Why Did The CARES Act Tie Up Help For Desperate Small Businesses?
The $2 trillion Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was signed into law on Friday, March 27th, was unveiled with great fanfare by the Trump Administration. Through bi-partisan debate in both the Senate and the House, the bill had been bolstered to include additional funding for healthcare workers and for hospitals. Also added were safeguards providing oversight of the disbursement of these massive stimulus funds.
On Tuesday, April 7th, 2020, in the midst of a pandemic that shuttered hundreds of thousands of small businesses, the Treasury requested more money; it asked for authorization from Congress for an additional $250 billion for the small business program. This amount would add to the current authorization of $367 billion provided under CARES to help hard-hit small businesses. Many would say that these extra funds were sorely needed – to help Americans and to boost the battered economy. But as of this writing, these additional funds have not yet been authorized.
As reported on Daily Clout March 25th, 2020 regarding the provisions of the CARES Act, despite small business being a sector that drives innovation, represents 50% of our work force, and which is also responsible for two-thirds of U.S. net new job growth, the sector was receiving only $367 billion of aid versus the $500 billion allocated for big business. While it will be a better outcome should the additional $250 billion, under request by the Treasury, be approved by Congress, the estimated real need of small businesses is over $1 trillion. Further hampering aid to this sector is the halting and slow implementation and execution for the legislation after it was signed into law.
As just one example of how poorly executed this disbursement to small business is, a number of the top SBA (Small Business Administration) approved banks did not, initially, participate in the small-business loan program provided by the CARES Act. This was due to the government-backed loan cap of 0.5% on the interest that these banks could charge. While this may seem like a kindness to small business owners in a crisis, the fact is that this tiny cap on interest rates, does not even cover the cost to banks of making these loans. That cap has since been raised to 1% for loans that must be repaid over a two-year period (See the most recent Treasury guidelines here).
This information gave me pause. Did anyone in drafting this bill, even consult with the top lenders? Further, didn’t our legislators know that the SBA’s processing capabilities are old, creaky and unresponsive, a well-known fact by those of us working for and in small businesses? How would this disbursement unfold? It turns out: Not so well.
The banks that actually lend most to small businesses were not featured in the White House update on the CARES Act, but other big banks – who don’t specialize in lending to small businesses – were. The banks that headlined at the White House media event on the CARES Act on April 7th are well known: Bank of America, JP Morgan Chase and Wells Fargo. But only two of these are among the top five lenders to small businesses, especially to those businesses with 50 or fewer employees.
In contrast, the largest lenders to small businesses, in terms of volume and dollars, are not well known, and they were not included in discussions. These real-life lenders to small businesses include Live Oak Banking Company (#1 in 2019, lending nearly twice the amount of the next largest lender) and Newtek Small Business Finance, Inc. (#2 in 2019).
Just as seriously, other whole sectors of those who actually make loans to small businesses were left on the sidelines. These include online, tech-savvy lenders such as PayPal, Kabbage, Square Capital, OnDeck, BlueVine, and many more, who are not “approved” SBA lenders, but who are actually in a position to deliver loans rapidly to struggling small businesses, customers whom they know well. Anyone who has used PayPal knows that if one is approved for a loan, the money can be available almost immediately and with almost no red tape. That’s not the case for the traditional big banks. Despite weeks of lobbying by these firms to be part of the distribution process, these lenders were not approached.
This omission of the real-life lenders was coupled with choking amounts of confusion, shifting guidelines, and badly performing infrastructure, which held up applications. Not surprisingly, applications flooded the notoriously slow SBA processing capabilities, as well as also flooding unprepared banks – some 3 million application or more on the first day. While there certainly have been loan approvals, the actual delivery of funds still seems in limbo due to continued inconsistency on guidelines. A bank cannot lend the funds until the SBA reviews the application and approves it for the program – even if the applicant is an existing bank customer in good standing. While, as of April 13th, Treasury Secretary Mnuchin announced that $230 billion had been distributed through 4,600 lenders, there is still a question as to what funds have actually been disbursed. Based on our conversations with bankers, disbursements are lagging well behind. And, reports from companies I am in contact with, after applying immediately on April 3rd, are still awaiting an SBA loan reference number. While I am sure that these kinks, in the context of an unprecedented relief package rollout, will eventually be worked out, the largest question still remains. Is this soon enough? And, is it enough?
So, omission of the real-life and online lenders, incomplete and varying funding guidelines, changing interest rates, and inconsistent application forms that poorly connected the approved banks, the SBA and the Treasury, all made implementation of this portion of the aid for small business, nearly dead on arrival. In other words, all that approved taxpayer money could not get to the desperate restaurants, retail stores, and other “nonessential” businesses that have gone without revenue and income for weeks.
In stark contrast to this massive mishandling of small business help, big corporations got the red-carpet treatment. Discussions began immediately with big corporations who would not only be handled faster, i.e. right then by Treasury and the Administration, but would also benefit from direct and nearly immediate funding from Treasury and the Federal Reserve. But small businesses, in contrast, needed to wait a week, until April 3rd, before they could even apply!
So, now what? Unfortunately, while fixing these terrible obstacles to execution will help short-term, there is not an easy solution long term without real reform, even beyond this immediate crisis. The odds for small businesses have been increasingly stacked against them for many years. This is a result of a long and getting longer list of many factors. Among others, these include:
- Inadequate, untimely or inappropriate programs through the SBA
- Poor or declining funding options
- Complex licensing and taxes
- Crumbling infrastructure
- Gridlock in Washington
- Eroding patent protections, and;
In a study released February 28, 2018 by the Kaufman Foundation, entitled “Breaking Barriers: The Voice of Entrepreneurs. The State of Entrepreneurship,” researchers found that 64% of small business owners did not think that government cared about them. And, over 60% did not think that the SBA programs were appropriate for them. Ouch!
So, what IS happening? Among other things, U.S. Business formations that will have employees with planned wages has been declining and, is in fact, down over 45% from its peak in 2006. New business formation is at its lowest level in over two decades. What will happen in this pandemic? You can imagine. The engine for our economy is decidedly in crisis. And, the foundations for the unprecedented innovation that our country has enjoyed over the past century, are being eroded before our very eyes.
Currently, our legislators under prioritize this sector. The SBA has 3,293 employees and a $710 million budget – the smallest of any other department or agency, and an order of magnitude smaller than the next smallest agency by budget, The National Science Foundation with $8 billion. In contrast, The Department of Commerce has a budget of $11.6 billion with over 46,000 employees, the Department of Agriculture employs 100,000 with a budget of $24 billion and the Department of Energy employs nearly 120,000 including contractors with a budget of $36 billion. How could a sector so vital to our economy be so ignored?
There is a glimmer of some good news. As of April 10th, both Intuit, Inc. – the company that owns TurboTax, QuickBooks and QuickBooks Capital, and PayPal, Inc. were added to the approved list of SBA lenders. Some partnerships have developed among the smaller SBA-approved banks with online lenders, to deliver these desperately needed funds. And in addition, just today, Square Capital was approved to participate in the SBA programs and get money to businesses.
But still, all of this is taking place a full 18 days after the relief act was signed into law and a month from the time that lockdowns were instituted in most states. Bear in mind that small businesses, the vast majority of which have 50 or fewer employees, rarely have more than 15-days of working capital immediately available. These businesses have likely already closed their doors, if not temporarily, permanently. And, the carnage will continue even among venture-backed start-ups and early stage companies as venture capital firms assess the ability of their reserves to continue funding hard-hit portfolio companies. Many venture capital firms, certainly, had never anticipated a pandemic, and thus may not be in a position to continue to fund their investments for an indeterminant period of time. For thousands of small businesses, too little too late is just too late: It means that their doors are closed forever.
What can be done differently for the future? For starters, legislators could review the right- sizing of the SBA’s relative importance among independent agencies and departments and establish a Special Advisor to the President, or even a Cabinet post, to raise the profile and advocacy level for the support, infrastructure, and policy necessary for small businesses to thrive in the future, whether for crisis periods or for daily life. Realizing the importance of this agency and its impact on the economy, former Presidents Clinton and Obama did just that.
All of this, in my strongly-held opinion, should take place within a complete understanding of the context of how our innovation economy began in the first place, and flourished before we got to the precipice on which we, and the millions of small business owners, now find ourselves.
 Fiscal Year 2021 Budget of the U.S. Government, Office of Management and Budget, https://www.whitehouse.gov/omb/%20budget/.