Coronavirus: Why Is It So Hard To Aid Small Businesses Hurt By A Disaster?

The U.S. government has committed hundreds of billions of dollars to help small businesses weather the coronavirus pandemic. But early reports suggest larger companies are gobbling up much of the aid, while many of the neediest ones – particularly those with only a few dozen employees – aren’t benefiting.

For example, large, generally profitable companies like Shake Shack, Potbelly and even the Los Angeles Lakers, with access to other lines of credit, have received millions of dollars in loans, even as mom-and-pop stores across the U.S. say they are still waiting to hear back about their applications.

Very small businesses, particularly those operating on small profit margins, are especially vulnerable, since they may not have the cash reserves to weather periods of economic uncertainty and typically have fewer ways to access financing. A recent poll by the U.S. Chamber of Commerce found that one in four U.S. businesses is two months away from permanently shutting down.

My research on efforts to help businesses recover from hurricanes and other disasters shows why smaller organizations have long struggled to get aid after a crisis.

Obstacles to aid

Hurricane Ike, at the time of its impact in 2008, was the third-costliest storm in the nation’s history.

It caused approximately US$30 billion in damages and devastated thousands of businesses in southeastern Texas. My colleagues and I focused our study in Galveston County, Texas, where Ike made its initial landfall and more than 3,800 businesses were interrupted and 53,000 employees were put out of work.

The Small Business Administration has a designated disaster relief program intended to help small companies recover through low-interest loans. Despite the devastation, we found that most small businesses in Galveston that applied for federal assistance were unable to get aid. In fact, the approval rate for low-interest disaster loans was only around 22%.

The trouble is, even though this is intended as aid, it’s still a loan – and the SBA needs to make sure borrowers will pay it back. One of the main ways any lender determines whether a borrower will do so is through its credit history, which many very small businesses lack.

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This article is republished from The Conversation under a Creative Commons license.

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Moon Kil Woong 2 months ago Contributor's comment

Because the money is flowing to the banks that fund big companies to keep them from defaulting. Also, because of if not outright government corruption, an entrenched bias to big business which writes bills and has the administration cater to the wealthy. It is good this is coming to light because something should be done about this. It hurts the free market system and prevents growth and innovation. Sadly this money will go to airlines, cruise ships, fast food chains,and hotels and not to others. Thus small R&D, technology, diverse restaurants, and ways of housing the poor will be overlooked and not funded.