US Small businesses false sense of security

The economic and COVID19 pandemic that has hit the USA has affected small businesses greater than most, as they have fewer means to combat shutdowns. Layoffs and furloughs have turned over 16 million to unemployment. Meanwhile the SMB owners thought they were going to get some govt assistance. Think again.

I’ve always promoted a sense of control and the “buck stops here” attitude to business.  I’d say that most small business owners probably share the same attitude.  Living in a world where 85% of them fail in the first 18 months means if you decide to start a small business, you better have brass cajones.

Small businesses rely on cashflow to keep afloat.  Although many of them are highly profitable, if they run a seasonal business (like clothing, travel, etc.) then they have to hunker down for the winter months and wait until demand peaks in summer.  That means although their bills don’t stop (rent, payroll, insurance, phones, Internet, etc.) they amass their income in the peak periods, save it and pay off the expenses over time.  Those that are lucky enough to have a business that sees revenue all year round, don’t see any surge of income to save, and are often living paycheck to paycheck, except they don’t draw a paycheck.

But the dream is there.  The dream to create something of value, something you can one day sell to someone or pass down to your kids.  It is a pure dream - a dream of hard work and reward, and a dream of not having a boss.  Unfortunately many are misinformed as to what a business really is, and create their own job.

And those that manage to understand that they should work ON their business and not IN their business, per the teachings of Michael Gerber, are the most likely to succeed, but that is even a smaller percentage:

But you still have to feel for the majority here because they have a dream.  The dream may distort the reality of the world, but that’s what dreamers do.  Without dreamers, we would never have Apple Inc., Tesla, Google, Ford, Microsoft, etc.   Dreamers create the future.  We need dreamers.

According to JP Morgan Chase, 48% of all US employees work for small business, with 18% working for businesses with less than 20 employees.  And for most first job hunters out there, they will work for small businesses out of school.   If you take away that onramp, then the only option might be some college internship that leads to a corporate job, or you are broke out of college.  Good luck paying back those student loans if you don’t have any onramp to making money.

Pandemic strikes

When you are dealing with SMB owners that are used to bootstrapping their operations and often have to hustle and fly by the seat of their pants to make payroll every 2 weeks, and they are forced by their government to shut down because of the health risks of overloading hospitals, they are screwed.  You can’t hustle when your economy is shut down.  Sure, some may have online operations that can make a small percentage of their revenue, or they have take-out or delivery that can bring in some money, but it is barely enough to keep the lights on.  I spoke to the owner of our local Greek Restaurant here in Scottdale, and he told me that although there is business coming from DoorDash deliveries and take-out orders, it only represents about 25% of their normal turnover, and DoorDash have the nasty habit of stealing 30% of the revenue from the restaurant because people are too lazy to get out of their homes and go and pick up the meal.

If anyone needs some government assistance, it is the small business.

Politically the US government loves to sing the praises of the SBA (Small Business Administration).  This group underwrite financing for small businesses, where often private lenders would run away from such a high risk group.  But the government understands the critical need that they have for this group, mainly due to servicing the lower economic employment and early employment needs of the population.  Also it doesn’t hurt that they tax SMB’s heavily because they can’t afford to hire an army of tax attorneys to offshore their revenue and use tricks to avoid taxes.

When the president, who is supposedly a “great businessman”, champions the role of SMBs in the economy and promises to provide relief, at the price tag of $350 billion dollars to we, the tax payer, I was ok with that.  I thought that if a group right now needs some help, this is the group.  The rules were that they would provide forgivable loans that could be used to maintain payroll, pay the rent, keep the lights on, etc. which would allow a SMB to shelter in place and close for a short period of time.  Congress signed off on this, and money was flowing.

Or so we thought.  They offered support in two ways - the “Economic Injury Disaster Loan”, which according to the SBA website states:

“The loan advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. This loan advance will not have to be repaid.”

And started at $10,000, this was enough for even the smallest of SMBs to get some relief.  Larger operations could use the “Paycheck Protection Program” (or PPP) which were handled by local banks.

But the banks were not given the specific clarifications of funding underwriting rules from the SBA to be able to act in time, and the amount of funding was limited so many just stopped offering PPP loans completely.

It seems that SMBs are (again) left out in the cold.  The 85% failure rate may be light considering the situation right now.

“I’m from the government, and I’m here to help”

It was President Reagan, who famously stated “The nine most terrifying words in the English language are: I'm from the Government, and I'm here to help.” 

It is definitely true.  SMBs will go down in flames from this pandemic at a rate we’ve never seen before.  When that happens, we will see a consolidation of BIG corporations, buying them out, removing consumer choices, where the only form of retail, food & service, and other offerings will be from public corporations traded on Wall Street.  The local Greek restaurant may go away, but will be replaced with another Chipoltle or Starbucks or Applebees.  The idea of a small restaurant may have some resurgence in the future, but it will be from newer startups, who must first compete with these mega-corporate owned enterprises to gain any foothold, which will be unlikely.

I hate to see a country turn into a cookie-cutter, franchise model, corporate owned plastic place, but I don’t see much of an alternative right now.  The neighborhood grocery store will die off completely in favor of Walmart, Whole Foods, Kroger, etc.  We will be forced to have fewer choices, and little unique options.  

And the only place to put blame on this was the US Federal Government, particularly under the management of one Donald J. Trump, for effectively swindling the small businesses.  One may argue that the SMB should have taken heed of President Reagan’s advice.

The Con

On April 13th, I received an email from the SBA stating that all $10,000 grants that were offered had been rescinded in favor of a program that provided $1,000 per employee to a max of $10,000.  Previously the max was closer to $50,000.   

If you are a single operator, freelancer, “Gig worker”, etc. you may have thought you had a life line to pay your rent, etc.  The SBA Economic Injury Disaster Loan was supposed to help you, because it supported those folk - the “micro businesses”.   But since they don’t employ anyone other than themselves for the most part, $1,000 is all you get.  Yep, that’s not enough to buy a new iPhone let alone pay rent, keep the power on, etc.  

Where do these people go?  Many can’t get work from the big corporations in middle management because they don’t have college degrees that let them even get into the interview room.  The only corporations hiring are Amazon or Big grocery stores, where the workers are subjected to higher rates of virus infection, and often inhuman worker conditions.  There are no unions there to protect worker rights and consequently we are turning back to a 1930s model where the great divide of rich vs. poor is enhanced.

I’m not saying that people should rely on government assistance at all, but the reality is that if you promise something, you have a duty to deliver on it.  Many SMBs and freelancers could have hustled quickly to find other forms of revenue to survive, but if they took the foot off the accelerator, they probably lost the momentum to recover from this.  And with the struggle out there to keep a SMB running, you always need to have your foot flat down on the accelerator.

The future for SMBs

The only hope I see going forward is to realize that there will be less and less impact on the overall economy from SMBs in the near future.  This will inevitably be due to the inability for the closed businesses to re-open, and that the corporate vultures will sweep down to take over the opportunities.
Near to where we live in Scottsdale, Arizona is a small micro-brewery called “The Scottsdale Beer Company”.

They brew their own ales and they are incredible.  In fact, I’d have to say they are the best beers I have ever had in the USA.  I’d say the world, but I’ve been blessed to have visited Germany for beer and that’s pretty damn hard to beat.  That said, this is a major part of the culture of our town and the ability for this place to thrive is critical.  Many a major sporting event has been seen in that pub, which not only offers incredible brews but also a gastro style menu of brilliant food.  Their Bison Burger is to die for!

Late last year, not more than 50 feet away from the front door of Scottsdale Beer Company, opened a Cold Beers & Cheeseburgers.  This is a line of restaurants from a company called Square One Concepts, who own eight different lines of restaurants throughout California, Arizona and Nevada.  Now I’m sure they are great restaurants and many people probably love them.  But what I saw was a blatant attack on an existing micro-brewery that needs the community support.  The thing is that the excessive growth goals of Square One Concepts will likely result in the same end result that another chain of restaurants in Arizona, Fox Restaurant Concepts, ended up.  They got acquired by NASDAQ corporation Cheesecake Factory.

So why is all of this important?  Well when you want to go out and discover new food, beverages, etc. you want diversity.  You want a lot of different options.  This is what creates a culture and community.  Yet if all the options are cookie-cutter duplications of the same concept from place to place, city to city, then you lack the diversity that makes and inspires new creations.  How could any SMB start and compete with a mega conglomeration of restaurants?  

Yet if the SMBs here fail and close due to pandemic, and specifically thinking that the govt might be able to throw them a life line, these bigger public companies with massive amounts of capital and lending capability will simply swoop in and take them rotting corpse of the SMB and turn it into yet another franchised template offering.  We, the consumer, will never benefit from that.

Cities like Austin, Texas, lead the way in terms of supporting new growth here.  They actively want new businesses to startup and are not interested in being a cookie-cutter city.

Hence this is why it was one of the fastest growing cities in the country and now is the second “Silicon Valley” in the USA.  People with money want to go there because there is more to discover about our existence in a city that promotes difference, being “weird” and creating something new.  But if you take that away, you reduce us down to nothing more than robots following the same path all the time because it is “safe”.  That’s herd mentality and you know what I think about that.

So we must support the SMB.  We must be willing to find creative ways to keep them open, or we will lose the things that make us human and interesting.  We will lose the natural diversity of dreamers.  We will lose our fellow neighbors who simply wanted to follow a dream and started a business.  It doesn’t matter if it was a small endeavor or a large one, they could at least have the option to try.  This is what brought most immigrants to the USA - the idea that there were opportunities that they couldn’t find in their home country.  That the adventure was worth often moving to the other side of the planet to pursue.

Let’s not kill the motivation of the dream.  Let’s support the SMBs with our business and “buy local” as they say.  If we do that, then we can keep this alive.  It isn’t going to come from government, in fact almost the polar opposite of help here came from government.

Ronald Reagan was right, it would seem.