Covid-19 Impact & PPP Gaps could result in 2.3 Million Small Business Fails

By Robert Phelan, CFA, GARP

( , 973-2727-3603,

April 6, 2020

While we are seeing ardent action by health care workers and supply chain employees, there are major gaps in government and bank processes for small business loans. Ben Franklin said, “Those who govern, having much business on their hands, do not generally like to take the trouble of considering and carrying into execution new projects. The best public measures are therefore seldom adopted from previous wisdom but forced by the occasion.”  With good intentions, the government has responded quickly but with executional gaps that increase the risk for the most vulnerable segment of the US economy to a shutdown– small businesses.  The US estimates of the Covid-19 GDP contraction and associated job losses points to a potential closure of 2.3 million small businesses.

Small Business Loans:

The government’s directive to the banks for providing support to small businesses lacks perspicuity. The government failed to communicate the reality that 23 million small businesses, many of them family-run, will not be able to maintain full payrolls and overhead when long term structural changes are occurring.  The banks should be advising their small business clients what actions are best suited to their situations.

The $350B in the Payroll Protection Program(PPP), which targets all small businesses with up to 500 employees, has major execution issues.  Those small businesses with higher numbers of employees and in-house accounting departments can provide their banks with the payroll evidence, overhead costs, and proof of profitability needed to complete the loan application process quickly.  Those smaller businesses with fewer employees are struggling just to apply. I know of investment management, environmental services, and restaurant chains, all larger small businesses that have applied for SBA loans.  As of April 6, 2020, the Payroll Protection Program has issued $70 Billion of loans to 250,000 businesses.  Therefore, the average loan is $280,000.  This large average loan amount proves my assertion that the government and banks are approving credit-worthy, bigger small businesses, not the more numerous, vulnerable, small businesses that employ a majority of the workforce.

“Shake Shack has applied for SBA loans even though it is a large public company and should have been supported by banks directly.  The eligibility by Shake Shack was granted because they own 140 U.S. stores are in high-traffic urban areas now largely shut down by the virus. Sales are down 70% on average, the company said, and it has furloughed or laid off 20% of its corporate staff.” (Davis & Haddon)

“An example of a small business experience comes from a Portland, Oregon restaurateur and cookbook author Naomi Pomeroy. She filed for a loan with her bank Friday, and was told that funds were already drying up. She and other prominent chefs fear that bigger chains will have an advantage to access funds over smaller institutions, many of which don’t have sophisticated accounting operations.” (Davis & Haddon)

During the 2008 recession, the US GDP contraction was 8.4% (Harrison).  The associated job losses during the 2008 recession was 400,000 (Harrison).  During that period, approximately 5% of small businesses defaulted on their loans and credit card debt. Consider the estimates of GDP contraction in 2020 of 20%+ and associated job losses of at least 10 million, the multipliers indicate that at least 10% of small businesses (2.3 million) will permanently fail.




Davis, Bob; Haddon, Heather. “Big Restaurant, Hotel Chains Won Exemption to Get Small Business Loans.” The Wall Street Journal, Dow Jones & Company, 6 Apr. 2020

Harrison, David. “Coronavirus Poses Accuracy Challenge for U.S. Economic Data.” The Wall Street Journal, Dow Jones & Company, 8 Apr. 2020

Author: RiskDirector, LLC

Risk Management Advisory and Consulting

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