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WashingtonWise Investor: Episode 17


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The Road to Recovery for Small Business

As the coronavirus continues to take a heavy toll on small businesses, we are reminded just how important they are to the economy—both local and national—and why it is important for the government to help them survive.

In this episode of WashingtonWise Investor, Mike Townsend is joined by Marianne Hayes, senior strategist in Schwab’s Wealth Strategies group, to discuss the impact of the coronavirus on small businesses and the 120 million people they employ. Mike and Marianne dive into the government’s efforts to support small businesses during the closures and consider how well they are working, as well as what the small-business segment of the economy may look like in the future.

Mike also covers the next round of stimulus—the CARES Act 2—that is being debated in Congress. And he addresses 2020 Election challenges in the era of stay-at-home orders.

WashingtonWise Investor is an original podcast from Charles Schwab. If you enjoy the show, please leave a rating or review on Apple Podcasts.

Click to show the transcript

MIKE TOWNSEND: You know what I miss the most about my old life, my pre-coronavirus life?

I miss the food trucks that gather about three blocks up the street from my office every day, offering a rotating series of lunch options from every cuisine imaginable.

I miss the wine store near my house whose proprietor has never missed on a recommendation for a good bottle for any occasion.

I miss the independent toy store that’s next to the wine store. When my three children were young, going in there was like being inside a dream for them, the place crammed from floor to ceiling with everything they could imagine.

I miss the little music store where I get my son’s books for his piano lessons.

And I miss the Italian restaurant that is about the only place my entire family of five is enthusiastic about going to. We’re trying to support them by ordering carryout from their limited menu, but let’s be honest—while the food is just as good, it’s just not quite the same.

These are some of the small businesses that are the lifeblood of every small town and large city in America. And I worry that they may never come back.

Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to help investors sift through the avalanche of news and information to better understand how this unprecedented crisis is affecting the markets.

Whether you are a small business owner, someone who works at a small business, or just someone who has a list of favorite small businesses like mine, we are all keenly aware of just how devastating this pandemic has been for that part of the economy. This week, we’re going to explore the impact of the coronavirus pandemic on small businesses—and what’s being done to try to help. We’ll look at the federal government’s desperate effort to help these businesses, whether that’s working or not working, and whether it will matter in the end.

But first, let’s do a quick check of what else is making news.

Small business is at the heart of a stalemate on Capitol Hill this week. The CARES Act, the massive $2.2 trillion aid bill that was approved at the end of March, provided $350 billion in funding for a new small-business loan program. But it became clear within days of the program’s launch that the volume of loans would quickly drain those coffers. Senate Majority Leader Mitch McConnell last week introduced a stand-alone bill to add $250 billion to the program, hoping to win unanimous support in Congress and approve it at the end of last week without having lawmakers travel back to Washington for a debate and a vote.

But it wasn’t to be. While Democrats support the additional aid for small business, they also asked for an additional $150 billion for states, $100 billion for hospitals, and an increase in support for the SNAP program, the food stamps program. Each side objected to the other’s proposal, and the two parties have been in a stand-off.

Efforts to break the stalemate are ongoing, with the hope that it can be resolved before the end of this week or early next week. I think it’s likely that a deal will be reached—both sides understand that the small-business program needs to be replenished as quickly as possible.

Meanwhile, at the same time, Congressional staff is hard at work drafting the so-called “CARES 2” bill. That bill, which could carry a price tag of $1 trillion or more, would add additional funding to other aspects of the CARES Act. Among the ideas on the table are a second round of $1,200 payments to low- and middle-income taxpayers, even as the IRS announced earlier this week that the first round of payments are hitting taxpayers’ bank accounts now. Also likely to be included in the next big aid bill: a further extension of unemployment benefits; another round of aid to hospitals and other health care providers; a boost in funding for testing and vaccine research projects; and money to fill in the gaps of the CARES Act, getting support to businesses that were left out of the previous legislation. House Speaker Nancy Pelosi has said that she wants to vote on the CARES 2 bill by the end of April.

But the logistics of both the interim bill for small businesses and a CARES 2 bill are complicated. Both chambers of Congress were planning to return to Washington next week—but that timetable was postponed earlier this week. Congressional leaders are struggling to strike a balance between two competing goals: showing that Congress is at work for the American people on the one hand and modeling the stay-at-home orders that most Americans are currently experiencing across the country. If Congress returns to Washington, it would entail hundreds of lawmakers flying on airplanes and then gathering in the relatively cramped confines of the Capitol, putting 100 senators and 435 members, not to mention their staffs, at risk. Earlier this week, House and Senate leaders pushed back the return of their respective chambers until at least May 4, though each chamber left open the possibility of returning with 24 hours’ notice if circumstances necessitate it.

That means that the bills under consideration are likely to have to be passed by unanimous consent, which any single lawmaker can block. And at least one Republican in the House has already announced his intention to do so. As we saw with the first CARES Act, those procedural challenges can be overcome, but the situation underscores the challenge of legislating from afar.

Finally, an update on a quirky tax situation that the IRS just fixed. As you know, Tax Day, which is normally April 15, was moved this year to July 15 as a result of the pandemic. That means that no one needs to file their taxes this week—everyone can wait until July. And that includes people who owe quarterly estimated tax payments—the first quarter’s estimated tax payment would normally be due on April 15; now it too is due on July 15.

But here’s what was strange. The second quarter’s estimated tax payment was due on June 15. That meant that if you owed estimated taxes, your second payment for 2020 was due before your first payment was due.

Last week, the IRS fixed that—now, both the first and second quarter estimated tax payments are due on July 15. So if you are among the millions of taxpayers who pay estimated taxes, remember that you now have two payments due on July 15, but no payments due before that date.

On my Deeper Dive this week, I want to take a look at Washington’s efforts to help small businesses, which have been decimated by the pandemic and are fighting for survival. The Small Business Administration estimates that there are more than 30 million small businesses—defined as businesses with fewer than 500 employees—in the United States. About 22 million of those business are sole proprietorships, with the owner as the only employee. Nearly half of the nation’s workforce—about 120 million Americans—is employed by a small business. So it goes without saying that small businesses are a critical part of the economy.

Now the majority of those small businesses are temporarily closed—and many are in danger of being permanently closed.

Preventing that outcome is a key goal of the CARES Act, which Congress approved at the end of March. The massive rescue bill set aside $350 billion for small-business loans to help them weather this storm. But is it working? And is our small-business landscape changed forever?

To help us look at these and other questions, I’m joined today by Marianne Hayes, a senior strategist in Schwab’s Wealth Strategies group. Marianne is both an attorney and a certified public accountant who has spent many years helping small-business owners and their families navigate the complicated landscape of business ownership.

Well, thanks so much for joining me, Marianne.

MARIANNE HAYES: It’s great to be with you, Mike.

MIKE: Let’s begin with just an overview of what Washington is doing to try to support small businesses. Now, just to be clear, small businesses include all businesses—including nonprofits, veterans’ organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors—all businesses with 500 or fewer employees.

The CARES Act set up a program where small businesses that have been impacted by the crisis can get loans. So how does that work?

MARIANNE: There are two programs that may be available to small business—the Paycheck Protection Program, known as the PPP, and the Economic Injury Disaster Loan, or EIDL. Let’s talk about each of the programs and why a small business owner may choose one program over the other.

The first is the PPP, which authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during this crisis.

The PPP loans can be for up to two months of your average monthly payroll costs from the last year, plus an additional 25%. There is a $10 million cap on the loan.

The real benefit of the program is that loan amounts will be forgiven as long as the loan proceeds are used to cover payroll costs—and most mortgage interest, rent, and utility costs—over the 8-week period after the loan is made.

MIKE: Yes, that forgiveness is an important feature of the loan. The second program you mentioned, EIDL, is not a new one—it’s an emergency program that has been in used in the past for things like natural disasters, right?

MARIANNE: That’s right, Mike. Economic Injury Disaster Loans have been used in the past after events such as hurricanes.

The EIDL offers up to $2 million in working capital loans for business owners whose businesses have suffered economic injury as a result of the coronavirus.

These loans are based on the size and type of the business, and the loan proceeds can be used to pay fixed debts, payroll, accounts payable, and other bills.

The PPP and the EIDL are not mutually exclusive. However, a small business can’t double dip and use the proceeds from both loans to cover the same expenses. If a small business uses $1 million to pay salaries for employees, they cannot use money from the EIDL for those same salaries.

MIKE: So do businesses get the same interest rate? What are the terms?

MARIANNE: There are differences in interest rates, terms, and deferral between the two programs. Under the PPP, all businesses are treated the same.

The interest rate on the loan is 1%, and the term of the loan is for 2 years.

Loan payments will be deferred for six months.

As I mentioned a few minutes ago, amounts spent on certain items during the first 8 weeks after the loan is made may be eligible for forgiveness.

Interest rates on EIDL are the same for all borrowers and is 3.75%—unless the borrower is a non-profit, and that rate is 2.75%.

Loan terms may be for a period up to 30 years, though repayment terms will be determined based on each borrower’s ability to repay the loan.

Payments may be deferred for up to one year.

MIKE: As of Tuesday morning, just over 1 million loans had been made under the PPP—totaling more than $242 billion—which is a staggering amount. Yet it’s been a very frustrating process for business owners and banks alike. So what have been the stumbling blocks?

MARIANNE: Mike, right out of the gate, there were issues.

The SBA guidelines were not issued until right before application process was to go live on April 3.

This caused a delay for some banks.

Some banks had technical glitches at first.

One bank reached its cap on the amount of loans it could make under the program until the Fed eased that restriction. On April 5, two days after the go-live date, Wells Fargo released a statement saying that, due to overwhelming demand, it is no longer accepting applications for PPP loans. The Fed eased those restrictions on April 8.

And some banks are limiting applications to existing customers or prioritizing loan applications for existing customers.

Let me give you an example of just how overwhelmed banks have been. Lakewood, Colorado–based FirstBank reported on April 10 that it began accepting business applications for pandemic relief loans through the Paycheck Protection Program on April 6. Within 72 hours, the bank received more than 15,000 loan applications requesting more than $2 billion.

“To put that into context: In nearly three decades, FirstBank has processed less than a third of that amount ($600 million) in SBA loans,” FirstBank said in a statement released Friday. “To handle the demand, we pulled in hundreds of employees, who are working in split shifts, 24-hours a day, to process these requests.”

MIKE: That’s an incredible story, Marianne—and that’s just one bank. It really underscores how many small businesses are desperate for help.

As the government’s efforts begin to take effect, what do you think are the expectations for success? I mean, we know some businesses will fail.

MARIANNE: I think you are right, Mike. But there is no way to predict how many businesses will fail.

These PPP loans provide money to cover payroll for the 8-week period after the loan is made.

Right now, small-business owners are in a race to take advantage of the PPP loans because once the money is gone, the options are more limited for small businesses to help them survive the pandemic and keep employees on the payroll. As you mentioned earlier, Congress is trying to add more money to the pot—we think that will happen, but there will probably never be enough money to help every small business.

And we don’t know right now what happens if businesses are closed for a longer period. If this crisis goes into the summer, we need to figure out where the money will come from to support our small businesses once those PPP loan monies have been used up.

There are just so many questions, Mike, that we just don’t have the answer to yet.

MIKE: Well, Marianne, I want to follow up on those thoughts by asking you how you think the small-business landscape might change. As you noted, it’s likely that at least some small businesses won’t survive. So what types of business may be able to weather this storm? Will new entrepreneurs be jumping in to take up the slack?

MARIANNE: Absolutely. New players may enter the market. Small-business owners may restructure their businesses to take advantage of the post–Covid 19 world. Some companies will see an opportunity to merge with other similar businesses or with businesses in other industries to expand their reach and hedge against a downturn in one segment of the company.

New opportunities will be born out of this crisis. When it comes to survivors, companies of all sizes that retooled themselves to meet the needs of hospitals and health care workers during the crisis may continue to manufacture products to rebuild the national stockpile. Take Insul-Fab in Texas as an example. It makes products we don’t see, like insulation, foams, and adhesives. The company retooled a production line from making aerospace parts to making sanitary, medical-grade face shields during this crisis.

MIKE: That’s such a great point, Marianne. There are so many companies around the country that are trying to pivot to making things that will directly impact this crisis. So the businesses that do survive are likely to have to adapt going forward—to find new ways to serve clients or to create more work-from-home opportunities. The ramifications obviously will have a much wider impact than just small businesses. For example, there could be a big change in commercial real estate prices if companies make a longer-term commitment to employees working from home. Fewer people working in big office buildings means fewer people eating lunch at the little sandwich shop across the street. There are just so many impacts that we have barely begun to consider.

MARIANNE: For some businesses, there will be a silver lining. Creative business owners will come up with inventions to enhance the work-from-home environment.

Companies may re-evaluate their work-from-home policies and may allow people to work from home on a more regular basis. This has significant downstream impacts, not the least of which is the commercial real estate market as you mention. What will happen to all of the vacant office space when companies and entrepreneurs don’t sign a new lease? Or they sign a lease for less space at a reduced rate per square foot? Only time will tell.

The big automakers have many suppliers for all kinds of parts used in the automobile manufacturing process. Some of these suppliers are small businesses. You may see some of the automakers or large manufacturing companies buy small businesses to ensure the continuity of their supply chain.

Like you said, Mike, there are so many questions that we have not even begun to consider. From a tax perspective, how will we pay for this? How will that impact the economic recovery?

Will taxes increase at the federal level on corporations? On individuals? Will there be a combination of a tax increase and a debt increase?

Then there is the impact on state budgets.

Take Colorado, where I am located for an example. When the state legislature resumes its session, tentatively scheduled for May 18, they will need to pass a balanced budget.

The Denver Post reported on April 9 that the expected budget shortfall is estimated to be between $1 and $3 billion, versus having revenue available of $27 million before the extent of this pandemic was known.

That’s a huge hole to fill, Mike.

MIKE: Well, you’ve really given us a lot to think about. So let me wrap up by bringing this discussion back to the investing perspective. We talk each week on this podcast about how what’s going on in the policy and political world impacts the markets. So what should investors be thinking about as this crisis continues to unfold?

MARIANNE: Well, this slump ended an 11-year bull market run—but history has shown that markets bounce back time and again.

We all have questions like, “Will the market return to pre–Covid 19 levels? And if so, when?

We simply don’t know.

I know that’s hard to hear, especially when we don’t know when we have reached the bottom.

The best approach is to work with your financial advisor to discuss your concerns and review your financial plans.

In fact, the best investment we may be able to make is investing in our small businesses when they are given the green light to reopen and resume serving our communities.

This investment will help our neighbors get back on their feet financially and strengthen our communities.

So Mike, when the stay-at-home-order is lifted, it’s time to go enjoy dinners at your neighborhood Italian restaurant again.

MIKE: I definitely will do that—in fact, I can’t wait. Well, Marianne, you’ve given us a great perspective on a complicated and really fast-changing situation—thanks so much for your time.

MARIANNE: Thanks for having me.

On my Election 2020 section of today’s podcast, Vermont Senator Bernie Sanders ended his presidential bid last week and endorsed the last man standing—former Vice President Joe Biden is now the presumptive Democratic nominee for president.

Biden can now fully focus on gearing up for the general election—but in doing so, he’s facing challenges that no modern candidate has ever faced. Fundraising is really challenging right now, as the Biden campaign faces both the logistical challenges of raising money without in-person appearances and the ethical challenge of raising money for a presidential campaign at a time when so many charitable causes are trying to raise funds to keep their missions going to support victims of the coronavirus.

Biden also doesn’t have a platform right now beyond video appearances from his home—and that makes it hard to connect with voters and get his message out there.

There are also still 22 states that have not yet held their primaries, and while these are no longer competitive races, they are still important for gathering delegates and for their down-ballot races for Congressional seats, as well as state and local offices. But of course Biden can’t travel to those states to campaign—and indeed, it’s not even clear when and how some of those states will vote amidst the pandemic.

That’s why his campaign is focusing now on his next key decision—choosing a running mate. While Biden has not set a timetable for the decision, don’t be surprised if it comes relatively soon. Biden and his team understand that a vice presidential announcement may be his biggest chance to grab the national spotlight for a news cycle or two.

Biden previously announced that he plans to choose a woman for his running mate, and speculation has long centered on several of the women against whom he competed for the nomination, including Senators Kamala Harris of California, Amy Klobuchar of Minnesota, and Elizabeth Warren of Massachusetts. But with several governors around the country showing strong leadership skills during the coronavirus crisis, momentum behind possibilities like Governor Gretchen Whitmer of Michigan or Governor Michelle Lujan Grisham of New Mexico is definitely growing. And keep an eye on Congresswoman Val Demings of Florida, who received praise for her performance as one of the managers selected to make the impeachment case against the president during the trial in the Senate earlier this year.

Expect lots of speculation over the next few weeks as the vetting process moves forward. But it may be a few weeks before Biden announces his choice—if for no other reason than dragging out the anticipation keeps Biden’s name in the news.

Well, that’s all for this episode of WashingtonWise Investor. Please take a moment to subscribe so you don’t miss an episode. And if you like what you’ve heard, please leave us a rating or a review on Apple Podcasts or your favorite listening app—those ratings and reviews really do matter.

For important disclosures, see the show notes or, where you can also find a transcript.

I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and most importantly, stay home—and keep investing wisely.

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