If a walk down your local Main Street doesn't tell you that small businesses are hurting, the data will: The number of open small businesses has decreased by a third since January of 2020.
Any small-business recovery is going to depend largely on the speed of vaccine distribution, the ability of entrepreneurs to think creatively, and the availability of appropriate financing. With a new administration and a new Congress, we'd suggest these seven initiatives to help small companies regain their status as a force for job creation.
1. Forget more debt: Give grants to microbusinesses.
Many entrepreneurs aren't comfortable taking on more debt, no matter how generous the repayment terms. They need grants to help them through the winter and spring. As crushing as the pandemic is, it's not going to last forever. If an entrepreneur had a good business in 2019, they should have the opportunity to have a good business sometime in 2021, too. Let's get them through the next few months without asking them to drown in debt.
Community development financial institutions, or CDFIs, are the most sensible way to distribute small grants, and President Biden's proposal includes $15 billion for just this purpose. In Pennsylvania, CDFIs administered the state program to make grants to small businesses hurt by Covid-19, says Dafina Williams, vice president of public policy at Opportunity Finance Network, the national association of CDFIs. CDFIs are already working with the smallest businesses, often in underserved areas, and are prepared to offer technical assistance as well as financing.
2. Loosen restrictions on PPP money.
A business that has partially shut down, or changed its model to run with fewer employees, is going to have a hard time getting a PPP loan forgiven. That's because even the newer version of the program requires that 60 percent of the money be used on payroll. Let's not micromanage entrepreneurs. These people know what they're doing, and know what they need to get their businesses back on their feet. Let's let them use the money for any legitimate business purpose and get them on the road to recovery.
3. Make the SBA a more powerful source for growth capital.
The Small Business Administration's flagship 7(a) program guarantees up to 85 percent of loans for amounts up to $5 million. Let's let the SBA play a larger role in the recovery and incentivize banks to make more loans through the SBA. We can start by raising the loan cap to $10 million and boosting the guarantee rate. For loans of more than $150,000, the guarantee rate is only 75 percent, so let's get the rate to 90 percent for all SBA-backed loans.
Let's also get rid of borrower fees, or at least cut them dramatically. The fees vary based on the size of the loan, but for a $150,000 loan, the borrower pays $2,250 (in addition to interest, of course); for a $5 million loan, the entrepreneur pays $138,125.
4. Institute an employee-addition tax credit.
The Cares Act instituted an employee-retention tax credit to encourage companies not to lay off their workers. But right now, we need small businesses to actually grow their payrolls. Unfortunately, companies in effect pay a tax penalty every time they add a new employee. Let's get them a tax credit instead.
5. License smaller SBICs.
The Small Business Investment Company program provides public money to match money raised by private investment funds. The money can be used to fund small businesses in a variety of ways, including both equity and debt. Any losses are absorbed by the private money first; historically, the SBA has run a modest profit on the program. Right now, SBICs seldom invest less than $1 million at a time. Some changes could help them invest in a wider range of smaller companies that also need help.
In theory, if you can raise $5 million and have run a fund before, you can apply for an SBIC license. In reality, the SBA has been hesitant to license funds smaller than $20 million, says Brett Palmer, president of the Small Business Investor Alliance. With the SBA match, that yields a fund of up to $60 million. And the bigger the fund, the bigger the check size. The larger fund size makes it very difficult for SBICs to invest less than $1 million at a time--and many small businesses much need less. "You need to allow more smaller funds to form, because they'll do smaller investments," says Palmer.
The SBA should license smaller funds, and also consider removing the rule that investors needed to have run a fund before. That sounds like a common-sense requirement, but it ensures that most SBICs are run by people who are White and male, says Palmer. Allowing successful entrepreneurs to run funds could diversify SBICs and get money to more diverse communities.
6. Extend the FFCRA.
The Families First Coronavirus Relief Act mandated that small companies offer paid sick leave to employees affected by Covid-19, and then gave them the money back via tax credits. It was supposed to expire at the end of 2020, but was extended until the end of March. It also was changed from a mandatory program to a voluntary one.
FFCRA is not perfect, especially if you can't use the tax credit. But right now it's the only mechanism we have in which the federal government supports paid sick leave in any way. Sick employees should be able to stay home without also worrying about the pay they're losing. That's always true, but it's especially important now. Let's extend the FFCRA at least through the end of the year.
7. Provide interest-free loans for landlords
For Main Street businesses that have been gutted by the pandemic, rent can be just as big a worry as payroll. You can ask employees to go on unemployment, or try to get them paid through the Paycheck Protection Program. But eviction moratoriums for businesses have mostly expired, and most landlords have limited flexibility to negotiate with tenants because of the covenants in their own bank loans. Let's ask Treasury to provide interest-free loans worth three months of rent to landlords that agree to rent moratoriums for that same period. That would help small businesses and small landlords.