NC businesses look to paycheck protection program to stave off COVID-19 losses
The tavern is the moneymaker for Fullsteam Brewery.
Located in the heart of Durham’s nightlife district, it is usually crowded with people ordering food and beer on weekends. The kind of place where you stand shoulder-to-shoulder at the bar — the exact type of place where health officials warn that COVID-19 could rapidly spread from a lack of social distancing.
Now it’s empty, cutting off a large stream of revenue for a company that employs around 50 people.
“We are particularly dependent on the tavern as a profit center,” said Sean Lilly Wilson, the founder of Fullsteam, who has a weakened immune system himself because of a kidney transplant. “It is just a super challenging time right now.”
Wilson said sales at the tavern plummeted 90% in March, and additional sales to restaurants and other retailers did poorly, too, forcing the company to furlough workers, reduce hours and lay off several more to afford to keep brewing beer.
Like many businesses looking down the barrel of considerable losses, the business and its workers’ future now are in the hands of the virus, its lenders and the power of a $2 trillion federal aid package.
Between its bank deferring some of its loans and plans to tap into parts of the federal government’s economic relief plan, Wilson hopes to keep most of his employees. He won’t be alone in trying to use those resources, as companies across the country rush to apply for aid.
Many are hopeful that they’ll be able to keep workers by taking advantage of a $350 billion portion of the federal relief bill called the paycheck protection program, which allows companies and nonprofits with fewer than 500 workers to get a low-interest loan to cover up to two months of payroll and expenses like rent and utilities.
If the loan is used to retain workers and the company doesn’t cut wages, it will turn into a grant — an alluring prospect given that most other relief and deferments will add to a company’s debt.
“That is really big,” N.C. State University economist Michael Walden said in a recent conference call, potentially giving companies more reason to hold onto their employees rather than lay them off. Already, more than 350,000 people have filed for unemployment benefits in the state since businesses began closing because of the pandemic, The News & Observer reported.
Wilson said the federal relief could “allow [Fullsteam] to maintain our staffing levels and ramp up when it safe to do so.”
Keeping employers and employees together
Christian Lundblad, who teaches finance at UNC’s Kenan-Flager School of Business, said the paycheck protection program is important because of how devastating it can be once a small business begins shedding employees. In an economic downturn, he said, small businesses and their employees — around half of the country’s work force — are the most vulnerable.
According to a survey from the the Small Business Investor Alliance, more than 66% of small businesses do not have adequate reserves to remain operating for more than two months, leading them to lay off employees to preserve cash.
The paycheck grant “is an important mechanism by which our government can directly” keep workers and companies afloat, Lundblad said. “That having been said, $350 billion will likely be the beginning of what is necessary” as small businesses rush to apply for the aid.
Tracy Ward, director of the SBA 504 Loan Program at Self-Help Credit Union, said she has a seen soaring level of interest in accessing Small Business Administration programs like paycheck protection.
“A lot of the companies are very interested in it,” she said. “Most of the small businesses are really concerned about their staffs and employees... [and] they are really hopeful that they can keep staff and rehire.”
But the program has existed for only a week — businesses could begin applying to lenders for financing on Friday — and banks and businesses are still waiting on guidelines about things like documentation requirements. She said it is critical that SBA gets this right, with an application that is clear, easy and fast — given the tough decisions companies need to make over the next 30 to 90 days.
“I believe SBA is diligently working to get those guidelines out, but they’ve been tasked with the enormous task of creating guidelines for a new program that is very different from any of their existing programs, and I am not surprised that getting those right and getting them out hasn’t been possible in only a week,” Ward said.
On Friday, many banks were still not yet ready to accept applications for the program, The News & Observer reported.
John Clowney, one of the owners of Bull City Ciderworks, is worried that most small businesses like his will find the federal programs too confusing to take advantage of. “It is almost information overload right now about all the potential help,” he said.
Clowney said his company, which was about to expand to Greensboro and Raleigh before the pandemic, has gotten deferments from its lenders and applied for an Economic Injury Disaster Loan from the SBA, as its business has been reduced to takeout and delivery.
He’s not sure if Bull City will take the disaster loan because it will turn into debt — and he’s worried the business model of taprooms might change if people are afraid to congregate in large crowds in the coming months. But he thinks every small business should take advantage of the paycheck protection program.
“It will be a critical cash-flow supplement,” he said, and could keep many workers from needing to apply for unemployment benefits.
With hours reduced at the cider maker, Clowney had told many of its 32 employees to go ahead and take unemployment benefits, as he thought they’d be better off that way. But the paycheck program could “allow us to bring people back on or at least not have them on unemployment,” he said.
Not just federal aid
It’s not just federal programs businesses are dependent upon. Landlords and lenders will also play a key role in deciding which business make it through the pandemic.
While many companies are getting 90-day deferments on their loans — a move that just pushes debt down the road — a more pressing concern is rent or mortgage payments.
Clowney said his landlord in Durham has taken off a third of this month’s rent, but it’s not like Bull City is losing only a third of its business. “If we are not bringing in dollars,” he said, “it doesn’t make sense to pay for when you are closed.”
That’s the dilemma Ali Farahnakian, the owner of the PIT improv theater in Chapel Hill, is facing as well. His bars and theaters in New York all supplement his Chapel Hill location, which has lost money in the two years it has been open. But those New York locations are closed and his landlords there still want rent.
“Businesses have been shut down for 30 days, and we have landlords in New York asking for full rent,” Farahnakian said. “Our perspective is we don’t know when this ends and we don’t know what this will look like when it comes back. We cannot in good conscience pay rent — this is force majeure.”
“Force majeure” is a legal term included in many commercial contracts that may provide relief in the event of unforeseeable or uncontrollable circumstances.
Some landlords have indeed decided to give their tenants some breathing room in the face of unprecedented crisis. Others might be too leveraged with banks to not ask for rent.
Sammy Martin and Wendy Mann, who own several buildings along Franklin Street in Chapel Hill, are landlords who have decided not to collect April rent. Having worked for years to get the right mix of tenants, the two don’t want to risk losing multiple tenants because they can’t pay all of their expenses.
Martin thinks they are probably an exception to the rule right now because most landlords need cash flow to meet their debt obligations with a bank.
“Landlords are obviously affected, too,” Martin said of the crisis. “But I have virtually heard nothing about banks being affected. No one is saying that the banks might have to take a hit as well.”
This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate
This story was originally published April 3, 2020 at 10:36 AM with the headline "NC businesses look to paycheck protection program to stave off COVID-19 losses."
