A photo of a sign reading "Closed due to coronavirus."
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How the Small Business Bailout Failed the People It Meant to Help

Many independent businesses were blocked from getting money thanks to a broken website and insufficient funding from Congress. Now they may close for good.

John and Courtney Sellers didn't think they would become coffee shop owners when they bought a century-old building in the picturesque downtown of Martin, their town of about 11,000, in West Tennessee. They originally wanted a storefront for their marketing and branding business, and they had fallen in love with the structure's elegant blue exterior. Then they began thinking of ways to raise money to fund literacy efforts in Nepal, where John used to live, and settled on selling coffee, with a portion of the proceeds going toward charity. But Martin's Coffee and Bakery took off after opening in 2017, and "took over our lives," John said. They soon had a successful business with 16 employees; in its first year, the coffeehouse raised enough money for the Sellers' nonprofit to build a library in Nepal.


Then the pandemic arrived. "We were not hit near as bad as other areas out there, but when people started really becoming aware of the coronavirus, it cut into sales dramatically," John said. When Tennessee Governor Bill Lee issued a statewide stay-at-home order in early April, the couple started "hemorrhaging a lot of money." Martin's has no drive-through service and customers come for the atmosphere, John said, and "adapting to curbside and delivery just wasn't working at all, especially with the delivery fees that a lot of these third-party apps are charging for it." They laid off half of their workers at first, then all of them—John thought letting them file for unemployment would be better than keeping them on at next to no hours. But it was a difficult decision. John knows many of them are having a hard time, including one single mom with three kids who relies on the job to pay her bills.

We Called Unemployment Offices in All 50 States. Only 2 Picked Up

"I just feel like the bad guy in this," the 28-year-old said. "All my staff is freaking out and then they are struggling to get unemployment." The Sellers are struggling themselves, however, since they still have to pay for utilities and insurance and the mortgage on that beautiful restored building. They're now $30,000 in the hole, and all their income streams have dried up. No one wants to give them new marketing business, John's wedding photography sideline doesn't pay since there are no weddings, and Courtney can't find work as a substitute teacher since the schools are closed. "I'm completely living on borrowed money," John said. "It's embarrassing, but it's all credit cards, man. I don't know how much longer that's going to go."


The CARES Act, passed in late March as a response to the economic devastation wrought by COVID-19 and the accompanying shutdown, looked like it might help the Sellers. Congress allowed all small businesses (defined as companies with 500 employees or fewer) to apply for Economic Injury Disaster Loans (EIDLs) of up to $10,000 through the federal Small Business Administration (SBA). Congress also set up a new SBA initiative, the Payroll Protection Program (PPP), which would provide a total of $349 billion in loans to businesses that wouldn't have to be repaid if they were spent primarily paying employees. The idea was that small businesses would be kept alive and encouraged to continue paying their workers.

Thousands of eligible businesses applied for PPP loans through the banks authorized by the government to carry out the program, but it quickly became clear that the system was overloaded. Business owners struggled to navigate an unclear application process and dealt with repeated website crashes. Genuinely small businesses found themselves competing for a limited pool of money with chain restaurants, hotel giants and firms with hundreds of workers. And the money wasn't enough: On Thursday morning, the SBA announced that the $349 billion set aside for PPP had run out, less than two weeks after applications had opened; the agency is also out of EIDL money.

"Nobody wants to wake up three months from now and reemerge from their home, and their bar and their coffee shop and their gym and their daycare have all closed."


On Tuesday, Senate Democrats and Republicans came together to pass a new relief package that allocated an additional $320 billion for PPP and $60 billion in EIDL loans and grants. But that funding is probably going to be gone within days as desperate businesses rush to apply. "It is likely that Congress would have to go back a third time, given the best estimates suggest this is a $1 trillion problem," said Joseph Parilla, a fellow at the Brookings Institution's Metropolitan Policy Program.

So people like the Sellers are waiting to see whether they'll get PPP or EIDL money, and waiting to see when they can reopen and when customers will want—or be able—to do things like buy a pour-over and a muffin and sit in a comfortable coffee shop chair. That could take weeks, or months, and by then many places will be forced to close for good. According to a Brookings analysis coauthored by Parilla, 26 percent of companies with 250 employees or fewer are at "immediate" risk thanks to COVID-19, and another 28 percent are at risk in the short term. Collectively, those businesses employ 47.8 million Americans.

There's more than just jobs at stake. Small businesses can define the character of towns and neighborhoods, providing a sense of place and character that Starbucks or Au Bon Pain can only awkwardly ape. Bookstores, cafes, restaurants, bars and other independent businesses can improve our lives in ways impossible to quantify—and already, many have closed for good. Many more will meet a similar fate.

The storefront of Martin's Coffee.

Photo courtesy of John Sellers

The application system didn’t work, then it started working, then it ran out of money

In trying to keep the economy afloat amid a once-in-a-generation pandemic, Congress and the Trump administration were confronted by a nearly impossible situation. Almost the whole economy was shutting down, and everyone needed money faster than the government could get it out the door. The SBA wasn't equipped to distribute $349 billion, so it used banks as intermediaries, which makes sense, Parilla said.

"You're standing up a massive apparatus, in terms of getting the guidance out to a lot of lenders who interpret that guidance and provide it customers," Parilla said. "It's this game of telephone that in the best rollout probably would have had some issues."

As policymakers and banks worked to set this system up, the existing SBA infrastructure was overwhelmed by people asking for EIDL funds. Mandi Headrick is a Seattle-based athletic trainer who went into business for herself in January, but a couple months later had to stop seeing all of her clients because of the coronavirus outbreak. One of them is a 93-year-old woman who is recovering from mouth cancer; Headrick was helping her learn to swallow again. "I was making a lot of progress with her and now she's having to do everything by herself," she said.

With no way to do her job, Headrick tried to apply for an emergency loan from the SBA in mid-March, but the agency website thwarted her. First it took hours to load, then it stopped working altogether. On March 25, the site shut down—not only was it nonfunctional, but it reportedly exposed the personal information of 100 business owners to each other, including their Social Security numbers. (The site relaunched on March 30, but on Tuesday it was reported by Business Insider that the new site exposed the personal information of nearly 8,000 applicants.)


People approved for EIDLs were supposed to get their money within three days, but that deadline has been largely ignored, according to small business owners in multiple states. Gerald Prudhomme, an IT consultant in Southern California, said that he has called the SBA hotline multiple times since applying for an EIDL in late March. At first, he was told that it would take five to seven business days; last week, the person he spoke to wouldn't even give him a timeline. (SBA did not comment on whether the three-day timeline had been waived.)

On March 27, shortly after the CARES Act passed, John Sellers filmed himself waiting on hold with the SBA to check on the status of his EIDL money. "The stimulus package looks great," he told the camera. "My issue is I have no idea when this is going to happen. And for many people, there is a real question of, if I go more into debt, will it eventually pay off? Is it going to be worth being open at all after all this happens? There's a recession coming after all this."

Jaunty piano music played as he waited on hold, having been designated caller number 996, and joked to the camera what was running through his mind: "Foreclosure, bankruptcy, famine, kicked out of my apartment," he said, laughing. "It's kind of a weird, happy playlist for a dire situation."

When the PPP system finally began accepting applications on April 3, a Friday, banks were warning that they weren't prepared, because to the Trump administration had tweaked the specifics of the program during a last-minute scramble to set it all up. By that Monday, the SBA site had crashed (again), stalling the ability of lenders to approve loans.


When this bailout effort began, Duncan MacDonald-Korth, a small business owner who runs a financial news service, started a website called COVID Loan Tracker that crowdsources data on how much money has been received by small businesses. As of Wednesday, of the nearly 14,000 PPP loans the site has tracked, 1,100 had been received, and 1,000 of over 13,000 requested EIDL grants had been received. That slowness is especially costly for brick and mortar businesses, MacDonald-Korth said, who see rent costs looming.

"Every time you execute a commercial lease with a landlord in the United States, you have to sign a personal guarantee, so that your own money is on the hook if you can't pay rent with your business," he said. "We've heard horrible anecdotes about all these people that are mandated to close by the government because of the lockdown. And then they lose all their revenue. And then if they can't pay rent, and a lot of times rent is by far the largest expense for brick and mortar business because salaries are low in that space, then their own finances are on the hook, which means it is not just about saving their immediate business. Their entire livelihood and everything they have is on the line."

Large chains cashed in as smaller businesses struggled

Headrick thought that a PPP loan was just what she needed, but she wasn't sure where to apply. The Seattle Office of Economic Development gave her a list of banks that were participating in the program, but none of them were willing to work with her. A woman at Chase gently informed her that she didn't meet the bank's requirements for loans, and didn't even have a business account there. (Headrick has a personal Chase credit card, but banks through a credit union.) She called another bank on the list and asked where to turn in her application, and the customer service rep "said, 'I don't know' and basically hung up on me."

"Every time I make another step, I feel like I'm running smack dab into a brick wall," Headrick said.


Loans were supposed to be processed on a first-come, first-serve basis. But it appears that businesses with a good rapport with their bank had a built-in advantage. (The COVID Loan Tracker reports that 81 percent of PPP recipients who filled out the survey had a pre-existing relationship with a bank.) And some of the businesses seeking PPP loans weren't small at all—a carveout in the CARES Act allowed large hotel and restaurant chains to apply as well. That meant that large corporations were competing with people like the Sellers and Headrick for a limited amount of money. Chains like Potbelly sandwiches and Ruth's Chris Steakhouse got millions in PPP loans—even though, progressive journalist Jed Legum reported, Ruth's Chris has furloughed many of its workers and closed restaurants.

"It's basically like giving food stamps to Bill Gates… and then saying to someone who's having problems paying the rent, 'You're not going to get anything because we had the money go to Gates.'"

SBA data shows that most PPP loans were for less than $150,000, but loans for more than $1 million made up nearly 45 percent of the total money handed out, giving some credence to the argument that larger businesses helped deplete that $349 billion fund. The bigger problem, however, is that the fund itself was much too small. Wells Fargo announced it had hit its $10 billion limit on April 5, two days after the program began. Other banks' funds soon dried up as well. Wells Fargo and Chase have been hit with class-action lawsuits alleging that the banks prioritized large loan requests that were more profitable to process, at the expense of genuinely small businesses. Shake Shack got $10 million in PPP funds, but announced on Sunday it would return the money, saying in a statement, "Until every restaurant that needs it has had the same opportunity to receive assistance, we’re returning ours."


In response to questions about delays in EIDL payments and larger businesses receiving loans, Carol Wilkerson, an SBA spokesperson, said, "The SBA approved loans from lenders via an online lender portal in the order they were received." A statement from Chase said that while the bank processed applications in the order they were received, "Because the number of applications to the Commercial Bank was much smaller than Business Banking [which handles smaller clients], the Commercial Bank did complete work on most of the applications it received. Although Business Bank funded nearly three times the number of loans, it received almost 55 times more applications than Commercial Banking, and therefore Business Banking did not complete its work before the $349 billion dollars allocated by the CARES Act were depleted."

The logistical hurdles that prevented some smaller, less-connected entrepreneurs from getting loans had real consequences. Headrick was eventually able to apply through her credit union, but was told that she had filled out the wrong version of the form. When she was finally able to get the correct paperwork in it was Friday, April 17, and too late—there wasn't any money left for her. (Her credit union has said it will process her application in anticipation of more money being allocated to PPP by Congress.)

"It's basically like giving food stamps to Bill Gates," said Prudhomme, "and then saying to someone who's having problems paying the rent, 'You're not going to get anything because we had the money go to Gates.' Why should a company with higher income get the money before someone who actually needs the money?"


The future is bleak

By now it's clear that the bailout has failed on multiple fronts. PPP doesn't do much to help business owners for whom payroll is not a major expense. The pool of money available for small businesses was laughably small, especially since the government allowed large companies to apply for loans. And the application system was so confusing and broken that in many cases it stopped people like Headrick from even asking for help in time.

Worse still, no one knows how long the economic effects of the pandemic will linger. "There's so much that's unknown," said Camilla Marcus, the owner of the Manhattan restaurant west-bourne and a member of the leadership team of the Independent Restaurant Coalition (IRC), a newly formed industry organization. Marcus has closed her restaurant even to takeout and delivery—she thinks it's unsafe—while continuing to pay her staff of 30. Even if the government allowed her restaurant to reopen, there might be restrictions on how many customers it could serve, and people might be wary of reentering public spaces, a feeling that could last months, or years. "Not to be apocalyptic, but people are not going to be able to dine out safely the way that we were three, four weeks ago," she said.

A survey last week from the IRC and the James Beard Foundation found that only about one in five restaurant owners were "very certain" or "somewhat certain" their businesses could survive until life returned to some semblance of normal. According to MacDonald-Korth, only about half of the respondents to the COVID Loan Tracker survey said that the full PPP amount they requested would be enough to keep their business afloat. Business owners face an impossible calculus: Is it worth it to try to stay open if even these government loans won't provide enough help?

"I'm trying to figure out what's the threshold, how much more in debt am I willing to go?" Sellers said. "How much time can I wait and then what is this new normal going to look like?" As of Friday, he's still waiting on his bank to see if he can get a loan. "We might be able to make it depending on how fast everything opens up," he said.

Ruth's Chris Steak House will certainly survive this crisis. But Martin's Coffee and Bakery, with a minuscule fraction of its legal and financial resources, may not. As Congress looks ahead to future relief provisions, it's worth thinking about which businesses we value as a society, and which places are worth saving. Because so far, it seems like the most unique and independent businesses are the ones who are most at risk of dying, and the ones that have gotten the least help.

"Not every small business can have a lawyer or financial adviser to walk them through the complexities of these programs," said Parilla, the Brookings fellow. "And yet, it's in the public interest to save as many small businesses as possible. Nobody wants to wake up three months from now and reemerge from their home, and their bar and their coffee shop and their gym and their daycare have all closed."

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