Small Business & COVID-19: What We're Doing Isn't Fair or Smart
Last Thursday, the Small Business Administration officially announced the inevitable: the Paycheck Protection Program (PPP), the Federal government’s only large scale initiative targeting small businesses, ran out of money less than two weeks in. Untold numbers of businesses, particularly the smaller firms, were left out in the cold.
Small businesses drive just under half of jobs and the U.S. economy. Yet we allocated them only $349 billion of relief, less than 15% of the total funding in the CARES Act. What a surprise that the funding would wind up woefully short.
Through a blizzard of liquidity programs, the Federal Reserve has thrown money at the crisis as well, orders of magnitude more than Congress. Unfortunately, here too the interventions have been skewed to the disadvantage of small businesses. Thanks to its responses to the 2008 crisis, the Fed was able almost instantly to reactivate programs for interest rates, quantitative easing, bank liquidity, repos, asset backed securities, money market funds, and investment grade corporates almost instantly - delivering trillions almost overnight to big banks and corporations. The Fed’s liquidity program for PPP loans and the Main Street Lending program for middle-market companies are both a tiny fraction of the overall assistance (it is hard to calculate an exact share given the unlimited nature of some of the Fed programs but to date clearly well below 15%) and also remain very much a work in progress.
In addition to being a dollar (or, more precisely, hundreds of billions of dollars) short, our efforts to aid half the economy have sadly been a day (or, more precisely, weeks) late. It took us weeks to stand up PPP, with many banks struggling to process loans. Thank goodness for the community banks that stepped up as larger banks faltered. And, by initially freezing out the non-bank private lenders (including fintechs) and community development financial institutions that actually serve small businesses and are the best distribution channel to reach this sector, we made it unnecessarily hard for small businesses to access any assistance that was available. Of course, even if as expected Congress ultimately adds some money, the stoppage as of Thursday has injected even more delay and uncertainty.
For small businesses struggling to meet payroll, days matter and weeks can easily be the difference between survival and extinction. If they go down, so do the jobs that they have created.
There’s always a lot of rhetoric from politicians and policymakers about the importance of small business. So why would a politically potent and substantively critical sector of the U.S. economy get the short end of the stick when it comes to real relief? Drawing on experiences from past crises, I can see three basic reasons. First, in a crisis, policymakers tend first to pull out and re-purpose the playbooks they already have; in this case, their existing playbooks were created in the last financial crisis when large banks and companies were in fact the center of the problem and thus the target of government assistance. Second, again in part driven by the last crisis, policymakers tend to equate big with both risky and important. Even though small businesses, in the aggregate, are clearly hugely important and hugely at risk. Finally, it is simply easier to figure out and deliver aid to a few hundred sophisticated large firms than to hundreds of thousands of small enterprises; like all of us, policymakers tend to do the easiest stuff first.
While this unintended but real neglect of half the economy can be explained, it should not and cannot be tolerated. According to the US Chamber of Commerce, as of the beginning of April - two weeks ago now - one in four small businesses had already shut down and another 40% expected to have to shut down within two weeks. That means that roughly two-thirds of small businesses, which again account for half of the jobs in this country, face ruin without assistance - which is to date has been both inadequate and late.
I am not arguing that large banks and corporations do not merit support; they do. But American small businesses need, and deserve, at least as much help as the banks or large companies. What we have done to date is not fair, smart, nor sustainable substantively or politically (certainly, with respect to the latter, in the long run if past fallout from crises is any guide). We have to get this right immediately, which means three simple but challenging steps:
Add money to PPP. Proposals are circulating in Congress to add another $300 billion. But we probably need at least twice that amount or another $600 billion more. I could be wrong, but why would we take the risk of falling short again? So what if the SBA has unused authority that it returns. Every qualified small business should receive their fair share and have confidence that they will get it. That confidence is critical to protecting these jobs. Why nickel and dime the most important sector of our economy and risk falling short - again? Go big.
Aggressively utilize responsible non-bank small businesses lenders to distribute the aid to their customers. These lenders include traditional players, fintechs and community development financial institutions. And these firms, more than large or small banks, have the connectivity and in many cases the technology chops to get it done right and quickly. Yet they have in practice to date been cut out. If every depository in the country was made eligible by default, why wouldn’t we do the same for every state licensed lender? The point is to get the aid to the small businesses fast. Shouldn’t we bend over backwards to make use of the best channels available to do that?
Require the Fed to craft and implement new programs that deliver support to small businesses and the middle market. This is admittedly complex and hard. And the Fed should be commended for the scope and pace of what they have done to date in response to the crisis. But we were able to figure out rapidly how to expand the safety net in the last crisis to banks and large corporations; we can do so now for smaller businesses. The right place to start is to get the only two programs so far aimed at small businesses, the nascent PPP liquidity and Main Street Lending programs, actually out there. While both programs need big changes, and just need to be bigger, something is better than nothing at this point. And we can build from there.