Loans, even cheap ones, are a very shity way of "helping" small businesses and individuals.
For example, a local restaurant where I live, will have to shut down for good in the next few days as they won't be able to afford their lease. If they get a loan for the lease, they'll be on the hook for that money with no guarantee of being able to pay it back and with way too much uncertainty in terms of when they'll be able to reopen the business.
It would be really bad for them to shut down, but it could be even worse if they take out a loan and then are not able to pay it back. Very bad situation to be in.
Same applies to individuals who will soon not be able to pay rent or other obligations. Loans are not a solution.
> Loans, even cheap ones, are a very shity way of "helping" small businesses
Really disagree on this point. The primary value of a business is their assets, brands and expertise. All of those things will be just as valuable after the pandemic as they were before. Assets don't just disappear because they're not used.
This is just as true for small businesses as it is for big business. Any business that was profitable on Dec 31, 2019, will very likely be profitable on Jan 1, 2021. The biggest challenge for those businesses is surviving operating cash flow losses over the next three months. This is extra challenging in the current environment because financial markets are freezing up.
Yes, business owners will eat some loss to their personal wealth. Regardless of what happens there's no way to make up for the fact that the economy is shrinking this quarter. At an aggregate level, we'll all be slightly poorer then we expected to be. The point of a well-structured bailout isn't to make sure that nobody anywhere ever loses money. It's to prevent otherwise healthy businesses from permanently failing due to a temporary disruption in credit markets.
If a small business owner loses a year of income it sucks. If an entire small business capsizes, that has widespread economic impact because the economy incurs distress costs and loses its organizational and competitive expertise.
I think you may be underestimating the extent to which a “small business owner loses a year of income” and “entire small business capsizes” are the same thing.
If the business gets a loan to last them through the crisis, they will pay it back when they earn money after the crisis. It means they are using future revenue to survive right now. The interest for this loan should be very low and if they default in the future, the govt takes the hit.
The hope is that not all businesses will default at the same time, and just like the hospital, these loans flatten the default curve, and prevent the economy from spiralling into a deep depression from these defaults.
I understand that’s how it is meant to work, but I think small businesses are, on average, a lot closer to insolvency than people think. This is like offering low interest loans to... anyone to get through the crisis. It’s definitely better than nothing, but it doesn’t replace income, it just shifts it around (as you mentioned), which doesn’t help very much when you’re so close to insolvency. They’ll come out the other side with debt service payments that make business “survival” kind of pointless, unless there’s a ton of pent up demand and their revenue is much higher.
they continue to survive and make the payments. Yes, profits will tank, but eventually they will pick back up. It's not like there's a better alternative. It's better than shutting doors - you may not be able to pick back up when this all blows over.
Just as a hypothetical to illustrate my point, it's really common for small business owners in low margin businesses (like retail and restaurants) to have take-home pay of about $50,000 on $1,000,000 of revenue, which means they have $950,000 of expenses in a year. Even if they don't have to pay for certain parts of their business when they're shut down, how many hundreds of thousands of dollars of debt would they need to take on to keep the business in existence for the next few months?
How many hundreds of thousands of dollars of debt can $50,000 of net income service, even at .5% interest? Those dollars for debt service come straight out of the dollars for living expenses.
It may be better than nothing, but it may also not be. Trying to start over from scratch may be better than trying to start back up with basically any kind of additional debt.
The business may no longer be profitable because it is now servicing a large debt it didn't previously have. And unlike regular business debt, the money wasn't invested into something productive. This could go very wrong.
Then again, if the business is going bankrupt anyway, who cares how much it ends up owing?
Let's take a typical small business, and say it does $1 million a year in revenue. Cost of goods sold is $600,000 and fixed operating expenses are $350,000. Net margins are 5%, as is typical in small retail businesses. (These numbers are almost dollar for dollar from a local merchant-proprietor I know.)
Let's say the quarantine results in revenue falling by 70% over the next four months. Without a reduction in fixed costs, the business experiences a $76,000 operating loss. (About equal to 1.5 years of pre-tax profits.) Assume a 10-year amortized loan at 4%.
The cost of servicing the loan comes out to approximately $9500 a year. Which only reduces the ongoing annual cash flow by less than 20%.
Why should their landlord be entitled to 100% income? Only the peasants and serfs should take on this burden, go into debt, in order to prop up all the lords?
You’re assuming that four months have gone by and they didn’t have to sell assets to pay bills. Or relocate. Or lay off employees. Or employees quit because they couldn’t be paid with the loss of revenue.
You’re modeling makes a lot of assumptions and discounts too many human-driven variables.
We’re not talking about Coca-Cola Corporation there buddy, we’re talking about non franchise restaurants, bars, hotels, salons, etc.
A year of no income for these businesses will cripple them, and coming back to a mountain of debt (even if low interest) will essentially ensure that they never become profitable again.
How out of touch with the real world can you be to think that small businesses can afford to service enough debt to survive a year? Do you know how small the margins are for many every day businesses? Jesus.
> The primary value of a business is their assets, brands and expertise. All of those things will be just as valuable after the pandemic as they were before.
this doesn't seem true to me. at least the brand loses value over the pandemic, and there's likely complications from cashflow that eat into other assets.
Why does the brand lose value? My favorite restaurant is still a place where I want to eat when this is all over. My favorite brand of toothpaste is still the one I want to buy. How does the brand lose value?
By saying the brand itself has value, aren't you saying that if the owner gets into debt and has to sell it off to someone else it'll be just as good? That wouldn't give you pause?
In many cases small businesses derive most of their quality from the actual owner. They don't respond well to drop-in replacements of key staff members and owners.
Well, in the case of toothpaste, it's not a small company. The restaurant... yeah, if they changed owners and blew up what I like about the place, that would kind of stink.
Or, the new owner could be better than the old. That could happen, too.
Either way, it wouldn't be the same... unless they hired back the key players.
Yeah it's a bit tough for some small businesses. Anything related to style (cake decorating, floral arrangements, graphic design, sign writing, etc) or other subjective tastes will often have a brand which has value with current customers but will easily lose it if someone else takes over. Even if the work is still solid, it can alienate existing customers.
Most small business owners don't have "wealth" these days; working assets are usually leased so if they're not working, they're an active drain on your cash reserves. Businesses go bankrupt for cash flow reasons all the time. I know a few small business owners with 5-10 employees, and they all take home less annually than I do working a salaried job.
The other challenge is that when customers do start buying again, you have to start whatever marketing engine you had back up again at the same time everyone else is doing the same -- which is going to make it really expensive for everyone (while also ramping up the velocity of Google's money printer).
Your tone suggests that "small business owners" suggest that they're all better off financially than the average salaried employee. Well, as a former restaurant owner, I can tell you that in good times, the margins across the industry is 5% if you're doing above average. That means, a $2MM restaurant (which isn't an easy feat, even in NYC) will only net the owner $100K.
Loans were, and always will be, a false promise. There's too many variables in the equation that make it not appealing.
TLDR; Small business owners don't have "wealth." Get that out of your head and be sympathetic to what small business owners that you frequent have to deal with.
> Assets don't just disappear because they're not used.
This is fundamentally incorrect insofar as the only asset of any small business is typically the labor it employs. Large businesses have intellectual property, capital, real estate, vehicle/equipment fleets, and so on, but nearly all small business have a lease, their on-site inventory (frequently perishable), and their people. All of their ability to continue operations is represented by their ability to retain those people.
It is also bad for their landlord, because the property will be idle until things improve. A landlord is better letting the business shutter for a year and have a paying tenant again when it reopens, than to kick out the tenant and pay the costs in a years time to entice a new tenant in an environment that would be best described as a renters market. If I was the renter, I certainly wouldn't be getting a loan. Renters have a good bargaining position right now.
The loan gives them a longer window during which they don't have to shut down. If the business takes a loan and later can't repay it, they go bankrupt. If they can repay it, they stay open. Bankruptcy might result in the loan being discharged and the business remaining open.
The alternative is to close immediately and stop paying their workers. If that were my business, I'd take the loan, especially since it's federally guaranteed.
SBA disaster loans all require personal guarantees. So, you can't get run away from the debt by declaring business bankruptcy. You'd also have to declare personal bankruptcy.
not every small business is set up as an LLC, although I'd imagine most restaurants are. sometimes you just can't get the loans you need as an LLC; the lenders want an actual person to go after if the business goes under. if I were running a business under a sole proprietorship, I would have to think pretty hard about whether to take the loan or just cut my losses and move on.
I do feel it's generally inappropriate for the government to just give money to a privately owned business, but this is an extreme case where businesses are going under as a direct result of actions taken by the government (reasonable as they may be). not sure where I stand on this one.
What's a better alternative? Although loans are a bad solution for the type of restaurant you described, they are great solutions for small businesses that have predictable profits, of which there are many.
It's not the loan that's the issue, it's the loan terms.
If the terms are zero or near-zero interest for say 5 years then the effects to the business's bottom line would be mute.
If the loan is like some loanshark credit card company charging 27% compound with a three month payback, then yeah, bankruptcy is your friend.
Remember, countries take out huge loans to pay for wars that are paid back over generations, the UK just finished paying back it's loan for WW2 just recently.
These are the kind of loans people/businesses need.
If a restaurant is making $2m/y gross, with a 5% profit margin, is $100k/yr profit.
If they need to take a loan to cover 3mo of missing revenue, that's $500k. If that loan is an _amazing_ 0 interest over 5 years, the owner basically gets to keep his business name, for 0 profit over 5 years.
How is this any better than letting the business go bankrupt, starting a new one next year when the dust settles, and working it back up to profitability in < 4 years?
You should read the article. Here are the two paragraphs that explain what's happening.
> Now, the Trump administration is asking Congress for roughly $1 trillion in new economic relief as lawmakers begin work on the next phase. And there's growing consensus among Republicans and Democrats that direct payments to Americans will be needed, but how much and when that could happen remains to be seen.
> On Tuesday, Treasury Secretary Steven Mnuchin met with Republican senators and said he was working with Trump on the economic package. They are discussing payments to small businesses, loan guarantees for industries like airlines and hotels, and a stimulus package for workers.
> Lawmakers and the White House are already drafting another economic stabilization package that would send direct payments to taxpayers and provide loans to businesses.
I hope they do something a lot better than loans for small businesses.
Even direct payments won't be enough, unless they give small independent shops money to pay their leases every month until this is over, so they can keep their locations while there is no foot traffic.
The amount matters. I'll take a trillion dollar loan at %0 in a heartbeat and quickly become a millionaire via conservative investments. A 20k loan at %0 doesn't do much for me though.
It's just not true. Even investing in treasury bonds today has risk of loss.
There is no such think as risk-free investments. It can be risk-favored, for sure. And it is definitely a benefit to the receiver. But its not a "guaranteed killing".
This conversation is about a hypothetical where we have a trillion dollar loan with no interest. In that situation, taking on the lowest risk for the lowest return, or "bank checking account" would still make you rich. You wouldn't need an amazing knowledge of investments.
In actuality, trying to invest that much independently would probably damage the economy, and it's difficult to have any clue what would happen.
Here is the bill that already passed both house and senate that has relief for small businesses as well. Short summary:
The programs funded by the bill address issues such as
- developing, manufacturing, and procuring vaccines and other medical supplies;
- grants for state, local, and tribal public health agencies and organizations;
- loans for affected small businesses;
- evacuations and emergency preparedness activities at U.S. embassies and other State Department facilities; and
- humanitarian assistance and support for health systems in the affected countries.
The bill also allows HHS to temporarily waive certain Medicare restrictions and requirements regarding telehealth services during the coronavirus public health emergency.
- $61M to the FDA for various uses relevant to COVID-19 response.
- $20M to the Small Business Administration for admin expenses incidental to carrying out the disaster loan program.
- $2.2B to Department of Health and Human Services for preparations/preventions/responses to COVID-19; Not less than $950M to be used for grants or co-op agreements with states, tribes, etc. Minimum of $475M to be allocated within 30 days.
- $836M to National Institutes of Health for COVID-19 prep/prevention/response. Including not less than $10M to go toward training to reduce hospital employee and first-responder exposure to COVID-19.
- $3.1B to Public Health and Social Services Emergency Fund for developing innovations and enhancements to manufacturing platforms toward COVID-19 response. Emphasises creating affordable medication, among other things.
- $300M to same, for purchase of vaccines, therapeutics, diagnostics.
- $264M to Department of State for COVID-19 response.
- $1M to USAID for Office of Inspector General oversight activities relevant to the funding
- $435M to Global Health Program funding / Bilateral Economic Assistance, administered by USAID.
- $300M to International Disaster Assistance
- $250M to Economic Support Fund (Economic, security, and stabilization purposes)
- Telehealth Services During Certain Emergency Periods Act of 2020
The ESF is a foreign-facing economic support fund. The idea is to stabilise Middle- and South-American countries, for example, to avoid mass migration. Or at least that's what we tell Republicans. The real purpose is obviously to help the poorest countries, because that's what you do when you can.
And, yes, $250M is a rounding error. But the foreign aid budget is famous for being estimated as 20% of the federal budget if you survey the general population, when in reality it's <0.5%. So this isn't unusual or anything.
I believe ESF is for supporting and stabilizing overseas (non-U.S.) democracies & strategic interests.
Speaking of US homeland economic support, one could argue that the combined effort shown by the bill, and all of the allocated budget money, is going toward support of the US economy in some way.
The bill, as I understand it, temporarily allows telemedicine to be billed via government programs, whereas prior to this ‘war’, it was not possible. After the ‘war’ is over, telemedicine will not be covered by such programs.
Additionally, for a doctor to practice in a particular state, the medical board of that state grants and revoked licenses, restricting the practice of medicine to only doctors licensed in the state or states.
The bill also temporarily waives that, to allow for telemedicine to be conducted across states, but only temporarily.
So does this provide sick leave for companies that only offer vacation (paid time off) but no actual sick leave? Or are employees working at those places given the middle finger again and told to use their vacation days that don't exist (the WA sick leave act is like this)?
Also, what does a business with < 50 employees have to do to get exempt? Is there a deadline to apply? Or will we have to wait to get sick only to find out that we're given the middle finger and can't take it because our company is going to exempt itself?
Regarding the small business loans, I think a better incentive would be at the state level, to comp prorated property taxes on all commercial property for the next few months, but only if the owners also comp rent for all renters on the property during this time.
You may think that the landlords would be making more money by not accepting the comp, since the rent will have some premium on top of property tax, but the ones with some foresight may realize that they will lose more money if their tenants go out of business and they have vacancy periods, possibly only to find new renters at a lower price in the event of recession.
Prices increase when there is more demand for things than there is supply. If the economy collapses by 10%, then it’s likely that people will be offering deals on products to stimulate demand. That means prices going down, not up.
Okay, but as companies shut down, supply chains are disrupted and employers implement measures to enact social distancing, why wouldn't supply also go down?
Does the GPD going down necessarily mean that there is less demand and not less supply?
I have absolutely no problem with any of this but I am wondering about those who foam at the mouth against "socialism" and if they realize that is exactly what this is. You can call it anything you want to feel better "bailout" etc. but it's 100% socialism
I wonder if the hotel industry is also going to get only loans or instead unfettered cash with no need to repay, let's see how that one works with double standards.
Please do not take post political, nationalistic, or ideological flamebait to HN. We ban accounts that do those things, and you've done them repeatedly lately. Please stop.
Why do you think there is no "social net" in the US? The US directs over a trillion dollars per year to poverty programs. Certainly it could be better organized, but the starting point for any conversation about this shouldn't be that there is no safety net.
The public discourse on this is based on a complete misunderstanding of what is going on. In particular the official "poverty" statistics exclude huge portions of assistance. So much so that many programs could double or triple their benefits and not make a dent in the "poverty" level for the simple fact that metric doesn't measure what everyone thinks it measures.
I would suggest doing research on that subject. The US has one of the world's largest, most expensive social safety nets. The primary problem the US has isn't spending on its social safety net, it's not controlling costs properly (as with healthcare in general) and not directing its spending effectively enough.
The US spends approximately the equivalent of 40% the entire EU economy on its social safety net.
This new spending is a tiny drop in the bucket compared to the existing US spending on its social safety net.
It's precisely why the US poverty rate and US homelessness rate are comparable to Canada and France. Because the US spends very large sums of money on its social safety net.
It's why the US spends $650-$700 billion each year on free healthcare for the poorest 25%.
It's why the total government expenditures in the US are now $8 trillion every year. What do you think that's all going to? Roads? Military? Total government spending in the US is almost 40% of GDP.
Maybe in the mandatory spending of the budget, social security is a big part of it, but looking at the discretionary spending which is 50% defense, it sure is a big part of the budget in the US.
And sure, US spends a lot on social security, but how effective is it really? "Safety net" is a lot larger than just social security. For everyone to be able to go to the hospital for free is one thing that contributes to a safety net that the US does not have.
It's happening but as with all government programs, there is inertia in the current system. It was better to announce it and let the relevant organizations iron out the details than to do it the other way around. Bottom line is student loan interest is being waived for the time being. The multiple people you know who insist it's not true are free to continue to pay their interest though it will be applied to their principle instead.
Trump froze interest on government student loans. If your friends have loan providers that are not the government, then Trump's announcement is meaningless.
Testing availability has ramped up a lot and you can send a COVID test to any quest or labcorp for analysis.
> I know from multiple people who have called their loan providers
If they called "loan providers" they have private student loans and were never covered by Trump's promise in the first place. Trump can only waive interest for federal student loans, and all of those are serviced by Navient and provided by the Department of Education.
"Bold and significant" eh? Kind of like the "bold and significant" test kits that never materialized, or the "bold and significant" quarantine process we should've instituted as soon as the first patient was discovered.
LOL minus the diamond princess or the obvious one from like the woman from Iran? people were falling thru the cracks like candy, i happen to know 1 or 2 people that were confused they weren't even screened at the border.
i suggest you do more than just take any announcement from the WH at face value, especially when there are numerous sources saying otherwise.
But, yes america has an obligation to repatriate american citizens, and subjecting them to quarantine is the right thing to do.
I have no doubt people were falling through cracks though. America has an incredibly open border with lax enforcement, mainly due to partisan bickering. Hopefully, this will get everyone on board with border security
i'm saying the diamond princess people were probably the few that were properly quarantined given the news coverage. the flight entry points during that time didn't even bother, just asked a few questions on where you were coming from.
Not terribly interested in this thread, but for the record %0 interest loans when they're big (billions of dollars) are effectively the same as handing out free money. A bank would need to be ridiculously incompetent not to turn those loans into significant profits (and hey, give out executive bonuses too!).
Well you brought it up, so which bailout are you referring to when you said "Corporate “bailouts” are just loans." that isn't referring to billion(s) dollar loans?
After a little nudge the has USA jumped on board with other developed countries and offers sick leave, family leave, more unemployment assistance and free testing and treatment for a given illness.
I will be fascinated to watch the reaction if and when it's taken away again.
> After a little nudge the has USA jumped on board with other developed countries
We've had to warn you many times not to post nationalistic or ideological flamebait to HN, including just the other day. Really, would you please stop?
The US didn't really need a nudge. The White house and speaker of the house have said they were going to do this since last week. The US is ahead of other countries, given that our hospitals are not overrun already, and we've already started planning financially.
Reimbursing the populace for a natural disaster or -- in this case -- a government ordered shutdown, is actually akin to a simple civil liability.
Like, if you trip on a sidewalk, the city reimburses you because it is their responsibility to allow you to walk on the sidewalk. It is the federal government's responsibility to ensure interstate trade can take place. If they order it to stop, they need to reimburse you because their sidewalk had a giant gaping pothole in it.
They're not Socialist policies, that's a confusion over what Socialism is (total state control of the means of production, as one of several requirements).
What you're referring to is called a welfare state. They're welfare state policies, not Socialist policies. The US has been a welfare state nation for many decades now, and increasingly so.
For example, there are no Socialist nations in Europe at present, including Norway, Sweden, Finland, Denmark, or France. Those are overwhelmingly market based economies that have large welfare states.
I disagree with you. Not everything is so black and white that it must be one thing or another. Socialism doesn't have to be "Total state control of the means of production", it can be piecemeal and applied to some parts of a society or economy and not others.
Heathcare for all is not "welfare". It's the government taking tax dollars and then paying for things for all citizens. It's how the USA currently pays for Police and Prisons and the Military and corn subsidies and elementary school teachers among a million other things that are not welfare.
What I'm saying is the US is adopting more socialist ideas, and it's spreading the tax dollars around to more and more citizens in more types of ways, like the rest of the developed world has been doing for decades very successfully.
As I said, I'll be fascinated to see the reaction if and when it's taken back after COVID-19.
> What I'm saying is the US is adopting more socialist ideas, and it's spreading the tax dollars around to more and more citizens in more types of ways, like the rest of the developed world has been doing for decades very successfully.
Rubbish. The Defense production act invoked today is from WWII and extremely limited in scope. After the crisis is over the government will be forced to give up these powers. And thank goodness. This is no way to run a free country in normal times.
> And thank goodness. This is no way to run a free country in normal times
I take it you're aware of Denmark, Sweden, Norway, Australia, Canada, New Zealand and virtually ALL the other developed countries on the planet who function this way every day of the year and do very well.
Australia, Canada, and New Zealand don't have the same kinds of guarantees on freedom the United States does, frankly. I don't know much about the other three's laws and can't comment.
For example, a local restaurant where I live, will have to shut down for good in the next few days as they won't be able to afford their lease. If they get a loan for the lease, they'll be on the hook for that money with no guarantee of being able to pay it back and with way too much uncertainty in terms of when they'll be able to reopen the business.
It would be really bad for them to shut down, but it could be even worse if they take out a loan and then are not able to pay it back. Very bad situation to be in.
Same applies to individuals who will soon not be able to pay rent or other obligations. Loans are not a solution.