Is the number expected to be this high? I thought one of the core ideas of the stimulus was to prevent firing by giving small businesses a "free" loan if they retained their employees?
I've been trying to find a good authority on the economics of this stimulus but it seems I am always stuck finding the same "rehashed" news articles.
Yes. This is part of the United State's Main Street Lending Program, called the Paycheck Protection Program (PPP). The federal government is guaranteeing loans made by private banks. This is taking time to work its way thorough the banks, as they try to understand their long-term legal obligations.
In the mean time, some businesses are laying off or furloughing their employees so that their employees can get some money by claiming for unemployment benefits. Unemployment systems are established and somewhat functioning, unlike the loans, which probably need another week or two to start having an impact. Presumably, some of the workers will be recalled once loans are established.
"Presumably, some of the workers will be recalled when once loans are established." So what happens if you are kept or rehired by your company under the PPP - but don't have any actual work to do?
The core ideas were reported upon, the real purpose is to bail out the banks (once again) and the fortune 500 companies. Very little is going to the people hardest hit.
Banks really aren’t the focus this time around: the changes since 2008 were quite effective in bringing down risks. The bank-specific measures now aren’t aimed at stabilizing them, but at using them to, for example, use their existing personal knowledge of smaller businesses to direct funding.
Nor would I worry too much about Fortune 500 companies. Their scale makes any graft less meaningful, in relative terms. And since most support seems to be in the form of loans, it’s likely that most of it will be recovered. Boeing just isn’t going to go bankrupt.
The current administration seems to be filled with a specific sort of serial fraudopreneur. Like Saul Goodman, gut without the humor and remnants of decency. With oversight already gutted, I’d expect recently-founded LLCs with beneficiaries that just happen to be endangered-wildlife-shooting-buddies of anyone with a secret service pin the main artery of funneling money. I other as loans quickly spent before the company folds. Or, more directly, by being middlemen suddenly required to do business with the government, earning a 400% markup.
Remember that 3-person electrician outfit from the Interior Secretary’s home town in Montana that somehow got a no-bid contract to rebuild Puerto Rico’s entire grid after the hurricane? That’s this admin’s world.
The plan is a death spiral financing which puts a small business into a worse position after taking it than before. They have no revenue due to a government action, loan is based on the value of their payroll with the revenue and the the small business is required to spend 75% of the loan for payroll while being closed.
The fact that banks claimed that 0.5% interest is not enough for them to make it worth it so the Treasury bumped the number and cut repayment schedule is the clearest demonstration yet that it is another hand out to banks.
Because while payroll is a cost it is not the only cost that a business that no longer has any revenue needs to cover. The maximum amount of a loan is 2.5 times the verified payroll. That's 2.5 months of pay. The rest of costs still need to be paid, except there's zero guarantees that the revenue of a business is going to recover immediately after the stay at home is lifted [it won't immediately recover] and it is unknown when the stay at home would be lifted. Lets presume that all other costs of running a business are added to some other loan. That loan is not 0% and it is personally guaranteed.
This means that by taking this loan and spending it on a payroll for next 2.5 months, the owner of the business in a month number 3 is in a worse position than the owner of the business would have been today if the owner were to simply lay off everyone.
The only winners in this are banks making a percentage of a zero risk loan that can be serviced at an incremental cost of a couple of dollars (electronic payments). It is, frankly, disgusting that the congress yet another time took small business loans as a base and made it a money stream for banks.
> This means that by taking this loan and spending it on a payroll for next 2.5 months, the owner of the business in a month number 3 is in a worse position than the owner of the business would have been today if the owner were to simply lay off everyone.
How is that true? The loan is forgiven if it is used to pay employees. Yes there are other costs, but assuming a business doesn't want to just close up shop entirely, keeping their employees would be preferable to losing all employees and their entire business.
The revenue for these businesses cratered. It cratered due to government actions. For service businesses or businesses that sell to service businesses the revenue is zero or nearly zero. The reason why the businesses needed X employees before is because to support Y revenue pre-closure X-1 employees were not enough. In order for the the payroll portion of a loan to become a grant a business cannot decrease the number of workers even though it has no revenue to support them. Reductions in payroll costs reduce the forgiven part of the loan. Reduction in a headcount reduces the forgiven part of the loan.
Essentially, in order for a loan to be treated as a business makes the following bet:
"In no more than 2.5 months from the moment the loan is funded the revenue will return to pre-closure levels"
The non-grant part of the loan (or entire loan if it no longer qualifies) must be repaid in 2 years at 1% APR.[0]
The only real play for a small business that is planning on being around for a long time is to get the loan based on the top payroll number, immediately lay everyone off taking 1% APR hit and repay outstanding loans with higher APR. This is only applicable to businesses that have a lot of cash in a bank.
[0] Before Wells Frago/BOA/Chase etc complained to Treasury that they were not going to make enough money to "make it worth for them to do these loans" the repayment terms were 0.5% APR for 10 years.
The "free" loan is reportedly difficult to get since the government leaned on banks to provide these and banks are doing whatever they can to avoid the situation. For instance, Wells Fargo says they are out of those loans and Bank of America tried to make these loans dependent on already having another loan with them (policy revoked after outcry).
Small businesses in our town are laying everyone off instead of waiting on these loans b/c the employees can qualify and receive unemployment immediately now. Once things open again, they plan to rehire the same people if possible.
All this is anecdotal but seems to me that new unemployment rules are part of the rescue package (I don't really consider it a stimulus package)
"Is the number expected to be this high?" = Yes, some models/estimates suggest it will reach 30m, though I don't recall the horizon.
"I thought one of the core ideas of the stimulus was to prevent firing by giving small businesses a "free" loan if they retained their employees?" = In some cases, I'm hearing that it is happening. In others, the funds are not flowing so owner/operators are proceeding to 'let go'.
"I've been trying to find a good authority on the economics of this stimulus" = Understandable, but difficult enough during 'normal' conditions. Now, everyone becomes an expert.
A lot of SMBs are having issues actually getting the money. One example: Wells Fargo is only authorized to distribute $10B of the money from PPP because of their scandal a few years back. Many SMBs use Wells Fargo for their business checking accounts. This has created a massive delay queue with folks having to reapply for assistance several times to no avail.
I don’t think any states are paying that extra 600/week out yet, where I’m at they are still recoding for it and expecting several more weeks. It’ll be back dated but still, and with the numbers of claims I’m wondering how much capital they really have for it.
Maybe some people can neither afford to move nor live in their apartment and will end up homeless. The people having the hardest time living in SF are the people we now call "essential workers" and "heroes" for doing the jobs we all depend on to survive. What exactly do you think happens to the city of San Francisco when all the "essential workers" are forced to move away or are homeless?
"What exactly do you think happens to the city of San Francisco when all the "essential workers" are forced to move away or are homeless?" It implodes!?
It's literally the gov just giving out money so these companies can keep the doors open and lights on under the guise of 'being in business'. The point is more of a psychological one - to create impression that things are going ok (or not as bad as it seems) at scale across the country.
That's the theory, but in practice it's turning out harder than expected to acquire said money. The government isn't just "giving it out" in the sense you can just walk up to a bank and leave with a bag of cash. You have to apply for it and then be approved and then wait for it to show up. This process takes time, and it's not clear how much time.
Another poster noted that Wells Fargo was capped at what they can distribute and BOA was refusing loans to people who were not already customers. So if you're a small business with Wells Fargo and get denied there after an unknown period of time it takes to process that application, then you turn to another large bank and get denied there, this is time wasted while a clock is ticking (rent is still due for your employees and yourself at the end of the month).
So what do you do? Do you lay off your employees because they can apply for unemployment right away? Or do you hold out and hope that the third bank you apply to for a loan will be a success? What if it's not?
It's very easy for Congress to say "We are giving out money. The businesses are saved!" It's quite another in the implementation of that, and to some degree I feel they were so eager to pass something that they didn't think these things through fully.
"So what do you do? Do you lay off your employees because they can apply for unemployment right away? Or do you hold out and hope that the third bank you apply to for a loan will be a success? What if it's not?"
That's a case by case judgement call that only the owners/operators can answer given their situations and values. There is not universal or general advice answer here.
"It's very easy for Congress to say "We are giving out money. The businesses are saved!" It's quite another in the implementation of that, and to some degree I feel they were so eager to pass something that they didn't think these things through fully."
I fully agree and my comment above was to suggest their intent.
I've been trying to find a good authority on the economics of this stimulus but it seems I am always stuck finding the same "rehashed" news articles.