While well-intentioned, the lending relief programs have so far been characterized by faulty execution and shortfalls in funding.
The government aid rolled out to small and medium-size enterprises, which was exhausted after only 13 days, has been problematic at best; at worst, if not changed, it will lag the survival period of many struggling businesses. The U.S. government framework is going to have to be enlarged, include more generous terms for participation and ensure that aid flows to far more smaller firms than the current oversubscribed program has accomplished to date.
While well-intentioned, the lending relief programs have so far been characterized by faulty execution and shortfalls in funding. The remedy is clear: The government’s policy framework needs to be updated to reflect the hard realities facing most small and middle market businesses during this severe economic downtown. It will require expanded funding to meet unquestionable demand, likely pushing the total aid package north of $1 trillion dollars through the end of pandemic.
Policymakers and the public are rightly concerned around the sustainability of small and medium-size firms. They account for roughly 52% of U.S. GDP growth and created nearly 70% of all new jobs during the previous economic expansion.
Policy improvisation akin to the sort that helped the economy weather the 2007-2010 Great Recession is now required to withstand the current health and financial crisis brought on by the COVID-19 pandemic. Policymakers need to pivot on the fly to adequately address the rapidly changing situation on the ground, a situation characterized by sharp sales declines across most major industries and unemployment levels approaching those of the Great Depression of the 1930s.
Relief to date has been hampered by a combination of antiquated government technologies and gaping holes in the legislative text around business qualification, including the definition of essential and nonessential businesses and other vagaries subject to wide interpretation. These issues have contributed to a set of conditions that are forestalling funding under both the Paycheck Protection Program administered by the Small Business Administration and its much larger counterpart, the Main Street Lending Program, run by the Federal Reserve.
Workable reforms
Three basic reforms need to be implemented in the next round of aid to avoid many of the problems plaguing the prior rollout.
The first two changes apply to the Paycheck Protection Program, and would help to limit qualification to struggling small and midsize companies with fewer than 500 employees and keep the Small Business Administration focused on supporting small businesses.
First, eliminate the PPP’s business location covenant, and focus instead on headcount.
Section 102, D (iii) of the Paycheck Protection Program ostensibly targeted at small companies is providing broad cover that allows larger companies to qualify for aid, arguably to the exclusion of smaller concerns. The text in the section states that “during the covered period, any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72 at the time of disbursal shall be eligible…” The program needs to omit the location stipulation and measure qualifying businesses solely by their employee count of fewer than 500 workers. If this is not addressed, the public will begin to ascertain that the program wasn’t, as billed, designed to help smaller companies. However, it is important to note that those firms in need of assistance under a reformed PPP would still be able to find aid through potentially forgivable loans inside an updated, and far larger, Main Street Lending Program.
Second and better yet, change the PPP’s employee threshold to businesses with less than 250 employees to create a real distinction between small and medium size firms and the government programs designed to serve them.
Such a move would provide the beleaguered Small Business Administration and its 3,000-plus employees with much desired breathing space to address the critical and existential issues facing small firms. After conducting the equivalent of 14 years’ worth of work in just 14 days, there is likely no other way to provide relief to a struggling government agency that finds itself understaffed and overwhelmed by public demand. Firms with more than 250 employees would still be able to find generous and attractive bridge financing through an updated Main Street Lending Program.
Third, ease term financing inside the Main Street Lending Program.
This will serve to attract more companies with more than 250 employees to this facility. The Main Street Lending Program, which is slated to launch on May 1, intends to charge the secure overnight finance rate (SOFR), plus 250-400 basis points. While generous, in our estimation small and medium-size companies that are facing many of the same issues of deep-pocketed big companies—including some in industries previously bailed out by the federal government—may not see it that way.
Instead, we think the lending rate should be reduced to SOFR plus 100 to 350 basis points. We recognize that such a move does put additional risk on the Federal Reserve’s balance sheet, as the Fed is committed to purchasing 95% of all MSLP loans made during the pandemic crisis. However, in this most unusual and exigent period, we believe this is exactly what the Fed should do in light of the $75 billion equity loss capital put forward by the Treasury Department. The Fed that will not take any losses here; the Treasury will, and that is exactly as it should be under current crisis conditions.
Moreover, it is important that those firms with more than 250 employees and less than 1,000 should be able to obtain potential forgivable loans through the Main Street Lending Program, consistent with the constraints outlined in current legislation.
Policymakers need to recognize that right now liquidity is the No.1 challenge faced by small and medium-size firms companies to sustain the current impact of the depressed economy and retain employees so they are ready for its gradual and orderly reopening. The $300 billion number being thrown around Washington as the size of the next aid program is not going to be large enough to address the problem. Based on discussions with RSM’s core small- and midsize-business clientele, demand for aid is going to outstrip such small thinking.
Congress and the Trump administration need to present a much more robust and far-reaching aid program to prevent the potential dissolution of up to 20% of the small business community. Time is of the essence. Key decision makers need to act decisively, overwhelm the problem and be prepared to sustain that action for longer than anyone will be comfortable.
