Why Small Business Loans Don't Get to the Intended Recipients
The New York Times has an interesting article Denied, Deferred and Ignored: 13 Applications, and No Relief.
The article discusses the plight of Graceann Dorse and her husband, Christopher Webb, who built a cinematography and special effects firm, FX WRX, in New York.
“The work we do has to be done in person, with a large crew,” said Dorse. So they are shut down with no income.
Three-fours of small business loans were from small companies, but they account for only 17% of the loans.
“You can see that there’s a real skew in there,” said John Pitts, former deputy assistant director of intergovernmental affairs at the Consumer Financial Protection Bureau.
“What we heard universally is, most people weren’t able to get a loan under $50,000,” Mr. Pitts said. “The banks just weren’t set up to do loans that small.”
Too Small, Too Different to Bother
Dorse applied in 13 different places, all rejected. The couple were the company’s only full-time employees.
The program was supposed to benefit the self-employed, but it didn't.
Lack of Regular Salary
Lack of a regular salary was the second red flag. They did not pay themselves a regular salary. Like many small-business owners, they took distributions from the company and reinvested capital into the business.
Again, that was not supposed to matter, but it did.
$350 Billion Used Up
The first Small Business program of $350 billion was exhausted last Thursday.
Thousands of applications are in the queue.
New $320 Billion Program
There is a new $484 billion program on deck of which $320 billion is intended for small business loans. Of that $60 billion is earmarked to assist small businesses that don't have established relationships with big banks.
Good luck getting it.
I have a friend trying to get a loan. He is in a similar situation as Dorse.
His relationship is with Fifth-Third Bank. Fifth-Third informed him there are 33,000 applications already in the queue ahead of him.
Who Got the Loans?
Business Insider reported Trump's restaurant recovery plan is built on fast food, as independent restaurants struggle to survive.
President Trump — a noted fast-food fan — is creating an economic recovery plan that puts the country's chains front and center. The council is made up of men who founded or lead organizations including:
- 1 regional chain (Ray Washburne, CEO of M Crowd Restaurant, who was the vice-chair for the Trump Victory Committee and has donated thousands of dollars to Trump and the Republican party)
- 5 fast-food chains (McDonald's, Chick-fil-A, Taco Bell and KFC parent company Yum Brands, Wendy's, Arby's and Sonic's parent company Inspire Brands)
- 7 other chains (CEOs from Olive Garden parent company Darden, Subway, Outback Steakhouse parent company Bloomin' Brands, Papa John's, Waffle House, and Starbucks, plus Jimmy John's founder)
- 3 beverage and packaged food giants (Coca-Cola, PepsiCo, Kraft)
- 3 industry groups (National Restaurant Association, National Association of Wholesaler-Distributors, International Franchise Association)
- 4 fine-dining empires (Wolfgang Puck, Thomas Keller, Jean-Georges Vongerichten, and Daniel Boulud)
Those groups are not exactly what people think of as "small businesses".
Shamed Into Returning Loans
Shake Shack got $10 million out of the program, but has since been shamed into returning the money.
Fast-salad chain Sweetgreen which was approved for $10 million did the same. Sweetgreen is not a public company but has been valued at well over $1 billion by Wall Street investors. It cancelled the loan.
Kura Sushi USA is worth $88 million and is the U.S. subsidiary of a Japan-based conglomerate that has more than 400 restaurants. The rules of the "Cares Act" allowed it to apply for a loan. It got $5.8 million, cancelled yesterday.
First Come First Serve
The larger the business, the faster the application and approval.
From a bank perspective, this actually makes sense.
If you were a bank, would you rather make 1 loan for $10 million or 500 loans for $20,000?
What Happened Synopsis
- Congressional loopholes on purpose
- Non-small businesses were first in line, and for big loans
- Money was quickly exhausted
But the queues are still enormous.
Banks still have a preference for larger loans.
What's Going to Happen?
- A repeat of the the first program minus places like the Shake Shack.
- Money will run out because the queues are already overloaded.
Because Dorse was mentioned by the Times, I bet some big bank seeking positive publicity steps up and gives them a loan.
But good luck to the likes of my friend at the tail end of a 33,000 queue at Fifth-Third Bank and others in similar shoes.
Better Description of What Happened and Will Happen.
It's the government and the Fed, stupid! What did you expect?
Economically, What's Next in General?
On March 23, I wrote Nothing is Working Now: What's Next for America?
I noted 20 "What's Next?" things.
Covid-19 Recession Will Be Deeper Than the Great Financial Crisis
On April 1, I commented, the Covid-19 Recession Will Be Deeper Than the Great Financial Crisis. Do not expect a V-shaped recovery.
- More teleconferencing and fewer corporate lunches
- Less air travel, hotels, and car rentals at the personal and business level
- More work at home
- More do-it-yourself haircuts, nails, lawns, etc.
- Fewer car purchases
- Fewer home purchases
- Accelerated online shopping and more mall closures
The knock on impacts of all of those means more bankruptcies and less employment..
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