Everything Is Harder For Small Businesses: “When disaster hits, it takes three to four years for a small business to stabilize—and that’s when all this is going to hit the fan.”

That’s Janice Jucker, president and co-owner of Three Brothers Bakery in Houston. She’s also vice-chair of the Goldman Sachs 10,000 Small Businesses Voices National Leadership Council, which engages policymakers on issues facing small businesses. She provided input into a recent Bipartisan Policy Center report on access to credit. I wanted to talk to her further about something she highlighted for that report: the subordination process for disaster loans from the Small Business Administration (SBA).

Jucker is like many small business owners and entrepreneurs I’ve met and gotten to know. She’s incredibly proud of her company and excited to tell others about it. She’s doggedly determined to fight for her company. And she’s devoted to her people: “paying our team is the most important thing we do.”

Yet she’s unlike many other small business owners and entrepreneurs in at least one respect. Jucker is incredibly tuned into public policy and how it affects her business—and she gets deeply engaged in public policy. At the moment, both because of her company’s experience and as part of her work with 10,000 Small Businesses Voices, she’s focused on SBA disaster loans.

Not Standing EIDL

The SBA has long-running disaster assistance programs through efforts such as economic injury disaster loans (EIDLs). These got a lot of attention during the COVID-19 pandemic, but many small businesses benefitted from them in previous years, too. Jucker and her bakery have had several disaster experiences involving floods and hurricanes. She received an SBA disaster loan after Hurricane Ike in 2008 and paid it back over five years.

Hurricane Harvey, in 2017, was “a totally different animal.” The bakery closed for 17 days, meaning a complete cessation of revenue. Business interruption coverage doesn’t typically cover floods, so an insurance payout wasn’t available. SBA disaster loans again helped fill the gap, but they still carry limitations. EIDL funds can only be used for “working capital and normal expenses” and this generally doesn’t include paying employees. That, says Jucker, “is one thing I think they should change.”

In the years prior to COVID, the SBA issued on average about 1,500 EIDLs each year. Heading into 2020, then, there were thousands of small businesses carrying these disaster loans. The pandemic induced a “dramatic revenue decrease” for Three Brothers Bakery and millions of other small businesses.

The CARES Act, passed by Congress in March 2020, introduced a deferment period for pre-COVID disaster loans. Small businesses like Jucker’s could pause repayment. Like many policies, however, this was a double-edged sword.

Deferment, while helpful in some ways, “can make things harder” because interest continues to accrue. Additionally, for small businesses seeking credit—through, for example, a bank loan—the SBA has priority liens on EIDLs, which means other lenders need to seek subordination from the agency. For pre-COVID EIDLs, the loan must be paid down to less than 50% before such subordination can occur.

This strikes Jucker as precisely the opposite of what government should be doing to help small businesses: “why are you making it harder for people who are struggling and want to grow?”

There is currently a bipartisan bill to address this immediate challenge identified by Jucker: the Loan Interest Forgiveness for Taxpayers Under a Pandemic Act, the LIFT UP Act. Originally introduced in 2020, it was included in the revised HEROES Act that passed the House, but it went no farther. It was reintroduced this past February during the 117th Congress. It would provide the same debt relief to pre-COVID SBA disaster loans as was provided to SBA 504 and 7(a) loans during the pandemic. This would put disaster loans on equal footing and ensure that small businesses still recovering from past disasters aren’t put at further disadvantage.

“What Are They Doing to Get Ready for This Onslaught?”

There is a bigger picture, one that Jucker wants everyone to see. This isn’t about incompetence or ill will at the SBA. Jucker is quick to praise the agency: “the people working there really care about you.” This is more about capacity and the mountain of loans the agency has to work through.

Recall the statistic above: on average, about 1,500 EIDLs were disbursed each year prior to COVID. And during COVID? 3.5 million. In other words, the SBA disbursed EIDLs at a volume it would have taken over 2,000 years to reach at its pre-pandemic pace.

The COVID EIDLs do not suffer from the defect identified by Jucker: the 50% pay-down requirement for subordination. There is a one-page form small businesses can fill out. That’s a good thing. But it still takes 30-60 days to process those forms, and the overburdened agency is inundated with them.

Jucker says one person she spoke to at SBA told her that this year they’ve already processed three times as many EIDL subordination requests as in a normal year. That means small businesses are seeking credit from private sources. This workflow “will grow exponentially” and tax the agency’s resources for years to come.

The real kicker is what this means for the small businesses: “this will stall recovery for many.” Small businesses that received EIDL assistance and are seeking new sources of credit in order to expand and hire will run into this issue. A 60-day processing period may not sound like a burden, but small businesses will “lose out on additional capital and that means they’re not hiring and paying people.”

EIDLing Through the Years

We’ve all dealt with personal emergencies, big and small. There are immediate actions you take to stop whatever the crisis is. There’s clean-up after the crisis abates. And then, inevitably, there are unintended effects from those actions later on.

Commendably, Congress acted with remarkable dispatch in setting up the Paycheck Protection Program (PPP) and putting more money into EIDLs. Those were the frantic emergency actions. The loan forgiveness and one-page subordination processes are the clean up. Already, according to Jucker and others, we’re running into some of the unintended side effects.

This is inherent in policymaking of any kind: tradeoffs, not neatly-tied solutions. For Jucker and many other small business owners struggling to recover from disaster, such tradeoffs can mean unintended obstacles to growth.

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