guarantees and grants are certainly helpful, and they need to be deployed quickly and equitably.