As small business owners struggle to adjust to a new normal, help is either coming too late or not at all. With so many businesses on the brink of closure, how will they bounce back?
As stay-at-home orders lift, many of the nation’s small businesses remain on shaky financial footing, hoping their customers return and their flattened revenues bounce back enough for them to survive.
To be sure, some small businesses have been fine, or even thrived during the recent lockdown. Bakeries, locally-owned grocery stores, corner markets – many have seen sales rise since the pandemic began. But others – like restaurants, regional theater, gyms, shoe stores – watched sales plunge or even zero out in a matter of days, then stay that way for weeks.
Small businesses on the brink
Business failure statistics
“We’re going to find out soon whether the nature of a socially distanced economic recovery brings all these businesses back,” said Todd H. Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business School and Columbia Law School.There have been some positive signs. U.S. payments volume dropped 5% in May over a year earlier, a 13-percentage point improvement over April, according to Visa. And loosening restrictions on commerce means that a shoe store that had to bar customers in April can now invite them to try on sneakers in person; restaurants that only did takeout can, in some states, now fill their indoor tables as well as their patio. But due to social distancing requirements and fear of the virus, many businesses find themselves operating at reduced capacities.
On top of the loss of revenue over the last few months, this will make it hard for many business owners to pay bills ranging from credit cards to insurance to rent, potentially forcing them into delinquency not just on one, but often on many fronts.
This scenario, of small businesses struggling to stay afloat, is reflected in a number of early studies conducted on the pandemic’s economic impact. A survey of 5,800 small businesses, published in April by the National Bureau of Economic Research, found that “the pandemic has already caused massive dislocation among small businesses.”
Another report, published in early May, looked only at small businesses in the state of Nevada. It found that more than a quarter of the state’s small businesses considered themselves at immediate risk, and another quarter at near-term risk.
In some sections of some cities in recent weeks, small businesses have been hit with a second punch: damage from looting and rioting. History shows a mixed recovery for neighborhoods devastated by human-made or natural disasters, said Victor Matheson, a professor of economics and accounting at College of the Holy Cross in Worcester, Mass. Matheson studied what retail neighborhoods looked like a decade after the Rodney King riots (Los Angeles, 1992) and Hurricane Andrew (Miami, 1992).
While taxable sales in Miami had rebounded in ten years, in South Los Angeles, they had not, Matheson said. That may have been due, he said, to a fear of rebuilding due to the loss of life during the LA riots, when 63 people perished. In contrast, there were only 15 deaths directly attributable to the hurricane.
“One thing going in favor of these neighborhoods right now, is the number of [deaths] has been low compared to during the Rodney King riots,” he said.
One particular challenge for many small business owners is they depend on this month’s sales receipts to cover last month’s bills.
A strenuous reprieve
K. Davis Senseman is a lawyer in Minneapolis who represents hundreds of small business owners, most with 10 employees or fewer. Many were in growth mode before the pandemic hit. If their profits increased, they plowed it back into the business, making infrastructure improvements, or giving their employees raises.
“Most of them are kind of relying on, at most, four to six weeks previous incomes to pay the next month’s bill,” Senseman said. “The best sit on one or two months of cash flow. They’re asking, if I have zero income coming in, how do I continue this?”
Some of the damage has been temporarily put on hold for many merchants by credit card companies and other lenders who have allowed payments to be deferred without penalty, and state and local laws that have forbidden landlords from evicting tenants while stay-at-home orders remain in place.
But that doesn’t mean those debts or mortgage payments went away. They merely got postponed. “I think in the next three to six months, we will see huge delinquencies in this country, consumer as well as business,” said Oleg Yavorovskiy, founder and CEO of Guardian Debt Relief, a company which helps consumers manage and pay back credit card and other debt. “That really scares me.”
At some point, if unpaid debt piles up to the point where it becomes insurmountable, small businesses become insolvent and must shut down, Baker said. Often there isn’t a formal bankruptcy proceeding because there isn’t much of value for a creditor to go after. That’s why many small business loans require the owner’s personal guarantee – and why many small business closures result in personal bankruptcy filings.
“For small businesses, a lot of our assets are tied to personal guarantees,” Yavorovskiy said. “The rent is tied through personal guarantees; you’re personally responsible for the rest of your lease term. Those businesses, if they are [filing for bankruptcy], they will have to do the same on the personal level.”
Failings of the Paycheck Protection Program
There’s also been a significant effort to rescue small businesses by state and federal governments. The most well-known of these is the so-called Paycheck Protection Program, which provides small businesses with loans that can be partly or completely converted to grants. But the money comes with a number of restrictions, and businesses who fail to meet them find they cannot get answers about how and if they will end up owing the government money.
Tony Wilkinson, the chief executive of the National Association of Government Guaranteed Lenders, a trade group, said last week at a hearing of the Pandemic Response Accountability Committee, “There are countless stories of success and hope behind the millions of loans [given in this program]. I wish I could say participation in this program has been easy. It has not.”
Even as the loans were being handed out, the federal government continued to issue program guidance on a rolling basis, and some of the guidance contradicted other parts, he said.
The unwieldy execution has “chilled the willingness of many small businesses to even apply for loans during the second round of PPP funding, and has caused many businesses to return to disbursed loans out of fear of doing something wrong,” said Wilkinson.
The PPP definitely hasn’t been the help Diane Collins hoped it would be. She applied for the PPP as well as other small business loans to help her two-room, children’s dance studio, D.C. Dance, stay afloat during the lockdown. She got one grant, but found she didn’t qualify for the PPP because her teachers were all freelancers, rather than employees, and the program is mostly directed at payroll.
“As a small-business owner,” said Collins. “I go to bed every night scared to death.”
As long as her business is not allowed to operate, the city forbids her landlord from evicting her if she can’t pay the rent. But as soon as the city’s ordinance lifts, and she can offer in-person classes again, she will have a year to pay back the missed months of rent – and her monthly rent will once again be due.
Meanwhile, she wonders: Will parents be willing to send their children back into a pair of rooms where the kids will be jumping around together and breathing hard? What if she has to cut a 15-child class, not in half, but by two-thirds or more, to satisfy health requirements? How does she pay rent then?
Quandaries like the ones Collins faces has some small business advocates calling for more direct and extensive federal aid.
“If there isn’t a serious and long-term intervention right now, we won’t be able to pull back from this extreme unemployment,” said Amanda Ballantyne, executive director of Main Street Alliance, an advocacy group for small business. “We won’t be able to preserve the diverse small business sector we have in our economy.”
What to do next
Ballantyne’s organization is calling for intensive, extended government aid during this crisis to both small businesses and the workers they employ. It’s a concern Baker shares.
“The biggest danger is that government support ends too soon, and then all these small businesses can’t service their debts,” he said. “Nothing good comes from that.”
For now, small business owners need honesty and savvy, experts say – honesty with themselves, as to whether and for how long they can afford to stay in business, and savvy about how best to do so.
“If it’s looking like you can’t pay the debts, maybe you should stop the bleeding and shut the business down,” Senseman said.
Take a hard look at your situation, Senseman advised. Do you see a way out? Or will staying afloat likely only mean piling on more debt?
If the business does look viable, this is not the time to be shy or stoic about your situation. “Communicate,” said Michael Eckstein, owner of Eckstein Advisory and Eckstein Tax Services in Long Island, N.Y. “Everyone knows the world is falling apart. If you can’t pay a bill, you have to call [the person or business you owe] and say, ‘You know, I want to pay the bill. Is there anything you can do for me?’”
You may be surprised to find your landlord and other creditors want to help, he said. It’s not in their interest to have you disappear. “To a certain extent, everyone’s survival is dependent on each other,” said Eckstein. “I don’t want my client who pays me ten grand a year to shut down.”
Best to make those calls, if possible, before you miss the payment, says Beverly Harzog, credit card expert and consumer finance analyst with U.S. News & World Report. “That’s the time when lenders are more likely to work with you,” she said. “It gives the lender a better feeling to know you are really on top of this, and that you’ve come forward and asked for help.”
You should consider prioritizing taxes above all else. Many banks won’t approve a PPP loan for an applicant who owes business taxes, out of fears that the government may not forgive that loan when the time comes, Senseman said.
And nothing, said Eckstein, can protect you from owing payroll taxes. “Even if you close your business, [the government] can still come for you,” he said.
The urgency and pace of these decisions is unfolding unevenly across the country, Baker said. Some businesses looked at their balance sheets and folded almost immediately after lockdown orders went into place. Some are just now emerging from government-mandated hibernation, looking at a pile of bills swiftly coming due. Others are finding they can just make ends meet – for now – with temporary federal aid. And others are realizing they can make a go of it in this new economy, even if it is in an altered form.
Still, make no mistake – the road ahead could be bumpy. “We’ll see a significant increase in delinquencies in the next few months,” said Baker. “The race is: Will the economy recover fast enough to allow these companies to survive?”