American small businesses face massive closings without further pandemic help

OAKLAND, California / NEW YORK (Reuters) – After surviving two hits at age 27, Olivia Colt launched into a catering business, a dream of a lifetime. Ten years and another hit later, she had turned Salt & Honey Catering Plus Events into a thriving operation in downtown Oakland.

Now with the coronavirus pandemic forcing clients to cancel weddings and events, she has reduced her staff from 25 to six and has tried to generate new business by selling groceries online. She obtained a forgivable loan of $ 100,000 under the United States’ Paycheck Protection Program (PPP) and another loan of $ 150,000 under a federal program that is generally used for natural disasters. She hoped the money would help her through a few months of trouble.

But the difficulties are dragging on.

“I have applied for all the grants and loans, I have maximized my credit card, I have used my company’s reserves, I have spent my savings,” he said.

Colt now fears he may have to close his business permanently. Many small businesses across the country are reaching similar breakpoints in an economy with the highest unemployment rate since the Great Depression. Small businesses have survived the pandemic thus far with a combination of government aid, debt and income tolerance and creativity to sell to an increasingly confined and economically affected population.

As the first wave of US aid wears off, and homeowners and lenders lose patience, lawmakers are in tense negotiations over a new round of stimulus, which could include more money for small businesses.

The White House did not respond to a request for comment.

Most companies have already run out of money they got from the $ 600 billion Salary Protection Program, according to a survey released this week by the National Federation of Independent Business, a leading trade group for small American businesses.

The federation also discovered in early July that 23% of respondents expected to close the business within six months unless economic conditions change.

Bill Phelan, who tracks small business loans for credit reporting firm Equifax Inc., says defaults jumped to around 2.7% of small business debt. For the next year, their models predict an increase of 5% or 6%. (For a graph of the company’s default trends, click tmsnrt.rs/2CVqyzZ)

Default values ​​peaked at 6.35% in 2009, during the Great Recession, according to Phelan data. Then, the US government stimulus amounted to less than $ 1 trillion, compared to $ 3 trillion so far since the pandemic.

“Tolerance and PPP have helped a lot, but they cannot continue forever,” he said.

Without a vaccine to combat new waves of infection, Phelan expects double-digit default rates in the hardest hit sectors, such as hospitality, food service and retail.

Business owners like Colt have a hard time staying open without accumulating more debt, with no guarantees of success.

“Is it worth taking on more debt if your business can’t survive?” she asked.

Survival fight

Colt, whose mother and grandmother immigrated from the Dominican Republic, moved her kitchen in May to a cheaper space in West Oakland industrial. Initially, his previous landlord had been sympathetic, but he soon began demanding payments that he could no longer afford.

The new business you have improvised is not enough. Sales are one-third of its pre-pandemic projections. So now she is talking to accountants and lawyers about closing her business, while praying that it will never come to that.

Similar dramas are unfolding across the country, especially in states where waves of infection are forcing local officials to tighten restrictions on companies. Concerned consumers are also choosing to stay home and spend less, data from JP Morgan credit card purchases show.

That is causing business owners to look closely at the closure, said Ari Takata-Vásquez, who heads the Oakland Indy Alliance, a group of about 500 small businesses in northern California, including Colt’s.

“Three weeks ago I noticed a change in energy,” said Takata-Vásquez. “A lot more people seem to have a closure on the table.”

About 44% of recently surveyed members have enough money to operate for three months or less, says Takata-Vásquez. To help prevent an avalanche of failures, the Oakland organization launched a campaign this week to raise $ 4 million from donors to fund grants to local businesses, prioritizing businesses owned by immigrants and people of color.

Business owners who defy economic conditions still face the ever-present threat of a health-related shutdown. Colt closed its catering operation for two weeks in May, when a worker feverishly called to allow his staff to be tested and await the results. The tests found no coronavirus.

Used to sell lunches and coffee with milk to employees of the Oakland downtown office, Farley’s East Cafe has now burned its PPP funds and is coping with a contract with a nonprofit that buys restaurant meals. and distributes them to those in need. Co-owner Chris Hillyard says the long-term viability of the coffee depends on the reopening of the office buildings, a result that seems unlikely in the short term, as California leads the US states.

“We are waiting,” says Hillyard.

WHATS NEXT?

Thousands of miles away in Florida, toy importer Basic Fun Inc says sales are increasing dramatically as large retailers, including Walmart Inc and Target Corp, return to more normal operation. But CEO Jay Foreman doesn’t have the $ 10 million he needs to buy the merchandise to meet that demand.

In Bentonville, Arkansas, Holly Thomas has lost money since February at her printing and shipping company, a family business started by her father three decades ago. She has been paying her five employees, including herself, thanks in large part to a PPP loan of approximately $ 55,000. She is trying not to fall into the additional $ 150,000 she borrowed from the federal economic damage disaster loan program.

This year’s revenue through July 24 is down 35% compared to last year. He gave up a little storage space to cut his rental costs by a third, but his health insurance expenses increased 8% in April. At the current rate, he hopes to run out of funds by October or November.

Then what? He previously worked in the film and music industries, and is concerned that it may be difficult to find work in any industry with millions of unemployed people.

“Many people face the same question: what do I do next?” she said. “I know I will compete with so many people for a handful of available jobs.”