Failing small business

The coronavirus pandemic has devastated millions of small businesses. An April 3 survey found that 24% of small businesses have already temporarily shut down. Among those businesses still open, “40% report it is likely they will shut temporarily within the next two weeks.” These closures are swelling the ranks of the unemployed at an unprecedented rate, with 10 million people filing claims in the last two weeks. 

The CARES Act, which Trump signed into law on March 27, offered a lifeline to small businesses. It included a $350 billion fund to support small businesses. Businesses with fewer than 500 employees can qualify for a forgivable loan equal to 2½ times their monthly payroll, up to a maximum of $10 million. The loans will be forgiven in full for businesses that maintain their payroll for two months and spend 75% of the loan on payroll costs. 

One issue with the fund is that it’s too small. The total fund is “about half of what would be required to cover 2½ months of payrolls for every business in America with fewer than 500 employees,” according to one calculation. Other analysts say it would cost $1 trillion to support small businesses for three months. Not every small business will need help, but there are a few larger businesses — like chain restaurants — that are also eligible. So there is a real danger of the fund running out of cash.

The Trump administration’s rollout of the program, which began last Friday, has been disastrous. As a result, many small businesses are not getting the help they desperately need. 

Taxpayer funds as a perk for bank customers

The Small Business Administration (SBA) has not been funded adequately to handle the distribution of a fund this size. (Denmark doesn’t have this problem.)  So the program is being administered through banks. Small businesses apply for loans at participating banks, and the banks verify eligibility and distribute the cash. The government is paying the banks a fee (1 to 5% of the loan) to incentivize their participation. Plus, the banks get to charge 1% interest.

As you might expect, banks are facing an avalanche of demand for these loans. It’s the only way many small businesses will survive. So, to manage the volume, many banks — including giants like Bank of America — initially decided to offer the loans only to customers with an existing “business-lending and a business-deposit relationship.” 

Bank of America dropped the requirement after a flood of complaints. But its existing loan customers were able to get to the front of the line.

So this is a taxpayer-funded program that banks are now administering as a perk. Small businesses that may have never qualified or needed a loan previously are left at the back of the line. By the time these entities can find a bank to consider their application, the money may be gone.  

The cost of incompetence

Banks have also been hampered by the erratic rollout of the fund by the Trump administration. The program was slated to begin last Friday but, by Thursday, the SBA still had not provided critical guidance on how to administer the loans. 

The guidance that was eventually issued to banks left many of them confused. “[L]arge and small banks and lenders...across the country have stated they are not yet able to issue loans needed to implement the Paycheck Protection Program due to… a lack of clarity from both SBA and the Treasury Department,” Senator Ron Wyden (D-OR) wrote in a letter to Treasury Secretary Steve Mnuchin last Friday. One of the big issues was the banks’ responsibility to vet the applications and banks’ liability if any of the information provided was fraudulent. 

So on Friday, many banks were not prepared to start accepting applications.

On Monday, the platform the SSA created for banks to process the loans, called E-Tran, was down for four hours. Senator Marco Rubio (R-FL), usually a reliable ally of the administration, slammed the administration for the failure.

“I know there’s a lot of hard-working small businesses that couldn’t get their applications processed this week. They shouldn’t worry about it,” Mnuchin said on Fox Business last Friday.  

But time is of the essence. Many small businesses were forced to close weeks ago and, if they don’t receive cash soon, might be forced to close permanently. 

“The current delays are unacceptable, and hurt those that need the help most – very small businesses that find themselves in the worst of financial circumstances,” the National Federation of Independent Businesses said. 

On Tuesday, Mnuchin acknowledged the money would run out quickly, announcing in a tweet that the administration had requested an additional $250 billion.

But the Senate is out of session until April 20, making the approval of additional funds tricky. 

Private equity makes a cash grab

As small businesses struggle to obtain limited resources, private equity managers and venture capitalists have launched an aggressive lobbying campaign to grab some of the cash. Under existing rules, in most cases, small businesses that are funded by venture capital or private equity are not eligible for the program because of “affiliation” rules. (These businesses are not considered in isolation but aggregated with the other businesses in the firm’s investment portfolio.) But the billionaires are trying to change that. 

“It shouldn’t matter if these companies are backed by investments from corporations, pension funds or others. We’ll continue to work with the administration and Congress to request that federal programs support all businesses, regardless of ownership structure, and their workers,” the American Investment Council, which represents private equity funds with trillions in assets, said.

According to Politico, the “lobbying campaign is getting some traction” with House Speaker Nancy Pelosi (D-CA) saying, “it's a critical issue for Silicon Valley startups.”

The art of the self-deal

When Larry Kudlow, Trump’s chief economic adviser, joined the White House in 2018, he reported up to $2 million in assets and income exceeding $800,000. He was a CNBC host and was paid handsomely for dozens of speaking engagements.

At the White House, Kudlow makes $183,000 annually and continues to bring in outside income from royalties and other sources. But, as many struggle for survival, Kudlow revealed that his wife, a painter, has applied for small business bailout funds.

My wife Judy, whom you know, and she is a self-employed artist-painter, a very distinguished one of some renown, she could use some help with her operation and she went to a local community bank up in our place in Connecticut and apparently it’s just a one-page form, that’s all it is. So couldn’t be easier.

On Tuesday, Trump fired the Inspector General who was tasked with overseeing the coronavirus emergency relief funds. 

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