Since the Coronavirus. It can’t be enough.Launched earlier this month, small businesses in the US raised more than $ 300 billion in loans to help survive the devastating economic storm that was caused by the
Many small business owners contacted by CBS MoneyWatch complain that the concept of the lending initiative is too restrictive, which hinders employers who need a degree of flexibility in deciding how – and when – to use credit.
“The important point here is that this program is touted as an aid to small businesses, but in the case of many hospitality and service companies, its usefulness as an aid to business is actually severely limited,” said Joe Walsh of Green Clean Maine. the 35-employee home cleaning company he runs in Portland, Maine.
Legislature did not create the paycheck program as a small business bailout; Rather, it is intended to help companies retain employees. The initiative enables companies to take out a low-interest loan up to 2.5 times their monthly payroll. The loan and accrued interest are completely waived as long as companies spend the majority of the funds on retaining or reinstalling workers.
That sounds good in principle, but the rules effectively force entrepreneurs to keep paying their employees even if companies remain closed and cannot generate any income. As a result, several types of small business are badly suited to the credit initiative, say the owners. They include:
- Companies for which payroll is a small part of their total spend.
- Firms that employ mostly minimum wage workers who would be better off catching the increased unemployment that is also part of the government’s $ 2.2 trillion economic aid package.
- Firms that rely on contract workers who are excluded from payroll when calculating paycheck loans.
David Audretsch, Indiana University professor of economics and co-editor of Small Business Economics, estimates the Paycheck program will fail for up to 40% of the country’s 30 million small businesses.
The result: Millions of small businesses – which employ nearly half of all workers in the US – may not benefit much from the major government initiative launched to support these companies.
“It feels good that money is being distributed now, but I think there will be many people – from blue-collar workers to small business owners to policy makers – who will be dissatisfied with this program,” said Jason Furman, a former top Economic advisor to President Obama and professor at the John F. Kennedy School of Government at Harvard University.
A tricky two-point test of forgiveness
The Paycheck program offers two-year loans at an interest rate of 1%. But small businesses can completely waive the loans in a matter of months, effectively making money if they pass two tests (both by June 30th).
First, a company must have the same headcount as it had on February 15, or a workforce equal to the average number of workers it employed in the first two months of 2020. Second, any employee who earns less than $ 100,000 per year must also be paid at least 75% of their earnings by February 15 (through June 30).
However, both of these criteria can be difficult to meet. For example, if a small company has already laid off workers, they will need to be reinstated and their wages paid back retrospectively by February 15 – a potential trap as some employees will have moved on. If workers cannot be re-hired, a company can hire new employees to reach its head count before the virus breaks out – but that will only pass the first test, not the second, meaning the loan will only be partially taken.
In order for small businesses to qualify for loan waiver, the paycheck program also requires that they spend no more than 25% of funds on rent, utilities, and debt payments. The balance of the loan must be used to pay employees.
“I wouldn’t worry about the government failing to make these loans,” said Joseph Most, an attorney and tax advisor at Berdon LLP, an accounting and advisory firm for small businesses. “I think the process of forgiveness will be more difficult than what you imagine.”
“The housekeeper cannot call”
Walsh, who has applied for a $ 280,000 loan, said these restrictions make it impractical for Green Clean Maine, an environmentally friendly cleaning service that services about 400 families. Right now, the company’s revenue has dropped to zero – there is no way to remotely clean houses – and he doesn’t want to put his employees or customers at risk by continuing his operations.
A one-size-fits-all paycheck loan would require him to put his employees on hold even though they have no work for them at the moment, he said. “The intent of the program is to put your employees on hold, whether they are open-minded or not, and this presents a number of problems for companies. As we work in a service company, you cannot work remotely. The housekeeper can’t call it, “he said.
Walsh applies for the loan anyway because he urgently needs help.
“I’ll take it, and I’ll keep talking about the restrictions in the hopes that we can make some rule changes,” he said. “In the meantime, we have to work with it, so we’ll just work with it.”
It’s not just about keeping workers employed
Justin Moore, general manager of Uncle Bobbie’s Coffee and Books in Philadelphia, reiterated concerns that the loan program, while designed to protect workers, is doing too little to help small business owners meet non-wage costs.
“The focus has been on payroll, payroll, payroll, which makes a lot of sense in theory, but if you don’t have the option to spend the money on other expenses, there won’t be a shop coming back to,” Moore told CBS MoneyWatch. “The main caveat is that so much of the credit has to go to payroll in order to be taken out when companies have other needs.”
Moore has already prioritized his remaining cash flow to pay the three out of 17 workers he has been able to keep since Uncle Bobbie closed on March 16, when he is unable to use what he has already spent to include in his award calculations.
“When we get PPP, when it’s as strict as we think it’s right, we have no choice but to use it as a loan because we have all these other expenses that we haven’t even addressed because we have have spent the money we have on our people, “he said.
Employers also weigh what is best for their employees – keep them on payroll or apply for expanded unemployment benefits. The Coronavirus Aid, Relief and Economic Security Act adds an additional $ 600 in weekly government benefits, leaving some workers above their pre-coronavirus wage levels.
Evan Carroll, who owns three Pigtails and Crew Cuts children’s barbershops in North and South Carolina, has laid off all 25 of his employees, including hairdressers and salon managers, most of whom are now unemployed. He was recently approved for a $ 107,000 paycheck loan that he wants to take, if only because he sees no better alternative.
Even so, Carroll said he wouldn’t help his employees by keeping them on the payroll. “Most of my employees would make more money with that extra federal unemployment income,” he said.
“There’s no point paying them now, and if I do, I’ll have all that money used up before we reopen,” added Carroll. “I want to use the money when we reopen to make sure our employees keep their pre-pandemic income, even if they can’t work full-time.”
Minor changes in the rules for using paycheck credit would make a world of difference, small business owners said.
“Ideally, the government would give us the resources and allocate them to us as best they can – paying bills and doing other expenses,” said Moore, noting that he has a pile of bills due at the end of April. “Other companies in this ecosystem that we are involved in need this money too, like my landlord.”
He will likely be spending more than 25% of his loan on non-payrolls and expect to take on some debt.
“You get nervous when you have a five-figure mountain of debt on your balance sheet,” said Moore. “But at this point, it’s better to have money than not to have money.”