The Paycheck Protection Program Is Failing
Small businesses such as ours won’t survive without a lot more help.
It was a punch in the mouth when we had to close the doors of our three New York City restaurants and lay off 25 employees. We had been searching frantically for a way to stay open. We had kept up with the news, read press releases from New York Governor Andrew Cuomo and New York City Mayor Bill de Blasio, and talked on the phone with our insurance agent and our lawyers. Ultimately, we had to inform our employees that they would be out of work until further notice.
Our last service was on Sunday, March 15. Sales that weekend had dipped by 25 percent. Before the mandate to end dine-in operations came from city officials, we saw the writing on the wall: With the increasing number of COVID-19 cases in the city, sales would continue to decline. We would not be able to make payroll the following week.
We urged our employees to immediately file for unemployment, as we expected the Department of Labor systems to be overwhelmed—which they were, to a staggering degree. Luckily, most of our staff got through early and has been receiving unemployment for the past two to three weeks.
What about pickup and delivery? Sure, easy to say, but we would have to bring in roughly $30,000 in sales a week for one location just to meet expenses. That’s about 650 people a week ordering delivery or pickup at an average of $45 a person. That’s after Caviar or Grubhub takes its 30 percent cut. Near impossible. The numbers don’t lie.
Since locking the doors and freezing our auto-debits, we have been in survival mode. We started a GoFundMe campaign for our staff and raised enough money to pay health-insurance premiums for April. Our loyal supporters continue to buy gift cards. We launched an online wine-class series to stay connected with our guests and create a revenue stream, albeit a minor one ($10 a class). Those funds will help us pay our vendors and turn the lights on when we can safely reopen.
But these emergency measures are unsustainable without assistance from the federal and local government. And so far, that assistance has been impractical, insufficient, or both.
Last month, de Blasio announced a $75,000 interest-free loan available to local businesses that could prove a 25 percent decrease in sales over a two-month period in comparison with sales in the same two months in 2019. Only recently did we meet the threshold, since our drop-off was so sudden, starting in the second week of March, unlike restaurants in Chinatown, for instance, that closed in February. As of last week, applications were closed. Our attorneys think they can push ours through since they created an account in time, but the money is presumed to have dried up.
The Economic Injury Disaster Loan program, run through the Small Business Administration, requires a personal guarantor for the amount of money we would need. We are not in a position to guarantee hundreds of thousands of dollars. Especially without any idea of when we will be able to reopen or what business will look like. Will the hours of operation be limited? Occupancy reduced? Our previous sales projections are now moot.
And business-interruption insurance? Most restaurants don’t even pay for this. We do, but our broker informed us that our policy excludes closures due to a virus. Such is the case for most policyholders in New York State. A handful of well-known restaurateurs are uniting to fight their insurance carriers. So will we, but we aren’t holding our breath.
In late March, when Congress passed the $2 trillion relief package, we thought one component in particular, the Paycheck Protection Program (PPP), would finally provide a real lifeline. Here’s why it doesn’t.
The premise of PPP is that the federal government will loan you up to two and a half times your monthly payroll through private lenders, and the loan will be forgiven as long as 75 percent of those funds are allocated to retaining and paying employees. The other 25 percent can be used on rent and utilities.
After the bill passed, the Small Business Administration, which is in charge of the PPP, added a new clause that requires 75 percent of the funds to be used for payroll whether you are seeking forgiveness or not. It also requires you to either keep or rehire all your staff. The kicker: Those payroll funds must be used within eight weeks from the time the loan is distributed, which could happen as early as this week.
A serious flaw in this plan is that hourly employees might be disincentivized to return to work, as many of them will earn more under the expanded unemployment benefits than what they usually make. If some hourly employees decide that unemployment insurance is a better deal, businesses can remain eligible for the PPP only by hiring replacements—a fantasy staff for a ghost establishment.
While it’s admirable for government officials to think of employees first, they are forgetting a crucial element of employment: the business itself. How is it beneficial to protect the payroll of the employees if the business isn’t protected?
Health experts don’t expect a widespread reopening of the economy until late summer at the earliest. Even then, restaurants and bars won’t be able to operate as they did in the past. Who knows what business will even look like? Social distancing will continue into the fall or even later, which means that seat capacity will be cut in half and revenue overall will decrease by the same proportion.
The PPP is a Band-Aid for a wound that needs surgery. What happens after the eight weeks are up and the PPP funds have been used to pay employees but sales haven’t returned to a healthy level? Businesses will have no other choice but to significantly cut employees’ hours or entirely terminate them to stay afloat. Restaurants won’t have enough sales to justify the staff the government wants them to protect.
One unintended consequence we’ve already noticed is that landlords are pushing back on rent negotiations as if the PPP is a miracle cure for all of a restaurant’s financial obligations. In fact, most people who use the PPP won’t have money left over to apply to rent.
All these issues considered, many in the hospitality industry will decide they can’t take the risk of a PPP loan. Business owners will worry that they’ll do something wrong, and that they’ll be on the hook for a large loan that will need to be paid back in two years. Yes, a 1 percent interest rate is favorable, but a monthly payment for thousands of dollars certainly isn’t. Most restaurants lose money every month or barely break even. These difficulties may explain why the accommodation- and food-services sector is so far getting a relatively small share of the PPP pie: just more than 9 percent of total loans. (Almost 14 percent has gone to construction.)
Recovery won’t be a sprint but a long and grueling marathon. Many businesses won’t survive at all, and are already closing or filing for bankruptcy.
Congress has to act more swiftly. It needs to revise the PPP to extend over a longer period. It needs to fund business operating accounts in addition to payroll. It needs to forgive sales tax owed since the shutdown and for the foreseeable future. It needs to require insurance companies to carry their portion of the burden. It needs to prepare another bill to anticipate businesses not reopening in two months and the virus resurfacing in the fall.
We have done what we can to survive the past month. Now Congress needs to do its part to make sure that restaurants and the jobs they support will exist when this pandemic nightmare ends.