Jon Shell is managing director and partner at Social Capital Partners.
This is an article written in desperation. A last-ditch effort to make clear to our governments something that obviously is not yet clear to them: most local businesses will simply not survive social distancing. This week’s Economic Response Plan by the federal government, while addressing some important issues, offered only deferred taxes and a 10% wage subsidy to small and medium-sized businesses. For local businesses, suffering from sudden declines in revenue often in excess of 80%, operating on skeleton staffing, you can imagine how well this was received.
I see a lot of people trying to compare this to the recession caused by the 2008/9 financial crisis. I was a local business owner in 2008. That was a pothole. This is a collapsed bridge. Owners are feeling desperate and rapidly losing hope that they will be able to get through. Policies are required immediately to reduce or eliminate the expenses of local businesses so they can string out what cash they have left while we all work to flatten the coronavirus curve.
It’s worth taking a moment to define local businesses. These are day cares, barbers, coffee shops and restaurants. These are not tech startups, who are also small business and have the ear of this federal government (more on that later). The owners of local businesses are often only making enough to pay themselves a salary. They have personally guaranteed their business loans and their property leases (which can run up to 10 years), often with their homes, cars and whatever retirement income they may have. Let that last sentence sink in. When a small local business goes under, the owner cannot simply walk away.
Let’s be very clear about our moral obligation here. To save lives in our community, we have asked people to isolate and we’ve forced businesses to stop serving the public. Many businesses closed even before they were asked to out of a sense of civic responsibility. But make no mistake: we fired local business owners. And, so far, we continue to expect them to pay their expenses. So much of the economic impact of this public health crisis has fallen on them, and that is simply not right.
There isn’t much time to act – 25% of small businesses have less than two week’s cash buffer. 50% have less than a month. 75% have less than two months. Even the most optimistic observers believe our current conditions will last well into May. With no cash coming in, a quarter of local businesses will likely not make April’s rent, and half won’t make May’s. The Canadian Federation of Independent Business suggests a quarter of businesses will close within a month. This isn’t about saving jobs — it’s too late for that — the jobs are gone. It’s about helping these businesses survive so they can hire people back once we start resuming normal life. And it’s about supporting the people we’ve asked to bear much of the financial burden of this crisis.
To solve the short-term cash crunch, many are calling to make more and easier debt available to small and medium sized businesses. There’s certainly a lot to like about loans. If administered properly, they get cash into the hands of businesses quickly, allowing them to pay their bills. They’re relatively simple and familiar and many thoughtful people have argued for them here and south of the border (1,2). They also seem to be the preferred approach of government: the initial response to the crisis was an extra $10B for the Business Development Bank to loan to businesses and the Small Business Minister seems disposed toward the Council of Canadian Innovators’ (CCI) proposal for a loan-based rescue package for small and medium sized business.
The problem is that “small business” is a really big category. It includes the local businesses I described above, high-risk technology start-ups, and everything in between. For some small businesses loans will make sense, especially in the tech community. These are often high risk, win big or go home business models where winning big means these loans are a rounding error, and going home means they won’t pay. They’ve seen investment funding instantly dry up and CCI happens to be a lobbyist for the technology industry. I do hope this package goes through and I hope these companies survive; some of them will create a lot of good jobs in the future. But these are very different “small businesses” to the ones I described above, and a different answer is required.
From what I’ve heard from the people I know in government, local small businesses are not represented at the table where these decisions are being made. And the small business owners I know are incredibly frustrated and afraid. I’ve been involved in owning, managing and advising small business for 25 years. If you are at the table, here’s why what might work for some small business won’t work for the vast majority of them.
For most local businesses, loans, in any form, present a lot of hurdles. Finances are often not in good enough shape to be reviewed by banks, many owners will have a psychological barrier to taking on debt and some will have a language barrier. People who propose debt as a solution are often well-educated and experienced professionals who’s natural tendency is to turn to finance to solve problems. Loans are easy!
But they’re really not. Local business owners often have very little understanding of finance, and for many of them loans are things they’ve worked their whole lives to avoid. We might be prescribing medicine that the patient will refuse to take, even if it means dying.
As well, bankers who distribute loans have spent their whole career being risk-averse. They are unlikely to change on a dime and start handing out money to business that don’t meet their normal criteria.
Even if you can get over those hurdles, there’s is no “win big” scenario, like there is with technology start-ups. The best they can hope for is a return to previous, stable levels of income where profit often went to pay the owner’s living expenses. Additional loans may be a burden that takes years to pay off. And again, it bears repeating, by taking on loans these business owners will explicitly accept an unfair burden of our public health crisis.
This is a problem that can’t be solved with zero or low interest rates or creative repayment terms, like making the loans income or revenue-contingent, or having clauses that turn loans into grants. The more complicated these approaches are, the harder they’ll be to issue and administrate, and the fewer small businesses will understand them. Debt simply isn’t the right tool to save Main Street.
Luckily, there is a better answer: reducing and postponing expenses. If the amount that local businesses have to pay is drastically reduced, their two weeks or a month’s worth of cash can stretch for a lot longer. And since we’ve eliminated their revenue to save ourselves, it is incumbent on us to figure out a way to reduce their expenses, without asking them pay us back later.
Here are some specific ways this can be done:
1. Suspend commercial rent payments up to $10K. This will cover most local small businesses. To enable this, reduce the expenses of commercial landlords by shifting principal payments on mortgages to the end of the amortization period and come up with an equitable way to share the temporary burden of the interest on mortgage debt between landlords, banks and the federal government.* To be very clear, this is not a call for landlords to suffer the weight of this burden. It’s a call for the burden to be shared fairly by everyone in the property value chain: tenants (business owners), landlords, banks and government. If we do nothing it falls entirely on tenants.
2. Eliminate water, gas and electricity bills. These are under Provincial and Municipal jurisdictions — this will need to be a coordinated effort across all levels of government.
3. Delay collection of sales tax. Businesses collect sales tax and then periodically remit this to Provincial governments. If Provinces allowed businesses to temporarily hang on to that money, it would act like an instant zero-interest debt without the complexity and stress of taking out a new loan. Many provinces have an employer health tax which can provide similar instant liquidity to businesses.
4. Delay property tax. Most landlords pass property taxes on to tenants either directly or indirectly. The federal government could loan money to municipalities to allow these taxes to be significantly delayed, and make the waiving of rent easier.
5. Work with credit card providers to waive interest and delay payments on corporate cards up to $25K. Many businesses will be getting through this period by maxing out their credit cards.
These measures will save local business. They will cut costs to the bone, allowing them to wait out the crisis on their limited cash reserves. They will ensure that, when we’re finally allowed out of our houses, life will seem normal again with our community intact. They will help the economy recover quicker, as established businesses hiring back old staff will be significantly faster and more efficient than starting from scratch. And, critically, this approach produces a far more equitable sharing of the economic burden between business owners, banks, landlords and the government. That is a moral objective that loans simply do not accomplish.
France has done almost all of this. China has done a lot of this. Other countries have done parts.** Loans may appear easier to policy makers and banks, but they are worse. These are not times where we should be taking the easier path, these are times to do the hard things and be sure that we’re helping the people who need it. If other countries can do it, so can we. This is a war — there is nothing that should be off the table.
Another important policy to consider for the broader class of small businesses, beyond the local Main Street businesses that have mostly already been forced to shut down and lay off all their employees, is the wage subsidy. In Denmark and UK, the governments have introduced 75-80% wage subsidies (compared to the 10% wage subsidy announced by the Canadian government this week), a critical support for those small businesses trying to keep their employees.
We saw this week how governments can come together to help people in need. If you didn’t qualify for EI last week and were wondering how you were going to get by, Wednesday’s announcement gave you hope. Provinces and municipalities are adding new supports every day. We’ve seen what Canada’s governments can do in a week in a time of crisis. Well, the next most vulnerable group is local small business, and April rent is due in just over a week. The time to save Main Street is now, and it’s about to be too late.
* There are people out there who think the banks have already agreed to postpone mortgages. They have not. They have announced that, on a case-by-case basis, they will postpone principal payments for property owners that are affected by COVID-19. We don’t know how broadly this will apply. And, importantly, there is no incentive for these postponements to trickle down to tenants. Owners could receive postponements and still charge exactly the same rent.
** This Shopify post, ‘Government Relief Programs for Small Businesses Affected by COVID-19‘ lays out the efforts of different countries.