Small Businesses Got Emergency Loans, but Not What They Expected

A dress on a mannequin at the office of Caroline Keefer, a clothing designer, in Los Angeles on July 18, 2020. (Nolwen Cifuentes/The New York Times)
A dress on a mannequin at the office of Caroline Keefer, a clothing designer, in Los Angeles on July 18, 2020. (Nolwen Cifuentes/The New York Times)

For nearly 70 years, the Small Business Administration’s disaster relief program has helped companies recover from catastrophes including wildfires, hurricanes and earthquakes. But it has never faced anything like the coronavirus crisis.

Besieged by more than 8 million applicants — and operating in the shadow of the hastily assembled Paycheck Protection Program — the disaster relief effort has given out more money in the past few months than it had in its entire history.

But the demand has created a problem that is hobbling hundreds of thousands of applicants: The agency, afraid of running out of cash, capped its coronavirus loans at a fraction of what companies can normally borrow — even though the program has handed out less than half the $360 billion it can lend.

Caroline Keefer, a clothing designer in Los Angeles, had expected to qualify for a loan of at least $500,000 based on a complex formula devised by the agency. But when her loan offer arrived in May, it was for $150,000 — the ceiling the SBA quietly put in place that month. Qualified companies can usually take loans of up to $2 million.

“Without the extra capital, it will be very difficult for us to survive,” she wrote in a direct appeal to Jovita Carranza, the agency’s administrator, and James Rivera, head of the agency’s disaster office.

The limit has crimped Keefer’s efforts to salvage a business that did $2 million in sales last year. Her company, River + Sky, sells directly to merchants like boutiques, department stores and hotel spa shops. In the space of just a few days in March, as virus shutdown orders cascaded throughout the country, nearly $700,000 in orders — all of her spring and summer season — evaporated. She was left with a pile of unpaid bills for inventory that she suddenly had no place to sell.

Six days after she wrote to the agency, representatives there acknowledged that she had run up against the cap. Officials “do not anticipate increasing loans above this amount,” the representatives said in an email.

Keefer is grateful for the help she received but irked by what she sees as an arbitrary, poorly explained limit that was put in place after other businesses got bigger loans early in the crisis. Data released by the agency last month showed that it had made at least 20,000 disaster relief loans for more than $150,000. Its largest was for $900,000 in early April.

Nearly 400,000 businesses have run into the $150,000 limit, according to the agency’s data. SBA representatives declined to comment on the cap or why it was imposed.

The cap has been just one problem with the disaster program, officially called the Economic Injury Disaster Loan program. Applicants faced long delays, confusing procedures and communication lapses. And Tuesday, the agency’s internal watchdog said that hundreds of millions of dollars handed out through the program may have been fraudulently obtained.

Application hurdles, changing requirements and reports of fraud also plagued the Paycheck Protection Program, the short-term relief effort created by the CARES Act that has handed out $521 billion in forgivable loans to cover payroll and other costs.

The disaster loan program, a core part of the agency’s operations since it was founded in 1953, is more flexible. The program offers companies with 500 or fewer employees low-interest loans for terms of up to 30 years, which can be used for nearly any business purpose, including buying protective equipment and keeping up on debt payments.

Since March, it has lent out $164 billion in EIDL (pronounced “idle”) loans, more than twice what it previously distributed in its entire existence, to 3 million companies. Nearly $200 billion is currently unused.

More than 2 million other businesses have been offered loans but have not yet accepted them, so much of the unused money could still be lent out. But the agency’s ability to forecast how much money it will distribute may have been complicated by a decision Congress made in March to speed aid.

As the coronavirus pandemic took hold, Congress increased its allocations to the agency, enough to support $360 billion in loans. But it also set aside another pool of money for the SBA to distribute as grants to those who applied to the disaster loan program, whether they received a loan or not. The $20 billion for those grants — up to $10,000 per applicant — ran out last month.

Any business that wanted the grant was part of the applicant pool, even if it had no intention of taking a loan. (Applicants have up to 60 days to make a decision about taking the loan.)

It is not clear what role that uncertainty played in capping loan amounts, and agency officials have offered little clarity to lawmakers about the loan limit.

During a House hearing last month, Carranza was pressed by representatives from both parties about why the agency has not lifted the $150,000 limit. She said she would “continue assessing it.”

Two senators — John Cornyn, R-Texas, and Jacky Rosen, D-Nev. — introduced legislation July 21 that would provide the agency with billions more for its disaster loan program and prohibit it from capping loans at less than $2 million.

Rosen said the agency had not explained its “arbitrary” caps. The agency has “refused to publicly request more financial support for EIDL, despite small businesses across the country struggling to cover their operating costs,” she said.

The cap has left many borrowers with loans that they fear will not be enough to keep their businesses afloat.

Nicholas Johnson runs Su Casa, a furniture retailer with four stores in Maryland and Delaware. After all his shops were shuttered in March, he calculated that he would need around $500,000 to keep the company alive.

He got $157,000 in April through the Paycheck Protection Program, which he did not tap into until his stores started reopening in late May and his staff members began to return. Based on his operating costs and revenue, he expected to qualify for a $380,000 disaster loan.

Receiving an offer in May for just $150,000 — less than half of what he had anticipated — was “like a punch in the gut,” he said. He spent many sleepless nights, he said, wondering how he would fill his projected $200,000 shortfall.

So far, Johnson is managing to survive on higher-than-expected sales from his reopened stores, but he is anticipating rough months ahead. “My supply chains are all but broken,” he said. “At some point, revenue will taper off again because I won’t have anything to sell. I’m trying to build a buffer, because I know there’s more pain to come.”

For some, the cap is a minor impediment: Joy Parisi, owner of Paragraph, a writers space with two locations in New York City, said her disaster loan was enough to give her breathing room to chip away at unpaid bills and overdue rent.

But others would borrow more from the program if they could. Keefer also received a $48,000 PPP loan, which she is using to pay two employees, but it did not come close to closing the gap.

With her wholesale business in tatters, she pivoted to consumer sales. The disaster loan paid off her most urgent bills and allowed her to hire an agency to improve her retail website. Then she started buying ads on Facebook and Instagram.

The strategy shift has helped: In June, she more than doubled what she sold directly in all of last year. But that is still only a sliver of what she would usually make. And now Keefer needs cash to start manufacturing her fall and winter merchandise.

Seeing no other options, she took out an expensive loan from an online lender. It feels, she said, like a payday loan: “You have to start paying it back immediately, and it’s like a trap — you end up borrowing more just to keep up.”

The cash crunch has forced her to manufacture her clothing in smaller, more expensive batches; limit her marketing budget; and hold off on rehiring more workers. If she could borrow more money from the government, she said, she would immediately spend it on expanding her company — exactly the kind of economic activity the government wants to encourage.

“The EIDL loan is perfect; it’s exactly what we need to steady our ship,” Keefer said. “We just need more of it.”

This article originally appeared in The New York Times.

© 2020 The New York Times Company

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