Opinion - Invest in You: Ready. Set. Grow.

Stampede for emergency loans is crushing lenders, putting millions of small businesses at risk. Here are steps to fix the system

Seth Levine, founding partner of Foundry Group, and Elizabeth MacBride, founder of Times of Entrepreneurship
Key Points
  • Small businesses all over the U.S. are scrambling to understand the options available to them under various government programs enacted to blunt the economic blow caused by COVID-19.
  • But the relief offered under the Coronavirus, Aid, Relief and Economic Security (CARES) Act is slow, piecemeal and confusing.
  • The delays gaining access to SBA-backed emergency loans under the $349 billion Paycheck Protection Program are putting millions of businesses at risk of closing, threatening their employees, suppliers and communities.
  • Major banks and community lenders are unprepared to handle the influx of applications.
Temporary closed signage is seen at a store in Manhattan borough following the outbreak of coronavirus disease (COVID-19), in New York City, U.S., March 15, 2020.
Jeenah Moon | Reuters

The relief offered under the Coronavirus, Aid, Relief and Economic Security (CARES) Act is slow, piecemeal and confusing. The delays are putting millions of businesses at risk of closing, threatening their employees, their suppliers and their communities. This is putting us all at risk of a deeper recession.

Last Tuesday the Small Business Administration launched a disaster-aid recovery portal, repeating the promise contained in the CARES Act: The first round of aid would be delivered within three days. It has not arrived.

On Friday the U.S. government  tried to launch the $349 billion Paycheck Protection Program as part of the CARES Act. The PPP is being administered through the existing banking systems of Small Business Administration lenders. Some banks weren't ready. Some are already inundated.

Bank of America confirmed that it has received applications from 177,000 small businesses for a total of $32.6 billion in financing. Wells Fargo said it was at capacity for its allotment under the program.

Bank of America received 60K PPP applications, worth about $6B
Bank of America received 60K PPP applications, worth about $6B

Meanwhile, anger over both these programs is building in the small business community. They don't even know the half of it. As the program rolls out further, more flaws are likely to become apparent. The confusing legislation favors companies that already have relationships with lenders and leaves out many of the most vulnerable businesses.

The smallest companies, with fewer than 50 employees, have borne the brunt of the initial crisis, cutting 90,000 jobs in March, according to an ADP survey. They're the restaurants, gyms and corner stores. They had the least cash — an average of 15 days' worth, according to JPMorgan Chase Institute research. They have had to lay off their employees, who are often also friends. Now they're watching their life's work crumble.

And it's likely this aid will leave many of them out entirely.

The Foundry Group has spent hundreds of collective hours this week studying these programs and communicating updates to companies in its portfolio. The banks that are rolling out the program are unprepared and lack basic guidance from the SBA and Treasury on key details of the application process and the overall program. Treasury guidance is often internally conflicting — for example, on the question of whether 1099 contractors can be counted by companies as they calculate their potential loan amounts.

Companies that are backed by professional investors, with all the experience, resource and expertise that entails, are having trouble making sense of the options available to keep employees on payroll as businesses absorb the initial shock of the shutdown.

The PPP loan program needs immediate clarification and to be streamlined. That should be the first priority of the newly appointed Coronavirus Recovery Czar.

Congress did the right thing in making portions of the aid programs forgivable so that the most vulnerable businesses won't be hobbled by debt, but is the money allocated by Congress going to get to them in time? Or, in many cases, going to get to them at all?

These businesses are the lifeblood of America. And we're abandoning them almost completely to navigate this crisis on their own. Aid that is intended to help these businesses won't get to them if we don't take immediate steps to clarify the rules, get the technology up and running and begin a national coordinated campaign to communicate with and support all the small businesses that need help.

The steps to speed help

Here are steps the business community and federal government could take to speed help, probably without passing new legislation.

1. Set up individual loan funds

Anticipating that the federal aid would roll out slowly, states, communities and foundations have set up their own loan funds, often with donations, community reinvestment act credits from local lenders and help from local economic development groups. There are more than 30 so far nationwide, such as this one in Louisville, Kentucky, that aims to put 0% interest loans into the bank accounts of businesses with fewer than 10 employees within a week. SBA funds could be disbursed to these loan funds, which have lines of communication to their own small business communities — and can act much faster than the federal bureaucracy.

"We are disappointed in the lack of broader inclusion of community loan funds in the PPP and are hopeful that we can find a way to be partners to reach all Americans and the businesses and nonprofits who are not easily reached by the larger institutions," says Lisa Mensah, CEO of the Opportunity Finance Network, the association of community development financial institutions, which are involved in some of the new loan funds.

2. Urge big business to pay receivables faster

Big companies that market to small businesses and use their services are beginning to step up, by paying their receivables faster. Last week a coalition of tech companies that serve the small business market —Alignable, Fundbox, Gusto, Homebase, Womply, SmallBizDaily.com, Actual.Agency, Business.com and Small Business Edge — introduced an initiative called #paytoday to urge big businesses to pay faster.

Let's encourage a national movement around this. It's our respective civic duty as individuals and businesses to do everything we can do to support the small businesses in our communities.

3. Appoint a clear leader

Whatever interagency rivalry hampers the interpretation of the rules and implementation of the programs needs to stop. This is management 101. The mobilization needs a clear leader, who will be held accountable for making sure these billion-dollar programs run smoothly and transparently. President Donald Trump should appoint such a leader immediately to oversee these programs.

4. Provide more clarity 

The PPP loan program needs immediate clarification and to be streamlined. That should be the first priority of the newly appointed Coronavirus Recovery Czar.

5. Expand the program

Additionally, the program itself needs to be expanded. The intent of the program is to save jobs and to provide a lifeline to businesses most affected by the COVID-19 economic crisis. However, the way it's structured almost completely leaves out businesses such as restaurants, fitness facilities and other small businesses unable to operate in our current "shelter in place" society. Those businesses closed weeks ago and already laid off employees.

These businesses are unable to access key parts of the program related to loan forgiveness: For instance, the ability of loans to be forgiven based on future payroll obligations cannot be accessed if companies have already closed and laid people off and are unable to reopen quickly enough. These rules need to be addressed and updated to allow businesses such as these to receive the benefit of the program as they ultimately get up and running again as society emerges from their homes.

More from Invest in You:
SBA and small business disaster loans have never faced test like coronavirus
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Don't let panic drive your investment decisions. Here's how to get a grip

We need them to survive. And we need them to have the capital available to rehire the workers they were forced to let go as the crisis began. 

For the country to recover, we need small businesses. Every small business that goes under or shrinks has ripple effects — employees laid off, rents unpaid, contracts broken — that collectively puts us deeper into a recessionary hole. Small businesses are the backbone of our economy, the heart of our communities and the center of our strategy for rebuilding. The time to act to save these businesses is now.

Seth Levine is a founding partner of Foundry Group, a $2.5 billion venture capital firm based in Boulder, Colorado. Elizabeth MacBride is founder of Times of Entrepreneurship, a publication covering entrepreneurs beyond Silicon Valley.

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