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Why Another Round of PPP Funds Might Not Be Enough to Save Some Businesses

Even after weeks of debate, Democrats and Republicans on Capital Hill are still at loggerheads over another set of stimulus programs to help bolster the U.S. economy.

Though President Donald Trump announced a set of executive actions last weekend — offering unemployment benefits, an extension of the federal moratorium on evictions, a payroll tax holiday and deferment of student loan payments — they did not address the Small Business Association’s Payroll Protection Program. Introduced in March as part of the $2.2 trillion CARES Act, the PPP provided loans to small and midsize companies impacted by the coronavirus pandemic — that is, until the program closed on Aug. 8.

According to multiple reports, there is bipartisan support in Congress for extending the PPP as part of the next stimulus package. And the Trump Administration is on board as well: Treasury Secretary Steve Mnuchin has publicly urged Congress to renew the program.

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But according to experts, offering more PPP funds doesn’t solve the big issues impacting the retail industry: drastic sales declines and a growing credit crisis.

Since the pandemic took hold in the U.S. in March, retailers in almost every sector have seen revenue plummet, due to temporary stores closures, disruptions in the supply chain and consumers pulling back on their discretionary spending.

For small retailers who were struggling, the PPP funds offered a temporary lifeline. Though in order to qualify for loan forgiveness, businesses had to use a majority of the money on payroll within a set timeframe.

“The challenge was, how many people do you hire back if you have no sales,” said Raphy Soussan, a partner at accounting and consulting firm Mazars USA.

Short on Credit

Even with government support, many retailers — both big and small — have been forced to lay off or furlough workers during the pandemic, in an effort to stay afloat. And some haven’t been as successful as others at keeping the lights on: See the growing swath of bankruptcies among industry giants such as Neiman Marcus, JCPenney, Brooks Brothers, J.Crew, Stein Mart, the parents of Men’s Wearhouse and Ann Taylor, plus many more.

Those struggles are having ripple effects across the industry, particularly among their vendor partners. “The retail environment is upside down, where even if a retailer has survived, it doesn’t mean that you can necessarily sell them,” said Soussan, pointing to the challenges brands face in obtaining credit insurance on goods sold.

“The way it works is, most companies get credit insurance before they ship [their products] to a customer, to protect themselves in the event of a bankruptcy,” he explained. “They need approval from their insurance company or factor — whichever way they get it — and since the retailers have been going bankrupt, that has been a challenge. So even if you have orders, it doesn’t mean you can ship. It’s a double whammy for companies in the consumer product space.”

In early July, retail groups including the American Apparel & Footwear Association called on federal leaders to provide a financing guarantee as businesses run out of cash and struggle to obtain credit. It cited a recent report that found that the trade credit insurance industry had reduced coverage by nearly 14% since the end of last year, and that another cutback could inhibit supplier production by roughly $46 billion as well as the hiring of 155,000 American workers.

“Credit insurance is essential for apparel and footwear businesses to support manufacturing and limit overall risk, which is especially important now given the liquidity squeeze and cash flow uncertainty we are seeing,” said AAFA president and CEO Steve Lamar at the time.

Other Options

Until Washington comes to a consensus on the next stimulus plan, there are a few options for small businesses to gain the necessary capital to stay in operation. First, Soussan recommends that if companies haven’t applied yet for the SBA’s low-interest Economic Injury Disaster Loan, they should do so now.

“It’s been providing about $150,000 to companies. It’s not huge, but it’s something,” he said, although he advised reviewing the limitations, one of which prohibits the funds from being distributed to shareholders.

Business owners can also rally financial support from the community. Mainvest, an investment platform launched in 2018, takes the Kickstarter crowdfunding concept and applies it to established mom-and-pops. Although instead of receiving a T-shirt or bumper sticker in exchange for their money, supporters invest through revenue sharing notes and are repaid at a multiple from the proceeds of revenues generated.

According to Mainvest, 95% of their business users are moving forward and have either reopened or are preparing for reopening as local restrictions dictate.

As the situation with the coronavirus continues to fluctuate, uncertainty will remain an overarching factor in decision-making for most companies. So Soussan recommends playing it safe in the coming months. “The best thing is to preserve cash in whichever way they can,” he said. “It’s been a long four months for the consumer product space, and this isn’t over yet.”

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