A Coronavirus Lifeline: 6 Ways to Keep American Employers Afloat

The coronavirus crisis has escalated from a public health catastrophe to an economic catastrophe as well. Employers and their employees are taking the brunt of the economic damage. Even before this crisis, half of all small businesses didn’t have the cash reserves to weather not making money for just two weeks.¹For businesses in majority black and Hispanic neighborhoods, nearly no business had cash reserves that would last 21 days.²And with one-in-four small businesses shuttered at the moment, and another 40% at risk of closing in the next 2 weeks, they may not last long without more assistance.³The result? In the last two weeks of March alone, nearly 10 million people filed unemployment insurance claims.⁴

The federal government has come in quickly to offer assistance. Employers received initial support from both the Federal Reserve and Congress as the crisis has unfolded. Most recently, the CARES Act provides nearly $1 trillion to rescuing America’s employers. Nearly half of these funds will be used by the Federal Reserve to provide low-interest loans to America’s large employers, and $350 billion has been allocated to the Small Business Administration’s Paycheck Protection Program (PPP). This program provides federally-insured loans that qualifying businesses can receive to pay their operating costs, employee wages, and health care benefits. For businesses that retain and rehire their employees, these loans convert into a grant. Both these measures are giving swift injections of money into business accounts to prevent as many business closures and layoffs as possible.⁵

That federal action was essential, but we still have too many businesses that are at risk of closing their doors forever. As Congress considers the next aid package, it needs to act on a massive scale. We need a Coronavirus Lifeline to American employers that keeps small businesses afloat and provides smart relief for large employers to keep people on payroll and poised to restart. Here’s how to do that:

1. Invest $1 trillion in small businesses through an expanded Paycheck Protection Program.
2. Protect vulnerable local businesses with a new federally-insured microloan program.
3. Help diverse entrepreneurs and underrepresented small businesses with billions in equity capital.
4. Remove the already harmful barriers to trade.
5. Keep America’s large employers afloat.
6. Help local communities save local employers.

1. Invest $1 trillion in small businesses through an expanded Paycheck Protection Program.

As part of the CARES Act, the federal government injected $350 billion into the economy specifically to help small businesses through the Paycheck Protection Program (PPP) run by the Small Business Administration (SBA).⁶This program gives qualifying businesses low-interest (1.0%) loans so that they can keep paying their bills and employing their staff to weather this storm. Businesses that retain or rehire their workforce are not required to repay their loans. Consequently, for businesses that keep their employees, this money is a grant, not a loan. While the program is a critical lifeline for businesses to keep the lights on, there are already widespread reports that it will be widely over-subscribed and certain small businesses won’t be eligible, such as those funded by venture capital firms.

We must ensure no small business is left behind in this crisis. Congress should immediately invest $1 trillion in an expanded Payroll Protection Program. As long as small businesses need financial relief, there should be resources available to them. As part of this expansion, Congress should consider expanding PPP loans to cover a bigger portion of operating costs to give small businesses added resources to keep the lights on and rent payments current. And the program should also be expanded to all small businesses that certify they need help in this crisis.

2. Protect vulnerable local businesses with a new federally-insured microloan program.

In the decade following the Great Recession, more than half of new businesses were started by minorities. Despite this, minority businesses are still underrepresented in the US economy. While minorities make up 32% of our population, they own under 20% of our businesses.⁷We cannot let the gains made in the past decade be undermined by COVID-19’s economic impact. Many small businesses also need a separate lifeline that helps them with microloans—small $5,000 to $25,000 loans to help them operate from week to week.

To further help small businesses, Congress should establish a separate lending program that disburses federally-insured microloans to banks for businesses with fewer than 50 employees. These funds should be prioritized for industries highly impacted by COVID-19, such as restaurants and retail stores, and it should prioritize ensuring that minorities and women-owned businesses will not go under.  

Rep. Maxine Waters (D-CA) has already drafted a plan to make funds available to small businesses, with an emphasis on protecting businesses in low-income communities.⁸Rep. Waters suggests utilizing CDFI funds, as we did under the American Recovery and Reinvestment Act 0f 2009, to quickly “deploy resources to vulnerable populations and impacted small businesses.” To expedite small businesses’ access to funds there will be no matching requirements for businesses seeking financial relief. This lending program, as part of the CDFI, will grant federally-insured small loans, capping out at $25,000, to small locally-owned businesses.

3. Help diverse entrepreneurs and underrepresented small businesses with billions in equity capital.

Lending is not the only mechanism for small businesses to receive capital. Startups across the country are used to trading equity in a company for financial help to grow and hire. Yet, even before our current crisis, equity capital was too concentrated. Four cities in the United States received 80% of venture capital investment, leaving little for everyone else. And women and communities of color are overlooked by traditional venture capital funds. In 2016, just 15% of all businesses receiving venture capital were women-owned, 8% were Hispanic-owned, and 3% were Black-owned.⁹

For economic recovery to take hold everywhere, we need a new plan: a massive federal infusion of funding to spread equity capital to entrepreneurs and small businesses everywhere. Sen. Amy Klobuchar (D-MN) and Rep. Dean Phillips (D-MN) have just such a plan, the New Business Preservation Act. Administered by the Treasury Department, this bill will allocate $2 billion in federal funds to states to finance public-private equity funds. These equity funds will stimulate private investment in young startups across the country. Given the preexisting challenges of access to capital, the bill will expand innovation opportunity to more geographic areas and to more diverse entrepreneurs. Eventually this program can become self-sustaining, with any returns on investment being reinvested in future years. Policymakers can take the Klobuchar/Phillips bill and even go further—ensuring millions can benefit for years to come.¹⁰

Paralleling that effort, Sens. Gary Peters (D-MI), Debbie Stabenow (D-MI), Jeanne Shaheen (D-NH), and Maggie Hassan (D-NH) released the Small Business Access to Capital Act, a full reauthorization and funding increase of The Small State Business Credit Initiative.¹¹Just like the Klobuchar/Phillips legislation, it would get more essential capital to more people in more places and should be a priority for this Congress.

4. Remove the already harmful barriers to trade.

To keep the economy moving, we need to ensure that goods can cheaply and quickly move across borders. Some of our most highly-impacted industries rely on trade, and tariffs are a cost they can’t currently afford. For instance, retail trade, an industry highly impacted by COVID-19, accounts for 5.5% of national GDP.¹²Tariffs create an undue cost burden on these businesses as they are struggling to keep their doors open. The Tax Foundation built a model to assess the impact of Trump’s escalating tariffs and found that Trump’s tariffs have totaled nearly $80 billion. They have cost the US economy 180,000 jobs and $59 billion in long-term real GDP.¹³Even President Trump acknowledged the unnecessary cost burden imposed by his tariffs and has agreed to suspend payments on tariffs for the next 90 days.

This is insufficient. We need to remove the Section 232 tariffs on steel and aluminum and the Section 310 tariffs on Chinese goods. In addition to removing these tariffs, we should also consider placing tariff exemptions on medical supplies, essential goods and services, and goods whose supply chains are impacted by COVID-19.

5. Keep America’s large employers afloat.

The CARES Act set aside over $500 billion to ensure that America’s medium and large employers keep the doors open, retain their workforce, and continue to contribute to our national GDP. The Treasury will use most of these funds as a backstop to the Federal Reserve who will be providing trillions in loans for businesses.¹⁴But half of the companies that borrow through the corporate bond market have sub-investor grade credit—thereby making them currently ineligible for Federal Reserve loans.¹⁵Many other corporations are running the risk of losing their investment-grade status due to the swift economic downturn in the wake of COVID-19. Further, allowing these companies to become insolvent will have ripple effects harming American workers, consumers, and the economy at large.

Large employers in America have nearly 52 million people on their payroll here at home.¹⁶We need to ensure our large employers have financial support during this crisis, and we can see this happens while also protecting the federal government and taxpayers. One way to do this is for the Treasury to receive equity in companies it directly supports, like the airlines, as a condition for federal financial help. The US Treasury has a number of options to do this. They can receive a warrant, which is a financial security that gives the Treasury the option to buy stock in the company at a later date with a currently set price. They could demand an equity stake, which is an outright transfer of stock at the current market price. Or they could purchase a corporate bond, in which case the US Treasury is an investor in the company and receives regular interest payments to recoup funds provided.

Government and Federal Reserve financing should be granted to publicly-traded companies whose investment-grade credit status has been downgraded in 2020. That said, the Federal Reserve should not give a hall-pass to companies that have previously amassed irresponsible levels of debt through “junk bonds.” Companies with longstanding ledgers of bad debt should not be eligible.

In the coming months, more work will need to be done to establish a regulatory playbook for assessing how to protect industries in a manner that holds companies accountable and prevents the misuse of government funds. For now, tying equity to direct government financing is a good way to ensure that these vital companies with sub-investor grade credit will retain their workers and keep contributing to our economy.

6. Help local communities save local employers.

Currently, states have received at least $1.25 billion apiece in short-term aid for unanticipated expenses as a result of the COVID-19 crisis.¹⁷In addition to more needed short-term aid, medium and long-term aid should exist and be available for economic recovery. States and cities know their local economies and employers best—they should be given the resources to put that knowledge to use.

State and city governments should be able to apply for grants that provide economic relief to workers and small businesses within their state for economic recovery. The federal government, through the Departments of Treasury and Commerce, should set up a pool of money starting at $50 billion for specific projects and rescue operations for local employers. States and cities should consider benchmarks for any federal grant such as employees retained, businesses saved, and a strategy to empower women, minority, and veteran-owned businesses.

Conclusion

There needs to be a fundamental rethink about the relationship between American employers, workers, and government in a 21st-century economy. American businesses need support to be able to compete on a global scale. But our workers also need far more support and a much bigger piece of the economic pie than what they are currently getting.

We must get that right, and we will get that right. But right now, America is sick. And employers throughout the country are at risk of closing and never turning the lights back on. As Congress considers the next aid package, it needs to act on a massive scale. We need a Coronavirus Lifeline to American employers that keeps small businesses afloat and provides smart relief for large employers to keep people on payroll and poised to restart.