To avoid a repeat of 2008, Main Street America says help must come fast
(Reuters) – Two weeks. Maybe a month.
In the United States, small businesses say aid promised by the Federal Government and the Federal Reserve is good news in the battle to stay afloat during the coronavirus crisis, but must hit their bank accounts quickly if it is to do a difference as they barter with landlords, keep tax receipts, haggle with vendors and hope furloughed staff can get by on unemployment assistance.
“There’s no way we can pay all the bills related to our business – internet, dishwasher, our compost,” said Terry Sok-Wolfson, who has already closed his bar and two restaurants in the area. ‘Oakland, Calif., and says the third can survive for maybe two weeks depending on his meager cash reserves. Out of 30 employees, 24 were made redundant.
For millions of America’s small businesses, where personal assets are often pledged to secure business loans and credit cards underlying cash flow, the next few days will be crucial in determining whether a historic federal bailout effort limit the economic damage of the current health crisis. Otherwise, Main Street businesses will bear the brunt of an unprecedented and rapid shutdown of the US economy.
The speed with which loans can be provided could determine whether the economic fallout from the current crisis becomes as deep and persistent as it was when a housing bubble collapsed in 2007 and triggered a financial crisis and recession. two years.
Legislation approved by the Senate and expected to pass the House this week includes about $350 billion for small business loans, and nearly $450 billion that the U.S. Federal Reserve may be allowed to extend to more than 4 trillions of dollars in support for small and medium-sized businesses. businesses.
The programs dovetail with Small Business Administration loans intended to help businesses cover salaries, rent and other expenses through June. Much of this debt must be forgiven if companies keep their employees on the payroll.
Details of a Fed “main street business lending program” are expected to be announced shortly after the enactment of emergency legislation pending in Congress. Fed Chairman Jerome Powell said on Thursday that he aimed to make the eventual restart of the economy “as vigorous as possible.”
The Fed program is expected to target companies with between 500 and 10,000 employees, with other measures being taken to help larger companies and the SBA helping smaller ones.
Treasury Secretary Steven Mnuchin said Wednesday the goal was to make small business financing as easy as “you walk into a bank, you get a loan instantly. It covers your payroll. You hire people. It’s forgiven. »
Instant loans would be a big change from the current system, where SBA loans can take 60-90 days.
SHORT SHOCK OR GREAT RECESSION
During the last recession, the number of American businesses fell by more than 100,000 between 2008 and 2010 and the number of jobs by 8.5 million, with disproportionate losses among mid-sized businesses in the construction and manufacturing.
This time could be different as the economic shock is hitting the service and hospitality industries the hardest where public contact is part of what is sold in restaurants, bars, hotels, theaters and retail stores. which are the foundation of the American consumer society.
The St. Louis Fed estimates that 46 million workers who have “high contact” with the public could find themselves unemployed in the coming weeks – in a bid now to make their absence from work as short as the problems allow. public health, and with compensatory benefits such as unemployment benefits.
A record 3.3 million people applied for unemployment benefits last week alone.
The upside: If the shock is short-lived, they can quickly return to work in roughly similar roles, unlike 2008, when long-term unemployment also rose and workers sometimes found they weren’t working. were unqualified for jobs in factories that had been reorganized during the recession.
Chart: The Fed and Congress aim to circumvent a 2008 replay –
A THIN CUSHION
Research from the JP Morgan Institute has shown some resilience among small businesses. Studies of events involving hurricanes, for example, have indicated that businesses have lost considerable revenue, but have also significantly reduced expenses, reduced losses, and managed with only a small amount of damage to their cash reserves.
But the pads are thin. In a study of 600,000 businesses, only half had enough cash to cover expenses for 27 days. That means it probably takes about a month before homeowners face more debt, more personal financial risk, or a career change.
Manufacturers, who have suffered sequential shocks since the early 1990s due to globalization and recession, may actually be better positioned this time around – assuming the downturn is short-lived.
Many are still filling existing and incoming orders and can better manage the health risks of ongoing operations given their control over factory floors.
Look Trailers, based in Middlebury, Indiana, has reduced four of its six factories and laid off 400 of 525 workers, who can now apply for unemployment benefits.
But managing director Matt Arnold said the assumption was that demand would strengthen during the downturn and his dealer network would be able to fund inventory once the rebound begins.
“Everyone just furloughed people and waited for it to turn positive… It’s not like 2008,” he said. His company’s bank line of credit is likely enough to get him through the crisis, he said.
By contrast, San Francisco art supply retailer Howard Flax laid off its 18 employees after authorities issued a shelter-in-place. He is now bringing two back to help run a walk-in operation at one of his stores. He thinks he can negotiate with his landlord, delay insurance payments and make other adjustments because he plans to apply for an SBA loan.
It has other issues: Only about two weeks of inventory available and a vendor in New Orleans that had to close.
Assuming the shutdown continues, help should arrive soon.
“Submitting a loan is not something small businesses want to do,” he said. “It will be the hardest part on the road, but if it’s the only option, you do what you have to do.”
Reporting by Howard Schneider, Tim Aeppel and Ann Saphir; Editing by Heather Timmons, Andrea Ricci and Daniel Wallis