— Dr. Fred McKinney, Ph.D.
– Carlton Highsmith Chair for Innovation and Entrepreneurship and Director, People’s United Center for Innovation and Entrepreneurship at Quinnipiac University
The opinions expressed in this article is solely those of the author.
In this column a few weeks ago, I advocated that small businesses that do not receive Paycheck Protection Program loans (that can convert to grants) stop paying their rent, mortgages, insurance payments, leases, taxes and other fixed costs as the best way to survive this crisis. Now, six weeks later, we are seeing that Starbucks is requesting rent concessions from landlords; Liberty Mutual and State Farm are offering rebates and suspensions to customers; and some car manufacturers are offering no payments for 90 days or more on new loans. This economic crisis will not be resolved until the COVID19 crisis is resolved, and for small businesses their best chance to survive this crisis is for them to conserve as much cash as possible by not paying their fixed cost expenses. In other words, small businesses should stop paying rent, leases, taxes, insurance payments, loans and other fixed costs, not out of spite, but for survival.
Jerome Powell, the Chairman of the Federal Reserve System just opined that this economic crisis is likely to persist into the foreseeable future. Small businesses who received two months of working capital from the PPP to pay for workers and some of those fixed costs will run out of those funds next month. If Chairman Powell is correct, small businesses will be back where they started from at the beginning of this crisis with significantly fewer customers, bills to pay, and employees who will most likely have to be furloughed again. This is not a recipe for a V-shaped recovery, or for that matter, any recovery, in the small business sector, or for the economy.
If small businesses could suspend their payments to fixed costs suppliers until the economy reaches some agreed upon metric, hundreds of thousands, perhaps millions, of small businesses could be saved. The impact on diverse businesses will likely be even greater.
The last time the federal government conducted a national survey of minority businesses was in 2007. While this is far from current, one of the important findings of that survey was that minority businesses were smaller, hired fewer employees, and were undercapitalized. In fact, of the over 2.7 million Black businesses in 2007, only 109 thousand had employees, far below the proportion of non-minority businesses with employees. Many of these non-employee minority businesses did not receive PPP loans but still have bills to pay and no customers. In the first round of the PPP it was estimated that fewer than 2 million of the 30 million small businesses in the country received PPP loans. Even if another 2 million businesses received loans from the additional $310 billion added to the program in April, that is still only a fraction of all small businesses receiving support.
A program that allows all small businesses to restructure these fixed costs can help us avoid the economic damage done that was experienced during the Great Recession, when homeowners were forced to walk away from their properties creating a tsunami of economic wreckage in markets far beyond the sub prime mortgage market. Small businesses today are like those homeowners of the Great Recession. If we do not protect small businesses today, there will be massive bankruptcies tomorrow that will spill over into the entire U.S. economy. The best way to halt this damage is to restructure fixed costs now.
Starbucks knows that paying rent and not having customers is bad business and unstainable. If it is unstainable for Starbucks, think about how even more unstainable it is for most small businesses without the resources of this major Fortune 500 company.
We can solve this problem, but it will take more than the PPP. It starts with an understanding that small and diverse businesses are a keystone to the U.S. economy and we cannot treat them as if they are expendable. If we do treat small businesses as expendable, we will unfortunately experience a longer and deeper economic recession/depression than is necessary.