I’ve had a front row seat in watching disruption in the small business industry for the past 11 years. From the effect of the crash in oil prices on Alberta’s small businesses to the steady growth of e-commerce to the detriment of brick and mortar retail, nothing prepared us for this.
COVID-19 has brought an unprecedented disruption to the small businesses that drive our national economy.
11 years ago, I founded Merchant Growth, a financial technology company which provides financing for thousands of small businesses across Canada. We use algorithms to automate the approval process and have provided hundreds of millions of dollars in financing to help small businesses grow. With an average loan or advance size of approximately $30,000, these are truly small businesses – restaurants, auto repair shops, retail stores, grocery stores, small manufacturing operations, spas, salons, pharmacies, and more.
What we, and these small businesses, are experiencing is a natural disaster, not just a typical financial recession.
In an ordinary recession, if a small business owner is forced into bankruptcy because people aren’t spending like they used to, this is considered capitalism. But since COVID-19 is more like a natural disaster, most of us would agree that it is not fair for this business to be forced into bankruptcy. The government is mandating that businesses close their doors in the interest of public safety. So how could it be fair for us to let them fail as a result of it?
The small business sector represents approximately half of our country’s economic output, and most of its employment. The Canadian government has stepped up to the herculean task of averting an economic calamity with the Canada Emergency Business Account (or CEBA). The CEBA provides Canadian small businesses with $40,000 interest-free loans, and are in the process of rolling out the Canada Emergency Wage Subsidy (or CEWS), which covers 75% of wages for COVID-19 affected businesses.
There are gaps in the stimulus package, as it is today. While storefronts represent just one of those gaps, they are a very large group. Their situation is so dire that the current programs will not do enough. The CEBA gives businesses, including storefronts, cash which they can use to keep landlords current or pay other costs.
However, given that most of this initiative is in the form of debt that needs to be repaid, it is likely to result in most storefronts being further in the hole by the end of all of this. Increasing debt for storefronts completely ignores their financial realities. These businesses have low margins and little-to-no hard assets. They also happen to be coming out of their worst season (January to March tend to be the lowest revenue months for Canadian storefronts).
While it’s great that CEBA is providing cash, and creditors such as lenders and landlords may be giving payment reprieve, these businesses are going further in the hole with each passing month. Remember, when a landlord says it’s OK not to pay rent in cash right now, they are adding to the tab – that rent needs to get caught up eventually. A business with a negligible net worth from an accounting perspective cannot afford to go deeper in the hole. Once they are too deep in debt, many will have no choice but to file for bankruptcy.
Other jurisdictions, including the USA, have already solved this. The answer is subsidizing other overhead expenses in addition to subsidizing wages. One approach would be to increase the dollar amount of the CEBA loans and make a larger portion forgivable – only if you spend the money on certain eligible overhead expenses such as rent.
This would be akin to approach taken in the “Paycheck Protection Program” announced by the U.S Treasury. Another approach would be for the government to reimburse landlords directly – an approach that has been promoted by a grassroots group in Canada called Save Small Business, which have recently begun a trend of #RentSupportNow.
Through building Merchant Growth, I have developed an appreciation for how different one business type is from another, and how particularly in times of crisis or economic challenges, those differences are made clear. It will be impossible to save every business, and we will never be able to design programs that are perfectly fair. But we need to do our best.
Local storefronts are the fabric of our communities, a large portion of our economy and our jobs, and we need to do everything we can to make sure they make it.
David Gens is CEO of Merchant Growth and a Director of the Canadian Lenders Association.