Amid Scramble For Fed Funds, Fundamental Question: Who’s An SMB?

The middle of a deepening recession may not be the best time to play with semantics.

But as the scramble for the $349 billion allocated to the Paycheck Protection Program (PPP) — a mad dash for loans that left many of the smallest and most vulnerable funds out in the cold — showed, semantics matter. Especially when it comes to legislation, and when it comes to small and medium-sized businesses (SMBs) navigating a precarious economic landscape.

More specifically, the stimulus bill passed by Congress in March had verbiage in it that opened the door for firms decidedly larger than the mom and pop outfits that line Main Street to grab significant funding that might have provided lifelines to, well, the Davids of the restaurant industry and other verticals — not the Goliaths.

To drill into the language a bit, the language from the coronavirus relief bill outlined that businesses with fewer than 500 employees were eligible for loans, and the loans would be forgiven if those firms used the funding to cover operating expenses including payroll and did not lay off workers or rehired those who were laid off by June 30.

But, as they say, the devil is in the detail, and in this case, in the fine print. The same bill also included language that stated that some firms — such as restaurants — with more than one location, but fewer than 500 employees per location could also be eligible for PPP funds.

As The New York Times noted, restaurant chains and hotel chains lobbied — through their respective trade associations — to get that distinction put into the bill. And as a result, much publicized “land grabs” of funding (that’s our term) commenced. In one of the most visible examples, Shake Shack, with 189 outlets and cumulative 8,000 employees in the U.S., gathered up $10 million in loans. We’ve noted that at a rough average of about $240,000 per loan extended by the PPP before it was fully exhausted, roughly 40 other companies could have received at least some semblance of help to cover costs — at an especially vulnerable time.

The burger and shake giant later returned the funds. Potbelly, another chain, got $10 million, while Ruth’s Hospitality, which has 5,000 employees, got $20 million, with loans spread across two subsidiaries. You can do the math and see that dozens and dozens of smaller firms could have benefitted from the help.

Day late and dollar short, as the proverb runs. Congress is already nearing a deal to bring a fresh round of small business funding to the tune of $300 billion as the COVID-19 crisis continues. But as detailed in Politico, banks have estimated the run rate to be $50 billion a day, which indicates that any new program would be exhausted with alarming speed. There are still applications pending from the original PPP, which indicates at least some pipeline of demand that may have first claims on a new tranche.

New Funding May Not Be Enough

In the meantime, we would suspect that there would be scrutiny about just who is trying to tap into fresh funding rounds, and whether they have the capital wherewithal to weather economic turbulence better than, say the mom and pop shops that underpin a huge swath of the U.S. economy. There have been some overtures to carve out separate funding for especially challenged verticals such as restaurants. As we noted in this space yesterday  (April 20), U.S. restaurants may lose as much as $50 billion this month and hundreds of billions of dollars by year’s end, according to the National Restaurant Association, which has asked Congress for as much as $240 billion in additional funding.

Statistics from the National Restaurant Association give a sense of just who really deserves the SMB title. As many as nine in 10 restaurants have fewer than 50 employees; as many as seven in 10 restaurants are single-unit operations.

Against a larger landscape, as we noted our latest “Main Street on Lockdown” report detailing the yawning “cash chasm,” the average SMB (out of more than 500 surveyed) reported only having enough cash to stay open for 37 days as of April 6. Assuming they’d be able to get federal aid, these same firms — spanning retail, tech, manufacturing and, yes, restaurants — would be able to stay open 97 days.

The warning signs are ominous as Congressional tinkering winds on, the coronavirus pandemic continues and banks are swamped with applications for federally-funded lifelines. As we’ve detailed elsewhere, in Main Street research, these firms also are highly correlated with U.S. GDP. Main Street SMBs — decidedly not the Shake Shacks of the world — represent  28.3 percent of total employment, 36 percent of total establishments, and 23.2 percent of wages.