We just finished reading the Washington Post piece “Overwhelmed by demand, emergency disaster lending program for small businesses slashes its loan cap, people familiar with matter say”. We included a link to their article at the end for extended reading.
Let’s put things in perspective. In the US, any business with up to 500 employees or less than $7.5M in revenues a year for non-manufacturing is considered a small business. This means that small mom and pops as well as big regional and national operations with revenues in the hundreds of millions of dollars a year are eligible for the SBA’s Economic Injury Disaster Loan (EIDL) program.
So, when in early March States and Counties started to become eligible for COVID-19 EIDL funding on the SBA portal (and this is a very important caveat in the process), you had three types of small businesses off to the races:
- The BIG “Small Businesses” with revenues of $600K a month, with teams of accountants and admin staff,
- The REAL Small Business Owner with revenues below $100K a month and a few employees, and
- All other small businesses in between.
BIG Small Business had their teams of accountants ready to crunch the applications the moment their State and County were declared eligible for COVID-19 EIDL funding in the portal. These types of businesses can literally access all the information and documentation required by SBA with a few clicks in their accounting softwares.
Most likely, CEOs and Executives of Mr. BIG went to bed, while their team of accountants burnt the midnight oil, and woke up next morning with all applications submitted and received by SBA. Checked.
Nothing wrong with the above. As long as BIG Small Businesses play by the rules, it’s a fair game. SBA’s EIDL program usually funds up to $2M under this program and it’s expected for this entities to qualify for those amounts. They are “small businesses” but big employers after all.
Let’s go back to early March and look at the REAL Small Business Owner’s situation. No accounting team. Accounting is done mostly quarterly by your trusted accountant/comptroller. No monthly P&Ls, debt schedules, fancy analytics or anything of that nature at your finger tips. Everything in the SBA application had to be requested and gathered before the small business owner, not a team of accountants, had to spend hours after midnight completing the applications for a few nights before submitting. I say “after midnight” because the portal would not load before then. So many trying during the day made it impossible to accomplish the task on regular business hours.
See? The core issue is not the amount funded to the businesses. Theoretically, funding was proportionate to the level of business and we’ll give the Goverment the benefit of the doubt on that end. The problem was access to funding in a timely manner. By the time most REAL Small Businesses managed to submit their applications, THE MONEY WAS GONE. First round of funding was depleted. All mid-to-late March applications were pushed to the second round of funding by Congress.
Remember the caveat we mentioned earlier? Well, that made things simply worse. Even if the little guy was ready as a hawk, s/he had to wait for his/her State and County to be listed and most of them became eligible after the money was already gone.
Just to add a little lemon to this enchilada, by the time the second round was approved, the actual SBA portal used to apply for a real EIDL loan was also gone, just like the money. The only options since then have been PPP, $10K Advance and/or Bridge Loans. All great tools to help small business owners, don’t get me wrong, but not really as good as the actual EIDL program, where you could get a loan equivalent to a year of profits or big enough o pay all your debts, 30-year term, 3.75% interest rate and a grace period of 12 months before the first installment became due. THAT is what saves a Small Business Owner from going out of business in this crisis.
Now the Administration decided to put caps on the amounts for those lucky ones that managed to apply before today and stop the EIDL program all together going forward (with the exception of some agricultural sectors), because there is not enough money. Shocker! We knew that since the beginning! Funding was limited regardless of how many packages Congress could manage to pass. So why wasn’t there a cap from the start? Knowing that funding was not unlimited, why not cap at $500K or at least a $1M to protect the REAL Small Business Owner that did not have the resources to apply as quickly as Mr. BIG? Or even better, why wouldn’t they make a schedule based on annual revenue, allowing smaller businesses to apply first and work their way up?
At least 15 REAL Small Businesses could’ve been funded for every $2M given to one BIG Small Business. And again, the problem is not the amount being funded, but the fact that BIG Small Businesses had resources to beat the other 15 in the race for the money. One pool of funding, first-in, first-served. Who do you think had the upper hand?
Have we had all REAL Small Businesses take the funding first, and had the CAPS to apply mostly to BIG Small Businesses when the money ran out, we would be in a complete different situation today.
Most BIG Small Businesses have access to regular bank/private funding to plow through a crisis like the one we are living today. They have assets they can use as collateral. Not so much for the REAL Small Businesses that rent their space to operate and live paycheck to paycheck or whatever is left to whatever is left. The little guys have no recourse today… No money in their bank accounts, credit cards are blocked, banks are not lending and there are not enough customers to pay the bills, let alone make a living.
SBA’s Disaster Loans aka EIDLs were the only hope for survival and now that’s either capped or gone? Quite disappointing from an Administration that built its reputation, allegedly, on the mastering of business and economics.
Here is a link to the Washington Post article by Aaron Gregg and Erica Werner on May 7, 2020 at 11:14 a.m. EDT:
Featured photo: Treasury Secretary Steven Mnuchin discusses details for economic relief during a daily coronavirus response briefing as Jovita Carranza, administrator of the Small Business Administration, listens at the White House. (Tom Brenner/Reuters)