Barron's on MarketWatch: PPP only delayed the small-business day of reckoning
Before too many Paycheck Protection Program recipients congratulate themselves for qualifying and receiving loans, and as a result retaining employees who they might otherwise have had to lay off, keep in mind what follows.
PPP loans are designed to cover just eight weeks of payroll costs. The Cares Act and subsequent legislation allowed applications for funds beginning in early April. Including the time it took for loans to actually be disbursed, the first group of recipients will run out of funds in mid-to-late June, with more business running out in waves not long after. Small-business owners need to think about what happens next. Read more on small business in crisis A company that received PPP funds faces the choice of paying employees on its own dime after the funds run out, or implementing the layoffs it put off for eight weeks and thus foregoing loan forgiveness. Recipients who are retaining employees despite seeing precipitous revenue declines and few prospects for a fast recovery should legitimately ask if holding on to people is the right decision for their business. Do the mid-term prospects justify keeping as many employees, with or without the loans? One positive possibility for the business is that the virus catalyzes fundamental efficiencies in an industry that will allow affected business owners to serve the same demand with fewer employees. However, most companies realistically have less demand now, and will continue to have less for the foreseeable future. The PPP for these firms merely delays the day of reckoning, and saddles the business with government debt challenges. Absent a fourth congressional package designed to cover an additional eight weeks of payroll costs for previous recipients, there will be another surge in unemployment claims this summer. This surge could bring the current 14.7% unemployment rate up to 25%, a rate not seen since the Great Depression. In addition to the incredible level of personal suffering it brings, that level of unemployment also results in severe declines in consumer spending, which will further damage business recovery.Many voices have been shouting for businesses to reopen as soon as possible. That’s a noble endeavor, but it could backfire if premature opening enables a resurgence of the virus and results in more deaths. That would be a foolish, shortsighted, and ultimately ineffective solution to the problem. Instead, for those hard-hit by the impacts of the virus, the first action is to face the music and begin a staggered phase-out of employees, accepting the fact of possibly giving up loan forgiveness. While this is an unappealing option, it’s better to keep the business afloat with the funds provided than spend them foolishly keeping employees without the realistic potential for revenue to offset eventual costs. Second, businesses could avail themselves of the Treasury Department’s Main Street Lending Program, which was passed and approved by the Federal Reserve on April 30. The MSLP made an additional $75 billion available as a special-purpose vehicle that allows the Fed to purchase bank loans between now and September 30 to allow banks to re-lend the money quickly, increasing the capacity of banks to make loans to qualifying small businesses. The program, however, is designed specifically to provide additional support to companies that were profitable before the Covid-19 crisis erupted, among other terms and conditions. Lastly, businesses should actively advocate their support with lawmakers for a fourth rescue package designed to top up payroll funds for small businesses that have already received money in previous rounds. This could give the economy and the virus another eight weeks until this fall to work its way out of the system while the population in affected communities continues to shelter in place. Hopefully, at that point there will have been progress on testing and distancing protocols to allow most of the population to go back to work safely, kids to return to school, and for all of society to get back to productive endeavors.Email editors@barrons.com
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