There is a staggering number of small businesses nationwide that are at immediate or near-term risk of failure due to the shutdown of commerce in the effort to combat the spread of COVID-19. Looking only at businesses with fewer than 250 employees, a recent Brookings Institution analysis estimated that 54 percent of businesses and 47.8 million jobs fall into those categories of immediate or near-term risk; 70 percent of those businesses are microbusinesses employing fewer than 10 employees. These smaller businesses, along with their employees, are most vulnerable to the economic fallout of the new coronavirus because they typically lack more than a few weeks’ worth of cash reserves.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed on March 27, 2020, contains programs and initiatives aimed at helping small businesses stay in business and retain or rehire their employees. The growing impacts of the pandemic call for expanding the response in order to ensure a more rapid recovery, including by further assisting small businesses and their employees. However, the key program for doing this—the Paycheck Protection Program (PPP)—is unlikely to reach millions of the smallest businesses in need, a disproportionate share of which are minority- and women-owned. The largest banks have the financial expertise and capacity to push applications through the pipeline quickly, and their customers are likely to soak up existing funding before community-level banks. The demand is so unprecedented that the Small Business Administration’s system for authorizing loans has experienced technical issues. The smallest businesses—those with fewer than 20 employees—may not have preexisting lines of credit or credit cards with a bank. They need assistance with assessing financing options and applying for funds, and perhaps more importantly, they need cash grants immediately in order to remain in business and retain their employees until forgivable loans are approved.
Before any further funds are appropriated to the Paycheck Protection Program, Congress must fix these problems by taking the following steps. Otherwise, many more small businesses are likely to fail in the next few weeks, putting millions of people out of work and undermining the capacity of local communities nationwide to recover after the pandemic has abated.
Provide cash advances for PPP
Ideally, cash grants would have been made to small businesses as part of the CARES Act to help them retain employees. But if Congress acts quickly, it is not too late to allow small businesses that apply for PPP loans to request a cash advance while waiting for the loan to be approved. The CARES Act does not allow cash advances on PPP loans, but it does allow them for a different loan program—the Economic Injury Disaster Loan (EIDL) program—which existed prior to the recent pandemic. Unlike PPP loans, however, EIDL loans cannot be forgiven. While EIDL loans make sense for some businesses and have been used successfully by those affected by other types of disasters, many very small businesses with limited cash reserves or that already had debts to pay off are not in a position to take on more debt, especially when they are facing such an uncertain future.
Congress should consider allocating $100 billion or more to fund cash advances for very small businesses that apply for the PPP. Within a week of applying for the PPP loan with their local bank, these businesses would be entitled to a cash advance equal to a percentage of their quarterly payroll as verified by their 2019 W-3 or 2019 tax return. They need only certify that they have experienced at least a 50 percent reduction in receipts due to COVID-19-related reductions in commercial activity and that they will retain or rehire at least 80 percent of their precrisis employees. Later, after the crisis has receded and businesses file their 2020 tax returns, cash advances can be added to income with a full deduction allowed upon showing that 2020 receipts were in fact low enough and that employees were retained or rehired. Otherwise, loan amounts would have to be repaid in whole or in part with taxes due, based on how much the business missed the qualification criteria.
The third-party verification provided by banks would act as a deterrent for those seeking to abuse this system. As with the EIDL advances, these cash advances would not have to be repaid, even if the small business ultimately did not get the PPP loan for any reason. The funds for the advances could come directly from the U.S. Treasury Department, either through direct deposit or disbursed through the lending bank, but banks would not need to take the cash advance amounts onto their balance sheets.
Target local, minority-owned, and women-owned business funding
Dramatically expanded funding should be provided to community development financial institutions (CDFIs) and minority depository institutions. These institutions already know these small businesses and are in the best position to get funds to them quickly. Substantial funds should be dedicated to these financial institutions for the express purpose of delivering the forgivable loans to local small businesses in underserved areas. Because these institutions regularly provide loans to the target businesses, they are ideally suited to know where emergency loans are needed and are capable of providing the financial guidance these small businesses require.
Reboot support for state small business credit initiatives and community banks and credit unions
Congress should restart two helpful small business programs that came out of the 2008 financial crisis. First, it should refund the State Small Business Credit Initiative via grants to the states to support small business programming. Second, it should reinvigorate the Small Business Lending Fund—which still exists—to assist community banks and credit unions in absorbing losses that may arise from freezing small business, consumer mortgages, and automobile payments, provided they maintain or expand their small business lending portfolio.
Expand credit union loan caps
Congress should consider temporarily permitting credit unions to make small business loans during the COVID-19 crisis without otherwise counting them toward their member business lending cap. This additional lending ability may need to be paired with targeted supplemental capital, including to help absorb loan forbearance, but should be carefully constrained only to enable credit unions to help small businesses respond to this pandemic and be more resilient to future external shocks such as climate-related events.
Place a moratorium on small business mortgage and rent, credit card and debt payments, and utilities
Congress should call for a national moratorium on small business debt collections—essentially a freeze on foreclosures, evictions, repossessions, utility disconnects, garnishments, and other related actions. Due to the interruption in cash flow as a result of quarantine restrictions and the uncertainty of when, if ever, these businesses will receive help through small business loans, small businesses are being forced to let employees go in order to stem the buildup of fixed and recurring costs. A moratorium on legal actions by commercial lessors and lenders seeking late or missed payments from small businesses could prevent a wave of such actions flooding the legal system while also enabling small businesses to hold onto employees so that they can restart their businesses when health authorities say it is safe to do so. Creditors, landlords, and lenders who are harmed by the moratorium can be compensated in subsequent recovery bills.
In addition, Congress should temporarily freeze as many of the costs of credit as possible. For example, it should cap interest rates for small business credit cards and raise their credit limits. One way to do that would be to create, through the Small Business Administration (SBA) or the Federal Reserve, a secondary market for small business credit card lending that met those terms. In addition, Congress should cap overdraft and other small business banking fees.
Require congressional oversight of COVID-19-related SBA loans, with detailed SBA reporting requirements
The SBA’s implementation of pandemic-related legislation should be included under the purview of the congressional oversight commission established in the CARES Act. In addition, the SBA should be required to report to Congress on financial assistance extended and to make those reports public, just as the Treasury is required to do under Section 4026(b)(1) of the CARES Act. This reporting should include information on the distribution of loans across businesses of different sizes and geographic regions, as well as the share that are minority- or women-owned. Furthermore, the Government Accountability Office should include SBA pandemic programs in its mandated reporting under the CARES Act. This information could be helpful not only in determining whether the program is operating as intended but also in preparing for a future pandemic or other disaster, which scientists say will become more frequent as a result of climate change.
Put in place a structure for the long term: National Business Interruption Risk Insurance
This will not be the last time the country faces such a sweeping interruption in business. Scientists have long warned that the warming climate will promote the spread of diseases, some of them new. Even as the world pulls through the current pandemic, it is critical to consider lessons learned in order to prepare for future crises. The challenge is that while pandemics do not occur very often, the business interruption costs can be devastatingly large. And because small businesses lack capital reserves, any help they receive must be swift to avoid mass layoffs. This is one reason why adding climate-readiness commitments to federal support programs—including those noted above—would make a lot of sense.
To address business interruption during future pandemics, whether regional or national in scope, Congress should establish a federally guaranteed National Business Interruption Risk Insurance system for small businesses. Many businesses already carry business interruption insurance, yet insurance companies maintain that those clauses do not cover nonphysical damage such as that caused by pandemics. In part, this is because of their inability to underwrite such a large-scale, nationally correlated shock. One possible model for this program is the Terrorism Risk Insurance Act (TRIA), only with up-front premiums required in order to create a pool of funds.
Federal support would enable private insurers and private businesses to begin to cover pandemic declarations by the national government or any state, county, or municipal government. By doing so—and by explicitly decoupling coverage from direct physical loss to the insured’s property, which served as a block to coverage for those who had business interruption insurance prior to the current outbreak—such insurance would also place some private capital ahead of the government.
Moreover, a National Business Interruption Risk Insurance system would have the advantage of being automatic, resulting in a more organized response from the federal government. Checks would go out sooner, mitigating mass layoffs, reducing the burden on the unemployment insurance system, and ensuring a faster recovery. Worker protections, such as those requiring businesses to retain employees, and climate protection measures would be appropriate as part of such an insurance program.
Many design questions would need to be addressed, such as how to coordinate public-private funding, whether to include all businesses rather than just small or small and medium-sized ones, how much coverage would be needed, how to invest federal funds, and more. However, while it seems like a future pandemic is far away in time—and hopefully it is—there is little risk in starting to prepare now. As the current crisis shows, the costs of failing to do so are too high not to.
Alexandra Thornton is the senior director of Tax Policy for Economic Policy at the Center for American Progress. Andy Green is the managing director of Economic Policy at the Center.
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