The Year Small Businesses in America Failed the Stress Test
With small business owners closing shops permanently at unprecedented rates, we take a look back into how effective government stimulus was and where small businesses are heading.
Sundance Square in Fort Worth, Texas is a sprawling downtown area of luxury shops, fine dining, and lively bars.
Usually around the holidays, there’s constant foot traffic and active shoppers, with busybodies going hurriedly between one store and the next.
People happily swipe their credit cards on high-end niche items like western-style jewelry, specialty candles, or cigars from a local manufacturer. Shoppers stopping for Starbucks, premium gelato, or a drink at the bar to catch a break from their consumerism.
As I walked around last weekend, the downtown square I’ve been to hundreds of times was almost unrecognizable. With pockets being tight for consumers and small business owners barely keeping the lights on, downtown Fort Worth is mostly dead. Just like other downtowns in 2020.
In Sundance Square, twelve businesses have permanently closed with additional fire sales coming from big-box retailers like H&M as they are on track to shut down in the next few months.
Businesses can’t stay open if people don’t spend money. It’s that simple.
A survey across 556,000 small business owners found that "48% of owners say they are generating revenues below what they needed to stay in business."
47.1% of small businesses are shut in Washington D.C. Permanently.
A heightened version of this same data is taking place across metro hubs like San Fransisco, New Orleans, Dallas, and New York City among other major cities.
Flash sales. Boarded up stores. Employees laid off. Dreams left unfulfilled. Future promise robbed by a pandemic. Countless loans defaulted and bankruptcies filed left and right. The pain runs deep for hundreds of thousands of families in precarious financial situations.
The government did offer help, primarily as part of the Paycheck Protection Plan which was branched under the CARES Act. On March 27th, $349 billion of stimulus was set aside for small business relief. It was later expanded to $649 billion after the first $349 billion was loaned out within two weeks.
The Paycheck Protection Plan aimed to keep employees on the payroll of small businesses (to slow unemployment agencies from being backed up severely) and to infuse quick capital at favorable loan terms with low-interest rates. Businesses could use PPP funding to pay essential costs like utility, rent, and most importantly meeting employee payroll.
But, PPP funds essentially only gave business owners an eight to ten week runway, which was long exhausted by June after the first batch of PPP funds had been used.
With new small business stimulus of $284 billion announced yesterday, let’s take a look back at how business owners were assisted/hurt, state level policies, and an outlook for where small business is headed towards.
The Good, the Bad, and the Ugly of the PPP
The Good
Without the PPP funding my family’s business received, we would’ve had a tough time in the first critical stages of the pandemic. Uncertainty was extremely high and we had no idea whether or not all hospitality businesses would be shut down because of stringent COVID regulations.
Like small many business owners, we didn’t know if we’d be able to meet payroll or take care of mortgage/utility costs. The Payment Protection Plan’s funding was instrumental in ensuring full employment of our staff, resetting loan terms, and most importantly having our peace of mind back knowing we had the financial cushion to weather the storm.
Our story is not uncommon. Businesses like a fitness equipment seller in Dallas, a snack food supplier in New jersey, and a dental office in Iowa have all shared common positive sentiments in how PPP funding provided necessary leeway to overcome the economic freeze.
For those of us that have survived and maintained cash flow, being grateful for the Payment Protection Plan’s net positive effect on us is an understatement.
But as helpful as it was for us, it missed the mark for hundreds of thousands of American business owners across the country.
The Bad
In May, I wrote about how logjammed the process of accessing PPP funds was for real small businesses, not bigger enterprises like Ruth’s Steakhouse, Ashford Hospitality Trust, or the Los Angeles Lakers.
Reasons for this:
1) Business to bank relationship mattered tremendously. ‘Medium’ sized ‘small’ businesses like Ruth’s Steakhouse were able to fasttrack their application with their established lender because the banks were incentivized to priortitize bigger companies. Each bank transaction led to a 5% processing fee of total loan amont. I.e. a $10M loan for Ruth’s Steakhouse equates to $500K in revenue for the bank.
2) The first $349B of PPP funds were used up in two weeks. Businesses were left high and dry with banks freezing applications while congress and senate approved more funds. For quite a few businesses, it was already too late.
3) 1% of the 5.2M borrowers received 25% of PPP funds. The unequal distribution accentuates how businesses needing bare minimum amounts south of $250K have more rapidly closed doors compared to those who received the full $10M amount.
The most shocking statistic to come out of this according to an MIT study: PPP-eligible companies estimated the program had boosted employment by about 2.3 million jobs. At that rate, the PPP would have cost about $224,000 per job supported.
And the average job income is around $47,000. Unit economics aren’t exactly the most favorable here.
A moral crossroads emerges: were a high volume of small businesses already on the verge of crumbling pre-pandemic and government aid simply provided crutches for a few more months of survival? Would it have been more beneficial to put more money in the hands of citizens directly instead of intermedies like businesses or institutions?
I don’t know. But I’m curious to investigate this further once more data emerges.
The Ugly
"The data showed that more than 600 PPP loans were issued for $10 million, which was the program's individual loan cap. Among the well-known businesses that took the maximum-size loans were big chains, such as P.F. Chang's China Bistro and Potbelly, and major law firms like Boies Schiller Flexner. Kanye West's company, Yeezy, received a loan for nearly $2.4 million."
Reading this made me burst out in melancholy laughs. Kanye West’s net worth is $1.3B, and legendary lawyer David Boies’s is around $50M. Kanye West employs 101 people and his company Yeezy is valued at $3 billion. Boises’s Legal firm Boies Schiller Flexner makes $117M in revenue annually.
You can make the decision yourself if these are ‘small’ businesses.
There are also hundreds of stories of PPP fraud by bad actors across the country, large and small.
Google 'PPP fraud' and see these disheartening search results:
This is what you'll see. Throw in a nail salon ownership group illicitly receiving $13M, Lamborghini and Porsche vehicles seized in a $16M PPP fraud case in Houston, and a group of four Los Angeles residents somehow fleecing banks into approving 35 loan applications and taking home $3.25M of government funding.
Currently, $4B in illicit loans have been identified, with many bankers and financial regulators the final number will be north of $25B by the end of next year. These are not small sums of money, and having more stringent third-party regulators come into the picture might not be a bad idea.
Cities and states are taking action, but is it too late?
The vigilance cities and states are acting with to get financial aid to smaller businesses is encouraging. This actually might be more efficient and effective than federal financial assistance, as bottom-up aid increases the chances of rapid disbursement to small businesses.
As of this writing, the following cities/states have passed or are close to rolling out loans and grants:
The list is only growing.
This is real progress, and local legislators and economic planners deserve applause for their actions.
California will be rolling out a $500 million relief package for small businesses that includes income tax payment deadline extensions and interest-free tax payments for businesses at certain tiers.
The remainder of the funds will be allocated in the form of grants up to $25,000. Governor Newsom said "This is just the beginning of a bridge,” in reference to the aid being a holdover until Californian legislators meet at the beginning of next year.
But is this 'bridge' too little too late?
A now viral and emotional video of a restaurant owner Angela Marsden in Los Angeles pleading for answers in why her outdoor-eating-only restaurant was closed under new COVID-19 guidelines while a film set for an NBC show was deemed safe less than 100 feet away from her.
“Tell me that this [her outdoor-seating only restaurant] is dangerous, but right next to me — as a slap in my face — that’s [film set] safe?”
On one hand, NBC studios has the available resources to rapidly conduct COVID-19 tests every day and ensure the safety of their staff. They reduce risk to near zero, just like professional sports leagues have across America. On the other hand, small businesses are resource-constrained and are inherently transacting with strangers coming into their restaurants, stores, and offices.
Aside from having socially distanced tables, hand sanitizer, mask requirements, and rigorous employee sanitation protocols, what else can a restaurant be reasonably expected to do? Where massive companies can roll rapid test access and costs rather frictionlessly into their bottom line, small businesses operate at the whim of tight budgets and decisions made by municipal and state-level legislators.
What lawmakers seemingly forget is the basic economics of their decisions - if restaurants are already operating at less than 50% capacity for the past six months and minimal additional financial support has been given, how are bills supposed to be paid and employees compensated/retained at regular wages?
The same contradictory behavior happened in Texas where 14,000 people for ten days filed into Globe Life Park in Arlington for the Wrangler National Finals Rodeo. Texas welcomed the rodeo with open arms after Nevada didn't allow for the event to take place due to state policy and COVID-19 restrictions.
Simultaneously, Texas Governor Greg Abbott considering passed an executive order limiting restaurant capacity to 50%, bar restrictions, and elective surgeries at hospitals being halted indefinitely.
For locally-owned businesses in the hospitality space like bars and restaurants, the Payment Protection Plan funding has been long exhausted as it provided only eight weeks of breathing room.
The most recent data from Yelp shows total permanent business closures north of 100,000 across America with most businesses being restaraunts or mom-and-pop style shops.
Of course, turning a blind eye towards potential super-spreader events like the National Finals Rodeo while your own state's businesses die slowly seems to be more convenient. Somehow, elected officials and policymakers still fall into a logic trap of thinking the economy and a public health crisis are mutually exclusive.
They are not separate, they are intertwined. Incompetence has a high cost.
Double standards hurt. Where the Rodeo provided an opportunity to showcase Texas as a business-first, open state embracing liberty and freedom, the daily closures of small businesses symbolize a voiceless, disbanded faction of Americans seeing their livelihoods being wiped away.
Small business survival might come down to digital-first actions
There are decades where nothing happens, and there are weeks where decades happen. - Vladimir Ilyich Lenin
Small businesses in America have been struggling for the past decade. The overarching wave of digital-first commerce is no longer a choice, it’s a necessity for survival. Businesses that fail to establish internet presences will be obsolete in the coming years.
Whether it’s the high-end craft store in Boise, Idaho or a specialty cupcake shop in downtown Boston, small business owners have to understand that healthy cash flows and profits will result from having a maintained online presence, social media channels, and frictionless eCommerce options.
We will see how many businesses go under in mid 2021 as loan terms mature and people begin more ‘normal’ daily spending habits if vaccine rollout goes as planned.
With 48% of businesses fearing that by summer 2021 they’ll be dead in the water, business continuity and the need for survival will kick in.
Those that survive will have adapted to a new, internet-first consumer that the pandemic accelerated.
Letting small businesses walk into 2021 without knowledge of how to properly market online, invest in search engine optimization (SEO), learn customer acquisition strategies, is like people watching TV in 2020 in standard definition, not HD.
In The Pomp podcast, billionaire Kevin O’Leary, aka Mr. Wonderful, emphasized how every startup he invests/advises in, digitization wasn’t meant to happen for another 36 months. They moved all of those budgets up.
ASAP. Because retail has to move online for a chance to compete. Let me translate that in a more forceful tone: retail has to go online to survive.
This is a reality many small businesses tiptoed around for years even after web 2.0 and the rise of social media, but we are here now. There is no escaping it. Going D2C (direct to consumer) has become the primary option.
For candle shops, antique stores, boutique luxury purse brands, premium western wear... you name it.
Ghost kitchens are efficiently leveraging the culinary talent available on the market after the biggest wipeout of restaurant closures in modern American history.
For small business owners, partnering with regional or local digital marketing agencies needs to become easier and more affordable. Digital marketing agencies have seen an uptick in their demand but are still barely penetrating the total addressable market.
A unique time for the builders (small business owners) to partner with the sellers (the marketers/digital natives). Out of necessity, the new businesses being built now will be internet native first and in-person second.
Large scale problems, lackluster execution
In many ways, the Payment Protection Plan is a microcosm of how America executes large-scale programs in healthcare, higher education, bailouts for ‘too big to fail’ companies, and defense spending.
Whether it’s the Affordable Care Act, federally subsidized student loan programs, or questionable unemployment check programs, we always seem to be bolting-on solutions instead of foundationally solutions and questioning institutional practices.
The intentions are altruistic, but a net loss to society - socially and fiscally - undeniably has resulted more times than not.
As small businesses close across America, we are going to witness a drastic change in the backbone of America’s economy. Where middle Americans go from here is anybody’s best guess.
In an upcoming piece, I’ll closely examine how entrepreneurship has dropped precipitously across the United States. For all the glimmer and shine that startups have received in the past two decades, business-building has stagnated at concerning levels. Millennials and Gen Z’ers are less likely than any generation of Americans before them to start an enterprise.
Until then. Happy Holidays to all.
Very well put! You really summarized what many businesses across the country have been experiencing in a way that made a lot of sense and was almost exciting to read. Thanks for your concise synopsis, I look forward to your next piece!