The Right Way to Help Small Businesses

By John Bridgeland , Alan Khazei and John Arensmeyer
·5 min read

America’s small business economy is in a state of crisis. We all know that keeping small businesses afloat is the key to keeping the coming recession as shallow as possible. But the efforts Congress has taken so far have prioritized the needs of big businesses, not small businesses. The next economic relief package needs to fix this before it’s too late.

In the first stimulus package, Congress took care of big businesses by setting up a $500 billion fund at the Treasury Department that officials can distribute with little oversight. Since companies will have access to these funds through the Federal Reserve emergency lending program, obtaining them will be easy and direct.

By contrast, for small businesses Congress provided $349 billion in loans through the Small Business Administration’s new Paycheck Protection Program (PPP) that requires recipients to apply for the loans through regular banks who participate in the SBA’s 7(a) program. Those loans can be forgiven, but only if businesses keep their workers on payroll.

There are many problems with this. First, it’s at best cumbersome for small businesses to find a bank that’s open and accepting loan applications. The application process is confusing and time-consuming, and it will be weeks or months before applicants get an answer – many small businesses will have to close permanently and lay off staff before they receive any support. For their part, many banks have little incentive to take part.

And finally, it’s just far too small. The SBA currently guarantees fewer than 50,000 7(a) loans per year. There is no way they can ramp up to manage a short-term emergency where more than a million applications are expected.

We are already hearing story after story of small business owners unable to get loans or worried the processing time will take too long to keep their businesses running. The owner of a local pizza store told us she would like to keep her employees on the job but was refused a loan through the PPP program by her bank because it had little financial incentive to participate. Another small business supporting nonprofits was refused a loan because it did not have a current loan with that bank; layoffs will begin shortly. The smallest businesses most in need, particularly those in immigrant communities and communities of color, are being frozen out by bigger businesses, especially those with established bank relationships.

What’s more, banks are complaining, too. They worry about legal liability as expectations mount to make loans quickly and counteract fraud. The Independent Community Bankers Association complained that low-interest loans could mean “unacceptable losses” for lenders.

“Wage Support” is a better idea.

There’s an easier way. Since Congress intended that small businesses keep their workers employed, why not just pay them directly to do that? This is a policy called “wage support” that has been used by many countries in Europe and has been shown to work.

Here’s how it would work.

The Treasury Department, with the IRS, would create an online, one-page application asking for the business’ name, address, and account and payroll information. Since the IRS has payroll histories for the nation’s small businesses and is efficient at cutting checks, it could move quickly to advance four monthly payments to small businesses equal to their payroll costs as of December 31, 2019. Self-employed entrepreneurs and “gig workers” would also be eligible to apply.

No loans through banks, no worry about small businesses taking on more debt, no concern about delays and conditions. Small businesses that have already laid people off can rehire them right away. Firms would be subject to penalties for any fraud.

This program could work alongside PPP, or replace it. Small businesses should also be able to apply for direct emergency grants to cover health insurance and other benefits and critical expenses such as rent, mortgage payments and debt service – up to a maximum of 75 percent of payroll.

Direct payments, not loans.

Fortunately, Congress is recognizing the need for more funds to support America’s 30 million small businesses. These new funds should be by direct payment and not through the existing loan program in order to maximize their impact. Any direct funds allocated under the emergency grant programs would reduce the amount of forgivable loans under PPP, thereby saving money. Unemployment claims would be expected to decline too, with fewer workers getting kicked off the payroll. Once the stay-at-home orders lift, small businesses would be ready to reopen with workers still connected to each other and the enterprise.

Emergency Wage Support would gradually be phased out over a period of months as stay at home orders are lifted and our small business economy rebounds.

The fiscal impact of emergency wage support and emergency grants is not as severe as one might think. According to a 2017 report from the Consumer Financial Protection Bureau, 76 percent of all businesses in the United States (and 86 percent of minority-owned businesses and 88 percent of women-owned businesses) have average annual receipts less than $100,000. Eighty-eight percent of the nation’s 30 million small businesses employ fewer than 20 employees. And by keeping their regular wages, those employees will keep buying what they need in the rest of the economy, helping other businesses stay afloat.

Let's keep small businesses alive by paying them to pay their employees. Otherwise, millions of main street stores will never reopen, their workers will face potentially insurmountable financial hardships, and the character of our communities and country will never be the same.