With Stimulus Talks Stalled, Small Businesses Put Hope in Long-Term Loan Programs
It’s impossible to understate the level of economic calamity in which many of the nation’s small businesses now find themselves.
While economic activity has picked up since the early days of the pandemic, regions including New York City and its environs and the Philadelphia metro area remain hobbled. That’s according to the August Beige Book, the Federal Reserve’s regular survey of business activity in 12 districts across the U.S. Similarly, some industries have been particularly hard hit: business services in San Francisco; service-sector businesses in New York; and tourism-related companies in Atlanta. Overall, in many regions, the post-shutdown resurgence began to slow by late August.
Entrepreneurs say the Paycheck Protection Program, which extended more than $521 billion in forgivable loans to around 5 million small businesses up until the program ended on August 8, was pivotal in helping keep their companies afloat during the early part of the pandemic. Yet they’re growing increasingly concerned about what’s next–particularly as congressional negotiations over another stimulus package have stalled. Some businesses, they fear, may not make it.
“Unfortunately, the government is the bank of last resort in the live entertainment industry, which has been decimated by this virus,” says Stephen Vitale, CEO of Pyrotecnico, a 131-year-old fireworks entertainment company in Newcastle, Pennsylvania. “If there isn’t another stimulus package we’re going to face having to shut down the company.”
The start of Labor Day weekend still holds promise for certain struggling companies, like seasonal restaurants looking to extend service into the fall. But for many others like Vitale’s, the holiday is just another painful reminder of how badly they need relief from the government.
“We’ve seen a 70 percent cancellation rate in our business through July 4th. [Customers] originally postponed their shows until Labor Day, but as the pandemic continued, we saw about that same 70 percent cancellation rate for Labor Day,” Vitale says. His company typically helps produce more than 3,000 events each year–from traditional fireworks shows to special effects displays at concerts and sporting events. Baseball, which makes up 20 percent of his business, vanished for the season. College football and university work have already evaporated for the fall, too. Pyrotecnico’s headcount is now around 35, down from 105 prior to the pandemic.
Waiting on a large package
While members of Congress have discussed passing individual pieces of legislation in lieu of a single, larger stimulus package, Speaker of the House Nancy Pelosi (D-CA) in a statement released Monday expressed reservations about doing so. “Economists, the Chairman of the Federal Reserve, and others have urged Congress to invest robustly in the American people now, because interest rates are low and our economy needs certainty,” Pelosi said. “All seem to agree that a dollar spent now is a better dollar than one spent down the road.”
Whether lawmakers will come together on a larger package is still an open question. The House passed a $3 trillion Phase 4 bill in May. After returning from break on September 8, the Senate is expected to vote on a slimmed-down relief package estimated to cost between $500 billion and $700 billion; it had proposed a $1 trillion package at the end of July. The new proposal is expected to contain an extension of the PPP, and it may offer an adjustment to the program, allowing certain small businesses in severely affected industries a second shot at the forgivable loan program. That bill is also expected to contain enhanced liability protections for businesses.
While the measures could help ease some of the pressure faced by small businesses, some say it’ll just prolong the devastation. “Another stopgap PPP is better than nothing, but by no means is it sufficient,” says Chris Slevin, vice president of the Economic Innovation Group, a Washington D.C.-based research group. “The PPP was a mechanism to buy time but not delay permanent closures.”
Building a bridge
A better approach, or at least one that lawmakers will need to seriously start considering if they want to truly help the hardest-hit small businesses, is some kind of longer-term, low-interest, and flexible-use loan program, Slevin says: “Small businesses need something that is going to provide stability heading into 2021 and beyond.”
He specifically cites the Continuing Small Business Recovery and Paycheck Protection Program Act, which was proposed by Senators Marco Rubio (R-FL) and Susan Collins (R-ME) at the end of July. In addition to allowing a second draw on the PPP for businesses that saw their revenues decline by 50 percent or more since the start of the pandemic, the bill would allot $60 billion to a new long-term recovery loan program. The working capital loans would come with 20-year maturities, and target low-income communities and minority-owned and seasonal businesses, among others.
Similarly, the Restart Act, proposed in May by Senators Michael Bennet (D-CO) and Todd Young (R-IN), would provide a longer-term loan program for struggling businesses. Among its key tenets, the Restart Act would offer funding to cover a business’s payroll, benefits, and fixed operating costs for a period of six months. Funding would be based on a company’s revenue hit during the Covid-19 pandemic. Program loans, which could be forgiven in part, would come with a fixed-interest rate of between 2 percent and 4 percent for the first two years and a variable rate thereafter until year seven, when the loan is due.
Simply fixing the programs that currently exist but stopped working optimally would also do wonders, says Karen Kerrigan, president of the Small Business & Entrepreneurship Council, a nonpartisan advocacy group in Vienna, Virginia. She highlights both the Main Street Lending Program, operated by the Federal Reserve Bank of Boston, and the Economic Injury Disaster Loan Program, a longstanding business aid program from the U.S. Small Business Administration.
The Main Street Lending Program was expected to facilitate loans to small and midsize businesses that were in good financial standing prior to the pandemic. However, since it launched on June 15, the program has received little interest from businesses. As of mid-August, just 87 MSLP loans were either committed or under review, worth a total of $857 million out of an expected $600 billion pool.
For the EIDL loan program, the caps that were implemented in the spring have dampened the program’s popularity. Traditionally, eligible businesses can apply for 30-year EIDLs valued up to $2 million, but loans were capped at $150,000 in May. Additionally, the $10,000 grants available through the program at the outset of the pandemic were reduced to $1,000 per employee, up to a maximum of $10,000. Those grants don’t need to be repaid even if a business is later approved for a disaster loan. The advance funding expired in July.
While there has been talk at the Fed of launching a new Main Street Lending Program just for small businesses, no plans have been released. As a fix for the EIDL program, Kerrigan highlights the Ensuring Increased Disaster Loans (EIDL) for Small Businesses Act, a bill proposed by Senator John Cornyn (R-TX) at the end of July, which would look to restore the EIDL program to its previous caps and reauthorize the $10,000 grants. “It brings the program back to what Congress intended when they passed it,” Kerrigan says.
Regardless of which programs do eventually get taken up, time is running out, Slevin says. “I think the data and the demand is going to force action. I’d be really surprised if Congress breaks by October 1 without trying to address the small business needs in every state.”