The CARES Act was praised for approving $350 billion to assist small businesses. The American Enterprise Institute’s Michael Strain has a piece that explains why this program is an important effort.
Unfortunately, with history as our guide, we should fear massive headaches for small businesses trying to access these loans. One reason is that the loans will be administered through by the Small Business Administration, an agency renowned for its failure to perform during disasters. While they will be 7a loans as opposed to disaster loans, there is also no evidence that the agency ever gets reformed between disasters in a way that makes things better the next time around.
The bill provides loans for businesses with fewer than 500 employees. That, according to SBA, represents 99.9 percent of all businesses in America, 81 percent of them without employees. That’s a lot of firms. Strain and Columbia University’s Glenn Hubbard estimate that the demand for these small business loans could reach $1.2 trillion.
SBA will have to handle an exponentially large number of requests than it normally does. Politico writes:
It’s unclear whether the Small Business Administration’s modest bureaucracy can get it going fast enough to save firms from the brink, or administer 13 times its annual deal flow in just two months with any effectiveness. Its track record administering emergency loans, in fact, has at times been shockingly bad.
It doesn’t help that many big businesses will also be competing for these SBA loans too, thanks to an exception to the 500-employee limit for hotel and restaurant chains.
Alex Rampell (h/t to Tyler Cowen) over at Andreessen Horowitz, adds:
. . . the last mile of identifying, adjudicating, and disbursing assistance without a sea of fraud is a new challenge, one that the government is wholly unprepared for, and for which technology is the needed answer. Now. . . .
The stimulus bill is going to direct funds through the Small Business Administration, but the SBA doesn’t really make loans. It simply guarantees loans made by banks. For many banks, the way you apply for an SBA 7a loan is to prepare tons of documents, go to your local branch, and then wait as long as 90 days. Wells Fargo has a fancy website, but for SBA loans it directs you to your local branch for a process that takes dozens of hours of form collections and physical signatures followed by months of waiting. Many private lenders approve loans in hours, so the SBA process has historically been an adverse selection lending trap.
SBA is not the only ossified bureaucracy incapable of generating a rapid response. Now is not the time to ignore this reality. As Cowen writes, “We need to be honest with ourselves about who is capable of generating rapid response and who is not.” That’s why we should look for innovative ideas to handle this rather than fall back on what is around even though we know it doesn’t work well. Rampell has a suggestion worth listening to about how financial technology can help.
By the way, it is worth mentioning that the 500-employee limit may also cause some firms to fire employees to fit under the limit, as University of Chicago economist Casey Mulligan explains here.
Also, tech difficulties are making it hard for Treasury to send CARES Act checks to millions of Americans.