More PPP loans won’t save small businesses | Opinion
Payments should go directly into checking accounts, not struggle through government distribution.
When the Paycheck Protection Program (PPP) was announced last year as a congressional remedy for businesses bruised by COVID, I had strong reservations about the program and wrote about them. My fear was that businesses would not get the money they needed fast enough. It is rare when you are laying on a track, see a train coming, and still get hit by it. Unfortunately, this is one of those cases.
There is now a new round of PPP funding available, and loan applications open Monday. I hoped that I was wrong about the program because small businesses, in particular, find it harder and harder to make it in America today. The percentage of the U.S. workforce that is self-employed has fallen significantly in recent years, and Americans are starting fewer new companies. The number of companies less than one-year-old (as a share of all businesses) declined by about 40% between 1978 and 2018. These are devastating statistics because most jobs and innovations are created by small businesses, not large ones.
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Fast forward to today. According to a working paper from the National Bureau of Economic Research, the number of businesses in the U.S. declined by 22% from February to April, the largest drop on record. That’s a drop of 3.3 million businesses.
When we hear such statistics, we understand them, but it is hard for us to connect to them unless they affect us personally. Because so few of us are business owners today, a number like 22% of businesses failing does not truly hit all of us. What we forget is that many of these people toiled for years to build their business, often with great sacrifice to their families and under financial constraints with which most of us would never live. Small business equals people. It also equals freedom — the freedom of an individual to go out and start something. Over the past few decades at least, these businesses have struggled under pressure from big-box retailers, scant lending resources (despite lip service from banks), and now, the internet.
Why is another round of PPP not the answer to saving small businesses? The challenge with the program is twofold. The Paycheck Protection Program authorizes businesses to apply for loans with their banks but where the U.S. Small Business Administration (SBA) must also approve them. First, the bureaucracy required gave us “dumb and dumber.” Now, we have “slow and slower.” Have you ever applied for a loan with a bank and received the money easily and quickly? How about getting something done fast through the government?
Second, it only provides money based on payroll costs. Like most people who run businesses know, you cannot break apart payroll costs from other costs. If my rent is $500 per month and my payroll is $2,000, my total costs are what matters. If I cannot pay my rent, I also cannot put people in the space to work the business. Common sense. The real challenge is that most politicians are lawyers who have never run anything, so they have no feel for these things.
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Payments should be made directly to the checking accounts of all businesses in America. Businesses sign a simple promissory note in plain language with their bank (under penalty of future perjury) that they need the money and understand that they are making a promise to a federal government. Businesses that need the money, get it — quickly. If they don’t need the money, they don’t take it. This could be done easily and quickly. Some will say that this does not provide enough credit controls, but neither does the current PPP and alas, we now know that the PPP did not do much to prevent fraud and abuse.
Ronald Reagan once said the closest thing to everlasting life is a newly established government entity. Congress is so out of touch with the real pain of business owners that, instead of recognizing the problems and fixing them, politicians gave hearty congratulations to themselves for a job well done. In other news, we lost more than 20% of our businesses. COVID has had devastating effects on small businesses in our country. I worry that it has also amplified a long-time trend — fewer and fewer small businesses. The PPP is not a solution.
Brian Hamilton is the founder of Sageworks, the Brian Hamilton Foundation, and Inmates to Entrepreneurs.