More than any other time in the history of the world, small businesses will need the support of the government. In general, most small businesses are enterprises that survive on recent sales in order to move forward as an ongoing concern. The business model depends on recurring transactions. With the lockdown in place, and people prohibited from moving about, it is the small neighborhood business that immediately suffers.
So what relief is in sight? I am familiar with the loan programs of many government financial institutions (GFIs) and frankly, their programs will not provide the relief our small business sector needs. As I am now visiting my dear sister Maria in The US, it is worth taking a look at what they have provided.
The Small Business Administration (SBA) in response to the COVID-19 pandemic is providing small business owners in all US states, Washington DC and territories an Economic Injury Disaster Loan (EIDL) advance of up to $10,000 (approximately P510,000). The SBA’s EIDL program also provides small business with working capital loan of up to $2 million that can provide vital economic support to small business to help overcome the temporary loss of revenue that we are experiencing. The loan advance will provide economic relief to business that are currently experiencing temporary loss of revenue. Funds will be available within three days of a successful application, and this loan advance will not have to be repaid.
Note that the loan advance need not be repaid. It is important to underscore this provision. I don’t think Philippine GFIs have this “authority” to lend without the repayment. In fact many GFIs are burdened by aging bad debts which regulatory practices are preventing them from writing off. Even loans to high risk but deserving clientele are evaluated and scrutinized with a complex filter.
Further, the “SBA Debt Relief program will provide a reprieve to small business as they overcome the challenges created by the health crisis. SBA will pay the principal and interest of new loans issued prior to September 27, 2020 and will pay the principal and interest of current loan for a period of six months.” Effectively, government shoulders a part of the small business obligation.
And as our favorite advertisers would state, but wait, there’s more.
“The Paycheck Protection Program prioritizes millions of Americans employed by small businesses by directing $349 billion towards job retention and business operating expenses. It is a direct incentive for small business to keep their workers on payroll by providing each small business a loan up to $10 million for payroll and certain other expenses. If all employees are kept on payroll for eight weeks, SBA will forgive the portion of the loans used for payroll, rent, mortgage interest or utilities. Up to 100% of the loan is forgivable.”
There will be instances when the economic and social benefits will far outweigh the cost of debt forgiveness. It will take much more time and investment, for example, to create a new job than to save an existing one. And of course we should not ignore the multiplier effect of the economic activity the small business generates for the community.
The concept of forgivable loan is indeed a reassuring one. It was initially used to support the plight of those with large student loans in America. The public service loan forgiveness program was a federal program that forgive federal student loans for borrowers who are employed full time in an eligible federal, state or local public service job or nonprofit job. They must have made 120 eligible on time payments.
Apparently, the SBA likewise has been offering a Disaster Loan Forgiveness Program which allows certain individuals who have been affected by a natural disaster to get part of their SBA loan forgiven. Of course, the area must be declared a natural disaster zone.
It is difficult to expect that the Philippines will be able to afford the largesse of all these programs. However, it is still reasonable to hope that some kind of subsidy support be given to our small businesses. Subsidy has been a pejorative term to many economists in the past. But the times require drastic solutions. We don’t have to reinvent the wheel. Let us look at models elsewhere.
Policy makers should begin by empowering government financial institutions to adopt some form of debt forgiveness programs. It can even be a conditional debt forgiveness that is supported by employment retention and eventually job creation. As it is, many government programs are burdened by debt it cannot write-off and by the stringent rules of regulators. Development financial institutions must stand to really act as development agents, especially in today’s very uncertain pandemic environment.
The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.
Benel Dela Paz Lagua was previously Executive Vice President and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and a long-time advocate of risk-based lending for SMEs.