Steve Mnuchin and congressional leaders are rushing to fill the coffers of America’s small- and medium-sized businesses, some of which face imminent financial armageddon without a lifeline.
In addition to the $349 billion emergency small-business lending program which was rolled out in haphazard fashion late last week during a frantic push by Mnuchin to get cash into the hands of business owners before anyone else got fired, the Fed is poised to unveil the details of a program for mid-sized companies with 500 employees or more.
“We’ve been actively working on this for the last week, having daily calls with the Fed”, Mnuchin told CNBC, of the so-called “Main Street” lending facility. “We hope to have an announcement this week with the details on that and get it up and running as soon as we can”.
Mnuchin’s message to small businesses competing for what already looks like scarce funding under the Paycheck Protection Program, was simple: “I want to assure all small businesses out there: We will not run out of money”.
Perhaps feeling as though that wasn’t emphatic enough, he drove it home: “If you don’t get a loan this week, you’ll get a loan next week or the following week. The money will be there”.
Underscoring just how urgent the situation is, a new Fed study (using responses from a poll conducted late last year) shows that even when the economy was still performing well and consumers were enjoying the wealth effect from a melt-up in stocks, only 20% of healthy small businesses had enough cash on reserve to operate in an environment characterized by a 60-day revenue shock. Here’s the Fed to explain:
A new question in the 2019 survey asked business owners how they would respond to a potential financial loss equal to two months of their revenues. Unfortunately, the scenario posed in this question no longer represents a hypothetical situation for firms facing the effects of COVID-19. Responses differ across the financial health spectrum. Only one in five healthy firms reported they could continue business as usual with their cash reserves; this number falls to less than one in ten among stable, at-risk, and distressed firms. Further, there are clear workforce implications, as two of the most common responses include reducing salaries and laying off workers, especially among the healthiest firms. To bridge funding gaps, firms in all four categories said they would rely on the owners’ personal funds, but this tactic was more common among at-risk and distressed firms
Those figures are not particularly encouraging, and although there are many respects in which the comparison is apples-to-oranges, the picture one gets is that small businesses in the US aren’t that much healthier than those in China when it comes to a severe revenue hit. At the end of February, a study showed 85% of Chinese SMEs were set to run out of cash within three months as the COVID-19 crisis resulted in draconian lockdown protocols.
In his annual letter out Monday, Jamie Dimon said that according to JPMorgan Chase Institute research, 50% of America’s small businesses have less than 15 cash buffer days. That, Dimon noted, “reinforc[es] why small businesses are being heavily disrupted by the current crisis and will feel the effects for a significant period of time, even as more capital from the recent federal stimulus program reaches them”.
All of this may just be a reflection of the fact that no firms do “well” when government decrees prevent them opening the doors or otherwise generating operating income, but you get the point. It’s bad out there, and small businesses, “healthy” or otherwise, don’t have the cash to ride out the storm, where that means taking none of the actions listed in the visual below, and simply using their existing reserves to continue normal operations.
Headed into the new year, a majority of small businesses said they were enjoying revenue growth, and at least a third were adding employees.
And yet, margins were already being crimped, as input costs rose for 76% of businesses, the Fed study showed. Only 61% of businesses whose input costs were rising said they were passing that along to consumers. Two-thirds of employer firms reported experiencing financial difficulties over the previous 12 months. The largest challenge: Paying operating expenses.
Thanks to the virus, operating income for many small businesses has been reduced to zero (or somewhere close to it). Fixed costs, however, don’t simply disappear. And therein lies the problem. If you don’t have the cash, and can’t secure relief for rent and other expenses, you’re left to take some of the actions mentioned above.
Note that “healthy” and “stable” businesses (which made up some 70% of the sample) would overwhelmingly choose to fire workers, defer payments or downsize. Layoffs are obviously bad, downsizing is no good either and when it comes to deferring payments, well, one person’s debt is another person’s asset. A deferred payment to, for example, a landlord, may imperil his/her ability to service other loans, which in turn starts to drive up non-performing assets at banks. And then, we spiral.
ADP data out last week showed small businesses cutting the most jobs in a decade. Disconcertingly, the data did not capture the full scope of layoffs associated with March’s lockdown measures, which means April’s numbers will doubtlessly be worse.
Small business sentiment tumbled the most on record in March, the NFIB said Tuesday.
The Trump administration is looking for at least an additional $250 billion for the Paycheck Protection Program amid signs it will hit capacity. Payments on the loans, you’re reminded, are deferred for six months and may ultimately be forgiven.
At the direction of President @realDonaldTrump, I've spoken with @SenateMajLdr, @SenSchumer, @SpeakerPelosi, and @GOPLeader to secure an additional $250 billion for the #PPPLoan program to make sure small businesses get the money they need!
— Steven Mnuchin (@stevenmnuchin1) April 7, 2020
“I will work with Secretary Mnuchin and Leader Schumer and hope to approve further funding by unanimous consent or voice vote during the next scheduled Senate session on Thursday”, Mitch McConnell said, in a Tuesday statement. Nancy Pelosi on Wednesday suggested there are still some disagreements around how the extra money needs to be allocated.
One way or another, America’s small businesses cannot be allowed to fold en masse. And I mean that literally. It cannot be allowed to happen.
Let’s assume, for argument’s sake, you’re the type who doesn’t feel empathy. If that’s you, then just forget about the devastating psychological impact a small businesses apocalypse would have on local communities. Instead, just think about it from a whole-economy perspective. Here’s the Fed to help:
The importance of small businesses to our nation’s economy cannot be overstated. Small employer firms, those with 1–499 employees, account for 47.5% of the private-sector workforce.
Get the picture?