SOUTHEASTERN, N.C. — Government-ordered shutdowns aimed at stemming the spread of Covid-19 have thrown a wrench in the natural competition that underlies the nation’s economic system.
On the new pandemic playing field, unforeseen missteps, like not keeping an active credit line or choosing the wrong bank, now emerge as make-it-or-break-it choices that may set apart winners from losers — an uncomfortable economic reality, even for a region used to withstanding hurricanes.
Perhaps the biggest government intervention (besides localized shutdown orders) since the pandemic hit the U.S. has been the loved and loathed Paycheck Protection Program (PPP), administered through the Small Business Administration.
Many had the impression the first-come-first-served forgivable loans (basically, grants) this program offered were aimed at so-called small businesses.
The reality was a little different.
The $350 billion first round saw awards given to massive entities, including Harvard University, Shake Shack, and 71 publicly-traded companies, according to Forbes, while countless truly small businesses were left behind (the SBA has not released data showing the number applied vs. awarded to date).
Because businesses had to apply through banks, existing customers with larger accounts were generally prioritized. The non-profit Center for Responsible Lending warned even before the awards were announced that a majority of minority business owners “stand close to no chance” of receiving the loans through mainstream banks or credit unions.
An Office of Inspector General report released Friday afternoon identified several key failures of the program so far. Among the issues, the OIG points to the SBA’s failure to require lenders to prioritize underserved and rural markets, a provision included in the legislation that authorized the funds.
This includes small businesses owned by veterans, members of the military community, socially and economically disadvantaged individuals, women, and new businesses in operation for less than two years. The SBA did not include optional demographic information on its PPP application, making it nearly impossible to track whether loans ended up in the prioritized markets as intended.
Heather McWhorter, director of the University of North Carolina at Wilmington Small Business and Technology Development Center (SBTDC), said this program is a game-changer.
“Who would have thought a month ago that the federal government would have cut $349 billion of grants? That they don’t have to repay, basically, if they follow guidelines to small businesses?” she said in an April 22 interview. Congress has since replenished the fund, adding another $350 billion into the program.
Up to 75% of the loan amount awarded through the PPP must be applied to payroll costs, an incentive designed to keep people employed even if there isn’t much work to do. McWhorter and her team are tracking the loans on a database to see if they can differentiate a pattern among banks, but on Monday, she said the SBA has not yet shared a regionalized break down of awards.
“I think it will differentiate the survivability of the businesses if they did get it,” she said of the first round of PPP loans. “After Florence, they were all loans. I think this is unprecedented.”
One client, for example, had just paid off a loan with their bank, McWhorter explained. Because the client didn’t have an active credit line with the bank, their application was pushed to the back of the queue.
Serving 500-600 clients in the southeastern region, McWhorter said her office’s line was ringing off the hook after the first tranche of money was announced. Many small business owners panicked, frustrated with the complexities of navigating a quickly-patched together program, often with limited help.
Overall, McWhorter is optimistic about small business’ resiliency in the region, but worries about how small restaurants will make it through. “I worry about them the most,” she said.
At least once a day, sometimes twice, Peggy Mahan refreshes the progress bar under her PPP application with her longtime bank, BB&T. “I can’t even talk to a human being, frankly,” she said about the application with the bank. Weeks pass, and her progress bar still reads “under review.”
Mahan knew she didn’t get the PPP loan after the first tranche ran out and is hoping it will come through this time. “It’s not like I’m asking for a lot of money. So I’m a little frustrated,” she said Friday.
Owner of Occasions Just Write in the Cotton Exchange, Mahan employs one person (her sister) beside herself who she had to furlough once stores deemed non-essential were forced to close.
Wilmington Downtown Inc. gave Mahan a $3,000 grant through its Re-3 program, which has funded 30 businesses through community donations. The donation helped Mahan pay the rent, she said. Still, without a PPP loan, Mahan said she’ll have to unload more of her savings to save the business, nearly completely supported by foot-traffic.
In a business survey, WDI found full-time employees were down by more than half and part-time were down 71% on April 1 compared to February. This represents a reported 725 unemployed workers in the downtown business district alone. Of the 95 business owners that responded to WDI’s survey, a majority (28%) reported sales were down by 90% or more.
Popping her head into other business’ doors in the Cotton Exchange, Mahan said most are in waiting mode, not sure what to do. “It’s just a question of, what do we do during these very limited cash flow weeks?”
Saturday, many of the stores in the center opened their doors for the first time.”I think we’re anticipating, we’re hoping that our favorite local customers will come in and support us.”
‘Not everyone drank the Kool-Aid’
Joanna Puritz, longtime owner of Print Works in Wilmington, is about one month away from not being able to make next month’s payroll.
Business is down 65% at the shop, which opened its doors for the first time since shutdown orders on Monday. When she first heard about the PPP, she thought, “‘Oh this, is perfect! I can continue to pay them.’”
After being left out of the first round, she said she now feels disillusioned. She said she feels naive for believing the program would help a small, seven-person company like hers, and after seeing large corporations get the loans, wonders whether she would have been better off letting her employees go on unemployment.
“Not everyone drank the Kool-Aid and kept everyone on payroll. We’re hanging in together,” Puritz said.
Speaking with lending companies, she gets the sense they are trying to fill certain quotas by industry. The SBA has yet to share PPP data by industry, but starting during the second, $310 billion round of funding that opened April 27, the administration began setting aside designated time slots for lending institutions managing less than $1 billion.
As of May 1, the second round has been awarded to 56,512 awardees in North Carolina totaling $4.27 billion, with an average loan amount of $75,500. Of the 2.2 million approved loans in the second round nationwide, about half have been funneled through the biggest banks, amounting to more than half of the total funds awarded so far.
Her experience with Wells Fargo, the bank she applied with under the first round, was “awful,” she said (the company is now under federal investigation for its PPP handling).
After catching onto the idea that the bank had more to do with whether a loan was awarded than the company, Puritz has since applied for a PPP loan through four different lenders. “I don’t owe any money to anybody. It dawned on me I owed money on my mortgage at home to Quicken Loans,” she said, referring to the idea lenders may only be prioritizing clients with active lines of credit.
She’s also tried American Express, which she said has been “outstanding” to work with. “Every time you call them, a real person answers,” Puritz said.
If Cameron Management hadn’t offered to defer rent at the shop, Puritz may not still have her doors open. “I don’t even want to think about it,” she said.
Getting a break on rent may end up saving Puritz’s 16-year-old store. Hill Rogers, broker-in-charge at Cameron Management, said the real estate investment company was in a position to negotiate on behalf of select tenants before they started missing payments.
“We just felt it was the — for numerous tenants, that rent deferment was the right thing to do,” Rogers said. Cameron Management was proactive in identifying which tenants would have limited ability to pay rent before actually being requested to defer payments, he said.
“We got out in front of it. We went down our list and said, ‘They’re going to be impacted dramatically,’” he said. Restaurants, gyms, and other spaces explicitly closed down due to the governor’s orders were offered deferments in April and May. The company is in talks with other businesses requesting deferment that stayed open but were still impacted.
For more than half of the company’s tenants, the ability to pay rent has been a serious conversation, Rogers estimates. “Our tenants have been there for us. We want to be there for them too,” he said. “If the tenants can’t pay their bills, the landlords can’t pay theirs. Making money is essential. Therefore every business is essential.”
Rogers said Cameron Management’s local real estate portfolio is diversified, with investments in hotels, retail spaces, office buildings, restaurants, and more. Fortunately, the company isn’t too heavily reliant on, say, retail. Last week, Millionacres, a Motley Fool company, put Wilmington as the fifth-most exposed U.S. city to risks of economic loss in the retail sector, given the proportion of employees working in the food-service and retail industries.
“The whole retail industry was going toward being eCommerce,” Rogers said. “What was leasing physical space was eCommerce resistant.”
If companies like Cameron Management end up not making their payments, eventually, Rogers said the banks are going to get stressed.
“How many owners can sit around and survive on a lower normal for however long that’s going to take to get back to the old normal?” He asked.
Send tips and comments to Johanna Ferebee Still at email@example.com