For nearly 70 years, the Small Business AdministrationThe disaster relief program has helped businesses recover from disasters such as wildfires, hurricanes and earthquakes. But he’s never been faced with anything like the coronavirus crisis.
Besieged by over eight million candidates – and operating in the shadow of the hastily assembled Paycheck Protection Program – The disaster relief effort has given out more money in recent months than it has had in its entire history.
But the demand has created a problem that is hampering hundreds of thousands of applicants: The agency, fearing it will run out of money, has capped its coronavirus loans at a fraction of what businesses can normally borrow – even though the program distributed less than half of the 360 billion dollars that it can to lend.
Caroline Keefer, a clothing designer in Los Angeles, expected to qualify for a loan of at least $500,000 under a complex formula devised by the agency. But when his loan offer came in May, it was for $150,000 — the cap the SBA quietly put in place that month. Qualified businesses can generally take out loans of up to $2 million.
“Without the additional capital, it will be very difficult for us to survive,” she wrote in a direct appeal to Jovita Carranza, the agency’s administrator, and James Rivera, the head of the agency’s disaster office. ‘agency.
The limit has hampered Ms Keefer’s efforts to save a business that made $2 million in revenue last year. His company, River + Sky, sells directly to merchants like boutiques, department stores and hotel spa shops. In a few days of March, while virus stop orders cascading across the country, nearly $700,000 in orders – its entire spring and summer season – evaporated. She found herself with a pile of unpaid invoices for inventory that she suddenly had no room to sell.
Six days after writing to the agency, representatives acknowledged that she had hit the ceiling. Officials “do not plan to increase loans beyond this amount,” the representatives said in an email.
Ms Keefer is grateful for the help she has received, but upset at what she sees as an arbitrary and poorly explained limit that was put in place after other companies got bigger loans at the start of crisis. Data released by the agency last month showed it had issued at least 20,000 disaster relief loans for more than $150,000. His biggest amount was $900,000 in early April.
Nearly 400,000 businesses have exceeded the $150,000 limit, according to agency data. SBA representatives declined to comment on the cap or why it was imposed.
The cap has only been an issue with the disaster program, officially called the Economic Disaster Loan Program. Candidates were confronted long delays, confusing procedures and gaps in communication. And last Tuesday, the agency’s internal watchdog said hundreds of millions of dollars have been doled out under the program. may have been obtained fraudulently.
Barriers to application, changing requirements and fraud reports also plagued the Paycheck Protection Program, the short-term relief effort created by the CARES Act that has provided $521 billion in forgivable loans to cover payroll and other expenses.
The disaster loan program, which has been an integral part of agency operations since its inception in 1953, is more flexible. The program provides businesses with 500 or fewer employees with low-interest loans for terms of up to 30 years, which can be used for almost any business purpose, including the purchase of protective equipment and repayment of debts.
Since March, he has lent $164 billion in EIDL (pronounced “idle”) loans, more than double what it previously distributed in its entire existence, to three million businesses. Nearly $200 billion is currently unused.
More than two million other businesses have been offered loans but have not yet taken them up, so much of the unused money could still be lent out. But the agency’s ability to forecast how much money it will hand out may have been complicated by a move by Congress in March to fast-track aid.
As the coronavirus pandemic took hold, Congress increased its allocations to the agency, enough to support $360 billion in loans. But he also set aside another pool of money that the SBA will distribute as grants to those who applied for the disaster loan program, whether they received a loan or not. The $20 billion for these grants – up to $10,000 per applicant – sold out last month.
Any company that wanted the grant was part of the pool of applicants, even if it did not intend to take out a loan. (Applicants have up to 60 days to make a loan decision.)
It’s unclear what role that uncertainty played in capping loan amounts, and agency officials offered lawmakers little clarity on the loan limit.
During a House hearing last month, Carranza was pressed by representatives of both sides to explain why the agency had not lifted the $150,000 limit. She said she would “continue to evaluate it”.
Two senators – John Cornyn, Republican from Texas, and Jacky Rosen, Democrat from Nevada – filed legislation on July 21 it would provide the agency with billions more for its disaster loan program and prohibit it from capping loans at less than $2 million.
Ms Rosen said the agency had failed to explain its “arbitrary” caps. The agency “refused to publicly ask for more financial support from EIDL, despite small businesses across the country struggling to cover their running costs”, she said.
The cap has left many borrowers with loans they fear won’t be enough to keep their businesses afloat.
Nicholas Johnson runs Su Casa, a furniture retailer with four stores in Maryland and Delaware. After all of his stores closed in March, he calculated that he would need around $500,000 to keep the business alive.
He received $157,000 in April through the Paycheck Protection Program, which he did not tap until his stores began to reopen in late May and his staff members began returning . Based on his operating costs and income, he expected to qualify for a $380,000 disaster loan.
Getting an offer in May for just $150,000 was “like a punch in the stomach,” he said. He had many sleepless nights, he said, wondering how he would make up for his projected shortfall of $200,000.
So far, Mr Johnson is managing to survive on higher than expected sales from his reopened stores, but he foresees tough months ahead. “My supply chains are pretty much broken,” he said. “At some point the income will go down again because I won’t have anything left to sell. I’m trying to build a buffer, because I know there’s more pain to come.
For some, the ceiling is a minor obstacle: Joy Parisi, the owner of Paragraph, a writers’ space with two locations in New York City, said its disaster loan was enough to give it leeway to mop up unpaid bills and overdue rent.
But others would borrow more from the program if they could. Ms Keefer also received a PPP loan of $48,000, which she is using to pay two employees, but that failed to close the gap.
With her wholesale business in tatters, she turned to consumer sales. The disaster loan paid off his most urgent bills and allowed him to hire an agency to improve his retail website. Then she started buying ads on Facebook and Instagram.
The change in strategy helped: in June, it more than doubled what it sold directly in the whole of last year. But this is still only a fraction of what she would usually earn. And now Mrs. Keefer needs the money to start making her fall and winter merchandise.
Seeing no other option, she took out an expensive loan from an online lender. It looks, she says, like a payday loan: “You have to start paying it back immediately, and it’s like a trap — you end up borrowing more just to keep up.”
Lack of money forced her to make her clothes in smaller and more expensive batches; limit its marketing budget; and refrain from rehiring more workers. If she could borrow more money from the government, she says, she would spend it immediately to expand her business – exactly the kind of economic activity the government wants to encourage.
“The EIDL loan is perfect; this is exactly what we need to stabilize our ship,” Ms Keefer said. “We just need more.”