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Small businesses are desperate. Could a $ 1 billion program help?

By on March 9, 2021 0

After a thief hit Hollywood restaurant Los Balcones del Peru in a wave of protests over police brutality on Saturday night, owner Jorge Rodriguez considered himself lucky enough to laugh.

“He grabbed the more expensive wines we had and left,” Rodriguez said, adding the man had left the restaurant untouched. “Looks like he had a strong taste for red wines. He did not touch the whites.

Rodriguez retains a grim sense of humor even as he struggles to keep his business on life support.

The restaurant is located on Vine Street, a short walk from ArcLight cinemas. Like other businesses that serve tourists, Los Balcones was affected early on by COVID-19, the disease caused by the novel coronavirus. “It’s in January that we start welcoming all travelers from Asia and Europe,” Rodriguez said. “We never had this traffic.”

Take-out customers come in and out, but its number of employees has increased from 43 to seven. It cannot open for limited seats until early July. The restaurant received money from the federal government’s paycheck protection program, but that will soon be gone, with resumption of normal operations a distant prospect.

Millions of small businesses in California and across the country are in a similar situation. Their livelihoods were already threatened by COVID-19 lockdowns and the shortage of commercial traffic. Second, for many, came lost income due to curfews and property damage or loss of inventory due to break-ins and vandalism. Loans are difficult to obtain and extremely expensive.

Seeking to provide a lifeline, a Bay Area group formed in March is launching an ambitious California-wide program to raise $ 1 billion in capital to help otherwise healthy small establishments survive the over the next few months.

Community lenders, law firms, universities, philanthropic organizations, small business trade groups, and individual volunteers have joined forces as the California Small Enterprise Task Force to raise funds to provide funds to support working capital and other essential expenses until – everyone hopes – a better economy drives customer spending next year.

“We are trying to prevent or reduce the number of people in the queues,” said Susan Mac Cormac. A business lawyer and partner at international law firm Morrison & Foerster, Mac Cormac helped develop the task force’s plan, which she sees as essential to preventing a wave of poverty. “We cannot solve the economic problems of COVID-19 and the murder of George Floyd without being able to provide jobs in these [low-income] communities, ”she said. “And the only people who hire people in these communities are the microenterprises. “

In a March survey by the Small Business Majority Education and Advocacy Group, 44% of small business owners said they should shut down permanently without immediate financial assistance. Many have received forgivable loans under the Coronavirus Aid, Relief, and Economic Security Act passed by Congress. But big wads of emergency federal loan money went to fast food chains, hotels and other businesses with relationships with big banks and ways to hire lawyers, accountants and lobbyists. expensive.

“Federal and state funding is not reaching the businesses that need it most,” Mac Cormac said. “But the need is enormous.

The high default rate expected for small business turnaround loans translates into interest rates “well above normal,” said Adair Morse, professor of finance at UC’s Haas School of Business Berkeley. For the hardest hit areas, she estimates the rates “in the order of 25 to 30%, or even much more.” Thus, loan programs “must be at least partially subsidized by government or philanthropic backers,” she said.

The California task force started out primarily to offer advice to small businesses. Another early catalyst was Adam Werbach, an environmentalist and entrepreneur from the Bay Area. “Everyone felt devastated by the pandemic, so we gathered resources and skills to meet the need. UC Berkeley Law School students have set up a hotline. The working group created a comprehensive and well-organized resource guide and posted it online.

Once the loopholes in federal aid programs became clear, Mac Cormac and his fellow volunteers decided that advice was not enough. Better access to low-interest loans was needed. Much more.

The federal paycheck protection program has defined a business with up to 500 employees as “small.” The California program is for companies with no more than 75 employees. The vast majority of recipients will have much less than that, organizers said. The billion dollar program, called the Small Business Rebuilding Fund, is primarily a loan program, not a grant.

Morse from Haas School in Berkeley helps structure the program. The main goal is to reduce interest rates for small business owners to a realistic level while “reducing the risk” of investments for those with the money.

This requires loan guarantees from the government and lenders with skin in the game. Companies that apply will have to prove that they will be “viable” after the waiting period. “By using limited taxpayers’ money, we must do so in a way that maximizes the impact on the economy, so that the debt incurred by the government today supports economic growth,” Morse said.

California Governor Gavin Newsom has set aside $ 50 million to launch such programs, with an additional $ 50 million in his budget for legislative approval. The loan program would help small businesses access these funds. The group is lobbying Congress to add money to small business loan programs that the fund could operate. The Californian group also raises funds from philanthropic organizations.

Kiva, a San Francisco-based crowdfunding loan distributor to “unbanked” small businesses around the world, will administer the program. Loans will be bundled, Wall Street style, with pools, rather than individual loans, priced against risk. Commercial lenders will be repaid first, philanthropists last. Some grants will be awarded to companies that can demonstrate a solid business plan. Law firms such as Morrison & Foerster and Silicon Valley Power Plant Cooley offer pro bono advice.

Mac Cormac said people from seven other states have so far approached the California group to find out more about the program and possibly create their own.

It will take effort and cooperation, said Mark Herbert, the California representative for Small Business Majority. If small businesses cannot access capital, and soon, “the ripple effect and subsequent economic devastation will be incalculable,” he said. “But I am an optimistic person. I hope that policymakers and other leaders will do everything in their power to make sure that we have the tools to prevent this from happening.

A billion dollars is a lot of money, said restaurateur Rodriguez. “But it’s a lot cheaper than letting all of these companies go bankrupt.”

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