I am not a loan specialist or a banker. I am not an economist. I have no expertise in the arena into which this article delves. Other than the facts contained in this article, I have no special insights. I’m an investor seeking to uncover every stone when conducting due diligence.
I consider myself a glass-half-full kind of guy in terms of my outlook regarding this crisis. When the market began its headlong journey south, I took the losses in stride. I began buying a wide variety of companies late last week. Last night, I stumbled onto information that now quells my ardor for additional investments.
My investigation leads me to believe the government has no means to process the enormous number of loans that are to be directed to small businesses. Furthermore, there are reasons to believe that, even if the loans are processed expeditiously, the affected businesses may not receive the funds in time to undo the damage created by the enforced business closures.
I contend that the funds must make their way to the affected businesses within a short time frame. If that does not occur, many small businesses are doomed. And without a revival of those small businesses, the economy and the stock market are in for an extended period of malaise.
The Coronavirus Aid Bill
The Coronavirus Aid Bill has $377 billion budgeted for small businesses. I would like to voice a concern that I believe those in the investment community have not pondered. I will add that this is in no way meant to be a political statement.
The Coronavirus Aid Bill is designed in part to support small businesses and prevent a cascade effect that could cripple the economy. I am concerned there is no mechanism in place to provide the intervention the bill is designed to implement.
Small Business Administration (SBA) disaster relief loans are generally approved within 21 days; however, following Hurricane Katrina, SBA loans were processed in 74 days, on average. Furthermore, nine months after the storm wreaked havoc on the Gulf Coast, more than half of the businesses that had loans approved had not received funds or had received only partial funding.
Read this excerpt from the US Small Business Administration, Office of the Inspector General report:
In 2005, Gulf Coast Hurricanes Katrina, Rita and Wilma caused more than $118 billion in estimated property damage. As the federal government’s primary lender to non-agricultural victims of disasters, the Small Business Administration (SBA) approved more than 148,700 disaster loans totaling $9.7 billion to individuals and businesses that suffered losses from the Gulf Coast hurricanes. However, as of May 27, 2006, SBA had only disbursed $1.4 billion, or 14 percent of the loans approved. Because rebuilding efforts had progressed slowly, questions arose about whether SBA’s disbursement process was too slow. At the start of our audit, SBA workload statistics showed that 68,233 loans had been approved but not closed; 8,336 loans had been closed but not disbursed; and 36,180 loans had been partially or fully disbursed.
As noted above, the $9.7 billion in loans associated with that disaster pales in comparison to the $377 billion earmarked for the Coronavirus Aid Bill. I must question if it is possible to administer the sums in question, considering the SBA’s apparent failure during the Katrina disaster.
In a typical year, the SBA averages 50,000 7(A) loans totaling $30 billion. In the US, there are approximately 7 million organizations fitting the definition of small and mid-sized businesses. Now, consider the aid bill has 10X as much money, which will (hopefully) be disbursed to a much larger number of businesses.
Over the last twelve months, only 14% of all banks, non-bank lenders and credit unions processed SBA loans. Where is the expertise and infrastructure needed for this gargantuan task?
During the [financial crisis] recession I watched businesses doing all the right things to preserve their business unable to get loans.
Marilyn Landis, expert on SBA lending
It is my opinion the SBA loans are a critical component in the effort to mitigate economic damage wrought by COVID-19. If the funds are not disbursed in a timely manner and to the affected businesses, what will be the result?
According to a study by the JPMorgan Chase Institute, only half of small businesses have the cash to survive 27 days without revenues.
Source: JPMorgan Chase Institute via Business Insider
Small Businesses’ Contribution To The Economy
According to the SBA, small businesses constitute 43.5% of US GDP. The most recent data available is from 2014 when small business GDP totaled $5.9 trillion. Undoubtedly, it has grown substantially in the last half decade.
A study conducted by the US Census Bureau in 2010 states small businesses contributed 64% of net new private-sector jobs and constituted nearly 50% of private-sector employment. During the recovery from the last recession, from mid 2009 to 2011, small businesses provided 67% of the net new jobs created in the US.
I question whether the funds earmarked by the aid bill can be disbursed in time to prevent widespread bankruptcies among small businesses and prevent the resultant job losses. The US economy cannot rebound if small businesses are decimated. In turn, the stock market will not see new, lasting highs, without a robust economy.
Until I see America going back to work, I’m not adding new investments. I will average down on a small number of positions that I view as defensive. I need greater clarity before I invest new funds.
I caution investors who are rushing back into the market at this juncture. I believe we need to know the funds earmarked for aid to small businesses will be provided in an expeditious manner and to the affected businesses. Without that knowledge, we face the possibility of investing in a market that could be in the doldrums, or worse, for an extended period.
I welcome readers’ thoughts on the subject, as I question whether we can have a prompt recovery from this crisis without an effective response. I hope my concerns are misplaced, but I am beginning to fear the worst in regards to an adequate response from government entities.
Am I unduly alarmed? I certainly hope so. What better forum than Seeking Alpha to debate this matter.
I wish you well during these interesting times.
One Last Word
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no formal training in investing. All articles are my personal perspective on a given prospective investment and should not be considered as investment advice. Due diligence should be exercised and readers should engage in additional research and analysis before making their own investment decision. All relevant risks are not covered in this article. Readers should consider their own unique investment profile and consider seeking advice from an investment professional before making an investment decision.