In business, size matters. Larger firms, typically, have the capital cushion to weather economic shocks better than smaller peers, as they have broader customer bases, more diversified revenue streams and, sometimes, global reach.
In the throes of the coronavirus pandemic, the economic shocks have been myriad and global, and here in the United States have impacted small and medium-sized businesses (SMBs) with speed and ferocity.
As has been noted in this space, the Paycheck Protection Program (PPP) portion of the federal coronavirus relief package is designed to aid firms with up to 500 employees, with loans and grants of up to $10 million, and administered by the Small Business Administration (SBA). The program, which debuted last week, has already drawn tens of thousands of SMB loan applications across large banks and smaller financial institutions.
The endeavor is off to a rocky start, mired by last-minute rule changes and delayed launches of online portals through which applications are being taken. In addition, larger banks such as Bank of America and Wells Fargo have mandated that SMBs applying for loans must have existing relationships with those banks.
Now there’s another factor that may influence how the PPP progresses — and may squeeze some of the smallest firms that need capital now from getting the lifelines they need.
Larger firms — companies with considerably more than 500 employees and top lines that stretch into the hundreds of millions of dollars — are seemingly muscling into the equation.
The Wall Street Journal reported that some hotel and restaurant chains are looking for a piece of the $349 billion in loans, relying on language in the $2 trillion stimulus plan that open the door to such access.
In one example, fast food operator Shake Shack, with about 140 outlets, more than 7,600 employees and $500 million in annual sales (and net income of $24 million) is looking to apply for the SBA loans, which are backstopped by the federal government. Like other companies focused on dining and on foot traffic, Shake Shack has been hard hit by stay-at-home mandates that stretch across the country, with sales down as much as 70 percent.
“We’re looking at it all,” said an unnamed company spokeswoman in the report. “To the extent we believe we’re eligible and parts of the package will benefit the company, then we’ll look to pursue applicable options.”
The stimulus bill’s language offers exemptions for hotel and restaurant chains, with other exemptions in place for franchise owners in any industry that employ more than 500 people. The gating factor is that no single outlet in the firm’s roster employs that many individuals. Proponents quoted by the Journal state that franchises are effectively a collection of small businesses scattered throughout various communities.
We note that the exemptions pave the way for the field of companies vying for PPP loans to get a lot more crowded — creating a funnel effect that may leave smaller, relatively undercapitalized firms exposed.
These larger companies, with marquee names such as Shake Shack among them, likely already have existing relationships with banks in place, and may be looked upon as better risks.
Beyond that, there are signs the spigot is closing, at least a bit. Wells Fargo said Monday morning that it had stopped accepting applications due to “exceptionally high volume.”
In the meantime, there are other relief packages being crafted. As reported, the Federal Reserve and the Treasury are, as the Journal reports, planning to release a Main Street Lending Facility for mid-sized firms, which — if and when it debuts — might thin the crowded field vying for loans ostensibly earmarked for SMBs. In the meantime, the pressure continues.