Small businesses got emergency loans, but not what they expected

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For nearly 70 years, the Small Business Administration’s Disaster Relief Program has helped businesses recover from disasters such as wildfires, hurricanes and earthquakes. But he’s never faced anything like the coronavirus crisis.

Besieged by more than eight million applicants – and operating in the shadow of the hastily assembled paycheck protection program – the disaster relief effort has yielded more money in recent months than he hadn’t had any in all of its history.

But the demand has created a problem hampering hundreds of thousands of applicants: the agency, fearing it would run out of money, capped its coronavirus lending at a fraction of what businesses can normally borrow – even though the program distributed less than half. of the $ 360 billion it can lend.

Caroline Keefer, a clothing designer in Los Angeles, expected to be able to benefit from a loan of at least $ 500,000 based on a complex formula devised by the agency. But when his loan offer arrived in May, it was $ 150,000 – the cap the SBA quietly put in place that month. Qualified businesses can usually take out loans from up to $ 2 million.

“Without the additional capital, it will be very difficult for us to survive,” she wrote in a direct appeal to Jovita Carranza, the agency administrator, and James Rivera, the head of the disaster bureau. agency.

The limit has crippled Ms. Keefer’s efforts to save a company that made $ 2 million in revenue last year. his company, River + Sky, sells directly to traders such as boutiques, department stores and hotel spas. In just a few days in March, as orders to stop the virus surged across the country, nearly $ 700,000 in orders – its entire spring and summer season – evaporated. She ended up with a stack of unpaid bills for inventory that she suddenly had no place to sell.

Six days after writing to the agency, representatives on site admitted that she had hit the ceiling. Officials “do not plan to increase loans above this amount,” the representatives said in an email.

Ms Keefer is grateful for the help she received, but upset by what she sees as an arbitrary and poorly explained limit that was put in place after other companies secured larger loans early in the decade. crisis. Data released by the agency last month showed it had made at least 20,000 disaster relief loans worth more than $ 150,000. Its biggest was $ 900,000 in early April.

Nearly 400,000 businesses have reached the limit of $ 150,000, according to agency data. SBA representatives declined to comment on the cap or why it was imposed.

The cap has only been a problem with the disaster program, officially called the economic disaster loan program. Candidates faced long delays, confusing procedures and communication errors. And last Tuesday, the agency’s internal watchdog said hundreds of millions of dollars distributed under the program may have been obtained fraudulently.

Obstacles to enforcement, changing requirements, and fraud reporting have also affected the Paycheck Protection Program, the short-term relief effort created by the CARES Act that awarded $ 521 billion in funding. forgivable loans to cover salaries and other costs.

The disaster lending program, a central part of the agency’s operations since its inception in 1953, is more flexible. The program offers businesses with 500 or fewer employees low-interest loans for terms of up to 30 years, which can be used for almost any business purpose, including the purchase of protective equipment and monitoring of debt repayments.

Since March, he has lent $ 164 billion in EIDL (pronounced “idle”) loans, more than double what it previously distributed in its entire existence, to three million businesses. Nearly $ 200 billion is currently unused.

Over two million other businesses have been offered loans but have not yet accepted them, so much of the unused money could still be loaned. But the agency’s ability to predict how much money it will distribute may have been complicated by a decision by Congress in March to expedite aid.

As the coronavirus pandemic took hold, Congress increased its allocations to the agency, enough to support $ 360 billion in loans. But he also set aside another stash of money for the SBA to distribute in the form of grants to those who applied for the Disaster Loan program, whether or not they received a loan. The $ 20 billion for these grants – up to $ 10,000 per applicant – sold out last month.

Any company that wanted the grant was part of the pool of applicants, even if they had no intention of taking out a loan. (Applicants have up to 60 days to make a decision regarding the loan.)

It is unclear what role uncertainty has played in capping loan amounts, and agency officials have provided little clarity to lawmakers on the loan limit.

At a House hearing last month, Ms. Carranza was pressed by representatives for both sides as to why the agency had not lifted the $ 150,000 limit. She said she “would continue to assess him”.

Two Senators – John Cornyn, Republican from Texas, and Jacky Rosen, Democrat from Nevada – filed a law on July 21 this would provide the agency with billions more for its disaster lending program and prohibit it from capping loans below $ 2 million.

Ms Rosen said the agency did not explain its “arbitrary” caps. The agency “refused to publicly ask for more financial support from EIDL, although small businesses across the country are struggling to cover their operating costs,” she said.

The cap has left many borrowers with loans they fear will not be enough to keep their businesses afloat.

Nicholas Johnson runs Su Casa, a furniture retailer with four stores in Maryland and Delaware. After all of his stores closed in March, he calculated he would need around $ 500,000 to keep the business going.

He got $ 157,000 in April through the Paycheck Protection Program, which he didn’t tap into until his stores started reopening in late May and his staff began to return. Based on his operating costs and income, he expected to qualify for a disaster loan of $ 380,000.

Receiving an offer in May for just $ 150,000 was “like a punch in the stomach,” he said. He had many sleepless nights, he said, wondering how he would make up his projected shortfall of $ 200,000.

So far, Mr Johnson has managed to survive on higher than expected sales from his reopened stores, but he expects tough months. “My supply chains are almost broken,” he said. “At some point, the income will drop again because I won’t have anything to sell. I’m trying to create a tampon because I know there is more pain to come. “

For some, the plug is a minor drag: Joy Parisi, owner of Paragraph, a writers space with two locations in New York City, said its disaster loan was enough to give it leeway to reduce unpaid bills and overdue rents.

But others would borrow more from the program if they could. Ms. Keefer also received a PPP loan of $ 48,000, which she uses to pay two employees, but that has not closed the gap.

With her wholesale business in tatters, she turned to consumer sales. The disaster loan paid off his most urgent bills and allowed him to hire an agency to improve his retail website. Then she started buying ads on Facebook and Instagram.

The change in strategy helped: in June, it more than doubled what it sold directly over the entire last year. But this is still only a fragment of what she would usually do. And now Ms. Keefer needs the money to start making her fall and winter products.

Seeing no other option, she took out an expensive loan from an online lender. It sounds like a payday loan, she said, “You have to start paying it off immediately, and it’s like a trap – you end up borrowing more just to keep up. “

The shortage of cash forced her to manufacture her clothes in smaller and more expensive batches; limit your marketing budget; and not to rehire more workers. If she could borrow more money from the government, she said, she would spend it immediately to grow her business – exactly the kind of economic activity the government wants to encourage.

“The EIDL loan is perfect; this is exactly what we need to stabilize our ship, ”Ms. Keefer said. “We just need more.”


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