Small Business Loans Due To The Pandemic – How A Small Business Loan Program Failed In Just 4 Weeks Small businesses like Shake Shack and organizations like the LA Lakers have been able to get loans to fight small businesses. what happened
The sign is displayed in a store window in Grosse Pointe Woods, Michigan. A wage protection program to help small businesses survive the coronavirus crisis has run into trouble. Hide caption Paul Sancya/AP
Small Business Loans Due To The Pandemic
The sign is displayed in a store window in Grosse Pointe Woods, Michigan. A wage protection program to help small businesses survive the coronavirus crisis has run into trouble.
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Trish Pugh and her husband started a trucking company in Ohio in 2015. Even for a small business, it’s small: they had two drivers, including her husband, until they let one go because of the coronavirus crisis.
So his company applied for $349 billion in the first round of Paycheck, the federal government’s small business rescue program.
First, there was confusion between him, his banker, and the Small Business Administration about what forms were required. And then, once, he found out that he soon lost his money.
“I click on this website and it says I have to reapply when I get more funding. I’m devastated,” she said.
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Not only did the first PPP run out of money in 13 days, freelancers like Pugh were only allowed a week to apply.
“We’re basically set to lose everything, and that’s a shame because we did it all ourselves in the first place,” Pugh said as he prepared to file for the second phase of the $321 billion program. “Now we need help, we can’t get help.”
Pugh said he then received a loan of just over $10,000. It helps, but he doesn’t know how long he can keep his business going.
Frustrations like Pugh’s have been common since the start of the small business bailout program. But his experience was only part of the PPP’s problems, which began with the program running out of money in the first phase and the second round faltering. Here is the list:
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The PPP was created to allow any company with fewer than 500 employees to get a loan. But several large companies operating under the franchise model with fewer employees at separate locations have also applied for and received loans. Shake Shack, for example, employs about 8,000 people at its 189 restaurants in the U.S., but only 45 at each location.
So the chain applied for a $10 million loan from the SBA, which caused a public outcry, especially after establishing evidence that many small restaurants in need of money were unable to get loans. Shake Shack promptly issued a refund. The company, which has $104 million in cash and liquid assets, said it took out other loans from the SBA to offset the money coming in.
Similarly, Ruth’s Chris Steak House, a steakhouse chain with about 5,700 employees, received and returned a total of $20 million.
Then there were other organizations that most people wouldn’t call small businesses. Like the Los Angeles Lakers basketball team, the eighth most valuable sports team in the world, according to Forbes, is worth about $3.7 billion.
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But the Lakers applied for and received a $4.6 million small business loan. Once again, after the news, the Lakers decided to bring him back.
“After we found out that the funds of the program were exhausted, we paid off the loan so that financial assistance could be given to the most needy,” the team said in a statement.
Shortly after the public outcry against large, well-known companies caused an uproar, the SBA announced that it would conduct more scrutiny of PPP loan applications worth more than $2 billion.
Although tens of thousands of small businesses were left out of the program, according to an analysis of financial statements, banks collected more than $10 billion in fees.
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SBA-guaranteed loans have very little risk, and banks were happy to provide larger loan amounts, which led to higher fees.
Big business, we now know, took credit. Companies no longer had to fight for credit.
Chembio Diagnostics, a Long Island, New York-based company that makes infectious disease tests, received nearly $3 million from the program.
It was a much-needed cash infusion to help the company grow. “We felt it would be very beneficial to have this additional dollar amount or credit to increase our manufacturing capabilities,” said Gail Page, Chembio’s board member and former interim CEO.
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The problem is that the program is not designed to help businesses grow. It was intended to rescue small businesses, non-profits and freelancers who were struggling to pay wages or pay benefits and utilities.
Business owners who were lucky enough to get financing said the money saved their businesses. However, some owners also said that PPP rules do not allow them to use the money as they wish.
Among their biggest complaints: 75 percent of the forgiven loan amount must be spent on payroll. The rest can be spent on only a few categories: rent, mortgage interest or utilities.
But with many businesses not reopening, owners are wondering how to spend more on payroll with little or no work for their employees.
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“I understand that as a rule, we’re encouraging people to get back to work,” said Christian Piatt, co-owner of Brew Drinkery in Granbury. – But in practice, if there is a retail store that is not allowed to operate by the local governments as we used to do, then this should be taken into account.
Complicating all of this is the fact that some companies and financial professionals do not know whether to repay or forgive loans. They were waiting for more information from the SBA about how the waiver would work.
“In a way, it puts small businesses in a very unforgivable position because they can end up in a situation where they have to go out and spend dollars to put people back on the payroll, which is ultimately unforgivable. ” said Don Stevens, managing partner of private client services at the accounting firm CohnReznick.
It is important for companies to understand all of this early on. Forgiveness calculations are based on how businesses spend the money within eight weeks of receiving it. The program opened on April 3, so the first businesses have about four weeks to report their spending to the SBA.
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And just when you thought things couldn’t get any worse, the website crashed on April 27, the first day the second round of funding reopened. The economic downturn caused by the pandemic has hit small businesses hard. Since the great lockdown of spring 2020, many retailers have closed permanently in cities around the world.
Small and medium-sized businesses have a disproportionate impact on the local economy. They account for between half and two-thirds of private sector employment in the United States and the European Union, and about 40 percent of national income in developing countries.
But small businesses face more financing constraints than larger businesses, especially during economic downturns. As such, governments have taken various measures to help small businesses cope with the pandemic. Without this support, the failure rate of small businesses can increase by up to 9 percentage points.
Our weekly table reveals the most common public support measures used by 130 countries to help cash-strapped small businesses, based on the Access to Finance COVID-19 Policy Monitor. The data shows that overall, financial assistance such as grants is the most used policy measure (adopted by 77 percent of countries), followed by public loan guarantees (50 percent), late payment of loans (30 percent), tax benefits (28 percent). ). percent), lower interest rates (24 percent).
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However, the pattern of these policy responses varies across income groups. Most high- and middle-income countries have adopted multiple measures, with an average of 2.5 and 1.9 measures. About 80% of these economies implemented financial assistance, with other measures accounting for a smaller share, between 20% and 60%. Bolivia, Botswana and India, for example, are among several middle-income countries that have adopted financial assistance and loan guarantees.
On the other hand, no low-income country took more than two measures in policy monitoring. Financial assistance and tax incentives are the most commonly used measures, adopted by 75% and 33% of low-income countries, such as Mali, Rwanda and Uganda, respectively.
As the pandemic continues, monitoring policy measures to support individuals and small businesses affected by the pandemic will be critical as countries prepare to recover. Policy monitoring helps policymakers identify them
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