Small Business Relief in the COVID Economy

Key points

• In our last Conference Call Thursday April 23rd, we covered the broad economic impact of Coronavirus, its affects in the financial markets, implications for U.S. Small Business owners. and preparing for an underwriter.
• On Friday April 24th, the $484 billion Coronavirus relief package was signed into law, including $370 billion in aid for small businesses keeping employees on the payroll.
• On April 30th, we will be joined by David Hincapie, Economic Development Specialist, Small Business Administration. Sign up on our Meetup Page

____________

As of this writing there are close to 200,000 deaths globally, and over 52,000 people in the United States have succumbed to the contagion. To put this in perspective, the death toll for the entire U.S. engagement in the Vietnam War was 58,220.

The economic impact of the Coronavirus has been sharp and severe:

• In January the IMF predicted GDP growth at 3.3%, and it has now been downgraded to -3% for 2020 (in 2009 it was -0.5% during the recovery from the financial crisis);
• As of April 23rd, In the United States 4.4 million additional people filed for unemployment, bringing total (U3) unemployment to an estimated 26.4 million, or 15% of the workforce;
• The DJIA at 24,120 and the S&P at 2,875 (at this writing) reflect market expectations for a fast recovery after re-openings begin; and
• There are two countervailing pressures on price levels – the flood of liquidity is an inflationary pressure (i.e gold broke the 1,700/oz mark, as investors seek to hedge against price increases) , and the deflationary pressure through the contractions on main street as many households have less discretionary income which keeps prices lower.

The U.S. Chamber of Commerce reported, “Forty-three percent (of small business owners surveyed) believe they have less than six months until a permanent shutdown is unavoidable. Nearly half of small businesses (46%) believe it will take the U.S. economy six months to a year to return to normal.” 

The implications for Small Businesses have been most severe for those businesses which were forced to close (e.g. restaurants, hospitality, and retail), and for those with the least cash reserves. Unlike other recent recessions, this impact has been caused by a factor external to the economy (exogenous). As such, the dynamic is different. In the asset bubbles of the dot-com era (circa 1995-2000), and in the contraction in inter-bank lending during the financial crisis of 2008-09, we experienced primarily demand side slow-downs. 

For many small business owners this is not a slow-down, it is a full blown “hard-stop” as businesses have had to shutter their doors. Less disposable income means fewer purchases for those businesses that are open, and in the longer term we can anticipate unemployment and stages of re-opening will mean a re-employment process and a return to spending will be gradual. There could be longer-term changes to customer behavior regarding a return to crowded spaces and other perceived risks.

Unlike recent recessions, this contraction has also included a “supply shock” including disruptions in the availability of parts and finished goods from foreign markets. For some small businesses, this will have a ripple effect including suppliers that are unable to fulfill orders, longer lead times, and increased shipping costs. In some cases this is being exacerbated by trade and customs restrictions.

The federal response to Coronavirus has now included $670 billion in funding for small business lending. Loan programs through the Small Business Administration have received mixed reviews. They provide a lifeline for business owners and are designed to protect workers, yet questions have arisen regarding the extent to which loans have disproportionately benefited larger businesses. The Paycheck Protection Program (PPP), and the Economic Injury Disaster Loan (EIDL) program are both available to small business owners, and are designed to keep businesses solvent and to keep staff on the payroll.

In an upcoming discussion with the Small Business Administration, we will cover the eligibility requirements, the intended uses of the loans which are disbursed, and the other resources available to Small Business owners. For more information on this discussion, please see our Meetup Page.

New and small business owners should continue to protect cash reserves, cut expenses, ensure that approvals on new spending require the owners’ authorization, re-negotiate payments to suppliers, and construct budget scenarios with realistic assumptions. Prepare well for a loan underwriter by having well-constructed financials which convey: cash on hand and liabilities, a budget which shows clarity around sales assumptions, as well as the unavoidable costs coming due. Calculate your cash ratio and burn rate, and detail the assets which can be collateralized.

For more information, please see the following resources:

• "Running Out of Cash?", March 29, 2020
• Small Business Administration - PPP Interim Final Rule, Effective April 3, 2020
• "Coronavirus: Economic Impact for Small Business", April 13, 2020
• Small Business Administration – Additional Eligibility Criteria, Effective April 14, 2020
• U.S. Department of the Treasury FAQs, as of April 23, 2020