Wait! Better off not getting the SBA loan now

The Paycheck Protection Program (PPP), provides small businesses (SB) with 8 weeks of payroll loans convertible into grants. Most SBs are closed, by law, or their revenue has dropped 90%. Their workers are on unemployment. By using the loan to put them back on the payroll now, they will have no cash when they are allowed to reopen. Workers will have to go through the process of claiming unemployment all over again. This is worse for workers, SBs, and the market. It’s better for businesses to get the loan when they are open for business.

Here is why:

Small business impact: imagine the cash flow of a small restaurant. Sales are $100 K per month and have dropped 90%. The food cost is 30%. Labor is 30%. Rent, Utilities and other expenses are 35%. The profit is 5%.

Consider two scenarios. The first one is getting the loan now, when they are only allowed to do picks ups and deliveries. They will run out of cash in 8 weeks and be forced to put all workers back on unemployment.

A small business that gets the SBA loan now will be out of business by summer

The second scenario is if the restaurant gets the loan when they are allowed to reopen (e.g. May 1st). Although sales will recover slowly (will take 4 months), they will be able to survive permanently.

A small business that gets the SBA loan later, when it’s allowed to reopen, it’s more likely to survive

Workers impact: it takes 4 weeks to get out of unemployment, on the payroll, and back on unemployment. If they remain on unemployment now, workers get more cash than if they are on the payroll (due to the $600 per week additional payment).

During the first 8 weeks after getting the loan, the restaurant cannot reduce wages (by 25% or more) and needs to keep the same number of employees. Workers are better off staying in unemployment until the restaurant reopens. They have a better chance of keeping their jobs permanently.

The market has already priced an increase in unemployment. Artificially decreasing the number now and then increasing it once again once SBs run out of cash will be worse. On the other hand, if SBs get the cash in the summer when sales start to slowly recover, the market will react more favorably.