The fall out from the COVID-19 outbreak has had a dramatic impact on our society. People all across America are under some form of government-mandated lockdown to help slow down the spread of the virus. Venues, where major crowds could gather (concert venues, stadiums, theatres), were ordered closed last week or announced their own closures to comply with CDC guidelines.
As of Monday night, all bars, breweries, restaurants, distilleries, and wineries (among other businesses) in DC and Maryland were ordered to shut their doors except for delivery or pick-up services. While Governor Northam of Virginia has not ordered as severe of a shutdown, as of last night no restaurant or bar in Virginia is allowed to have more than 10 patrons present at a time. However, even without a full lockdown order many breweries in Virginia (ex. Port City, Rocket Frog, Ocelot, Aslin) are offering only to-go orders or delivery, in order to protect their employees and the public.
In the midst of all this, layoffs are rising dramatically and many small business owners in the area are concerned that neither they nor their neighbors will make it to the other side of this crisis. Without immediate and dramatic action on the part of the Federal and state governments, there is a significant risk that they will not.
Governments need to declare states disaster areas
To date, the only significant action the federal government has taken to directly assist small businesses has been to authorize the Small Business Administration (SBA) to declare the coronavirus pandemic as a qualifying disaster for Economic Injury Disaster Loans. Under that program, qualifying small businesses can receive government-backed loans from lenders up to an amount of $2 million at an interest rate of 3.75%, in order to address the economic impact of a disaster. However, there are several reasons this program alone is inadequate.
One, it requires the governor or, in the case of DC, the Mayor, to declare their jurisdiction a disaster area. So far, thanks to the work of Mayor Bowser’s Office, the District of Columbia and the surrounding counties of Montgomery, Prince George’s, Arlington, Fairfax, and Alexandria City; have all been declared and qualify for these loans. The same goes for Maryland counties that directly border Delaware and Virginia counties that directly border North Carolina. However, the rest of Virginia and Maryland have not yet been declared.
Second, these Economic Injury Disaster Loans cannot be used to pay back any other government-backed loans. As it turns out, a significant percentage of all small businesses in America have either a 7(A) SBA or other SBA backed loans or loans backed by the Department of Agriculture, Housing and Urban Development, or another federal agency. It is one of the primary ways that small businesses are able to obtain the capital to start their operations.
Third, as people like Julie Verratti (co-founder and owner of Denizens Brewing) have pointed out, “Loans are not the solution to save small businesses right now. Do you know how long it takes to close on a commercial loan?” The SBA states that the process for receiving funds from a disaster loan can take about 5 weeks, but the agency has never before faced the circumstance of a simultaneous nationwide disaster.
With many natural disasters, businesses would be able to file a claim with their insurance company to cover certain losses in the interim. However, almost no insurance policies cover losses related to a pandemic.
Last, even for those businesses that can obtain a disaster loan in time to actually save their business and put it to use in a way that would help that effort, the loan still carries interest. It would add more debt to the books of the business, yet another monthly bill that increases overhead and eats away at available cash flow, and makes the business less viable in the medium to long term. According to the Bureau of Labor Statistics, even during normal economic times, 20% of businesses fail in their first year, 30% fail in their second year, and 50% fail by year five. These times are far from normal.
Governments need to help businesses with cash, not loans
In order to save America’s Main Streets, far more drastic measures will be necessary. To that end, Julie, who has been a leading voice in our region on this issue, has proposed a major three-pronged program: “ An IMMEDIATE moratorium on all commercial debts, mortgages, and rents.  An IMMEDIATE moratorium on all personal debts, mortgages, and rents.  IMMEDIATE cash grants to small businesses and individuals across the country.”
When assessing Julie’s plan, there are several things to keep in mind. First, without drastic action from the federal and state governments, the US unemployment could hit as high as 20%. Many of your local businesses have already started laying off staff. Second, the way that the standard 7(A) SBA loan work lenders are insured by the federal government for between 75-85% of any loan they issue to a small business under that loan program. Those lenders will usually require collateral to secure the remaining risk of the loan. That means private banks have and are continuing to earn nearly risk-free profits from the US taxpayer.
The SBA has already issued guidance that lenders are authorized to unilaterally grant up to a 6-month deferment on any SBA backed loan without approval from the agency. However, at the very least, legislation should be passed that allows the SBA to mandate deferments on the loans they are guaranteeing. This will have the fewest constitutional issues.
With regards to the general call for deferring all commercial loan payments and rents, not to mention personal loans and rents, it is helpful to understand the significant actions that the Federal Reserve has already taken to support the banking system. On March 15th, the Federal Reserve dropped interest rates to near zero percent. This means that banks can borrow money from the Federal Reserve at nearly no cost. That same day, the Fed also pledged to purchase up to $500 billion worth of long term Treasury bonds and $200 billion worth of mortgage-backed securities as part of a quantitative easing program.
Essentially, the Federal Reserve promised to give banks $700 billion in cash for their assets and theoretically pump that money supply into the general economy. This is on top of $1.5 trillion injections that the Federal Reserve Bank of New York announced last Thursday, which was designed to prop up the short term (overnight repurchase) Treasury bond market and ensure banks there would be a buyer for those transactions.
Yesterday, the Federal Reserve announced an additional $500 billion infusion into the overnight repurchase market. These are essentially short term loans to banks to cover their liabilities at the end of each day. That same day, the Reserve also said they were creating a special vehicle, which may reach up to $1 trillion, to buy commercial paper (unsecured short term debt issues) from primarily large companies. This will allow those companies to finance their payroll and other operations at significantly lower interest rates than what the private market would charge.
Following the 2008 crash and the passage of Dodd-Frank, banks have been required to maintain certain amount of capital on hand and liquidity buffers. These requirements were part of the “stress tests” that you heard about during the Obama administration. There are also mandates from the Federal Reserve that any depository (i.e. “regular”) bank maintain certain cash reserves relative to their outstanding liabilities. On March 15th, the Federal Reserve lowered its mandates to banks by zero and instructed them to use their capital and liquidity buffers to keep money flowing to businesses and individuals.
Taken together, these are a dramatic and vast set of actions that are designed to pump easy money into the financial system. They give these banks access to vast amounts of capital at nearly no cost. In light of that stark reality, it becomes reasonable to demand that those same financial institutions turn around and provide equally generous terms to the communities they serve, especially small businesses and individuals. By temporarily freezing loan payments, businesses can hold onto their cash reserves and landlords can be more flexible in providing rent abatements if they don’t need to pay a mortgage on their commercial properties. Individuals will also be able to hold onto more of their cash, thereby enabling greater spending at those same businesses.
This is actually a much more direct, quick, and effective form of stimulus than what has been proposed so far and doesn’t add to the national debt. It may be what is necessary to keep people employed and our neighborhood businesses from permanently closing their doors. Doing so will help to ensure a viable tax base for communities going forward and may forestall the need for more dramatic measures.
Contact your elected officials
If you would like to get involved. Please reach out to your House member and Senator and ask them to please support a plan that pauses debt payments from any federally insured bank for the duration of the crisis. This should be in addition to any other stimulus measures they are supporting.