A debt trap may loom for the smaller businesses that desperately, and immediately, need access to capital.
The impact will be most keenly felt by the businesses that rely on crowds, on foot traffic, to drive sales and profits. These are the same firms that have been shuttered across several states — barbershops, restaurants, gyms and nightclubs.
The Federal Reserve, and Congress, have unveiled asset purchase and loan programs aimed at shoring up at least some stability for companies as they grapple with an uncertain economic environment, where the ripple effects in the wake of COVID-19 will last months, if not years. In the most recent salvo aimed at solvency, Congress has authorized as much as $7 billion for small business loans to be granted through the Small Business Administration (SBA). That’s one conduit of lending.
In addition, the central bank has stated that it will buy “asset backed securities” in the form of bundled loans, sold as bonds, that in turn will give banks money to lend.
Wednesday, the White House and Senate reached a deal on a $2 trillion stimulus package, which features expanded unemployment benefits and business tax relief to keep workers employed during the coronavirus crisis. As much as $350 billion is being established in a fund for firms to stave off layoffs and pay workers.
Interest rates may be low, yes, making loans relatively cheap, but the key issue is: How do you repay a loan when business is … gone, and mandated to keep away?
The question is a pressing one, and extends beyond state borders or verticals. As Goldman Sachs reported last week, a survey of more than 1,500 small businesses found that 96 percent of respondents have already been impacted by COVID-19. About half of those firms say they will only be able to continue to operate for a maximum of three months. And, the study found, roughly 67 percent said they were uncertain how to access or apply for funding.
Under the terms of the SBA funding, firms with up to 500 workers can borrow up to $2 million, and the interest rate is 3.75 percent. But as the New York Times reports, those who want to take out more than $25,000 have to put up collateral, as is standard for these loans. Typically, that collateral is real estate, as in the very homes that are owned by small and medium-sized business (SMB) owners. The SBA has said it will defer payments on existing disaster loans through the end of the year — which gives small businesses a bit of breathing room if they already have loans in place, and frees them to consider loans to grapple with COVID-19. But adding debt to debt can eventually stress firms to the breaking point.
Margins are thin for many of these firms. As noted in a JPMorgan study, small businesses employ 48 percent of all workers, and are responsible for 45 percent of GDP.
The median small business has daily cash inflows of $381 and outflows of $374, and with an estimated average daily cash balance of $12,100 cannot float operations all that long if the top line suddenly freezes, as JPMorgan has estimated that there are only 27 cash “buffer” days in reserve.
The storm clouds are gathering, of course. It took only a few weeks for the entire economic picture to be upended, for businesses to begin shedding workers as sales and supply chains began to dry up, as edicts came from various states to shelter in place or stay home.
The latest unemployment data show a spike for the week that ended March 13, as reported by the Labor Department, to 281,000 from 211,000 the previous week. That’s only the beginning of the deluge, of course.
And those data points show what is likely to be a sudden, screeching halt from the healthy growth estimated by the PYMNTS Main Street Index, which had been showing compound annual growth rates of 2.6 percent. That growth reflects roughly a decade of single digit percentage improvements in wages, establishment creation and job creation. The Main Street Index takes data that lags a bit, as reported by various agencies, and looks forward too, to the end of the current quarter. We are of course going to see a tipping point beyond March, an economic dip (perhaps more than a dip) where breadth and length can only be awaited, not ascertained, at this point.
The stimulus package is here. The question is, what comes next?