Restaurants fear future credit burdens
NEW YORK – US restaurant owners fear a government coronavirus relief program loan could be a burden rather than a blessing.
The Paycheck Protection Program has disbursed more than $ 4.3 million small business loans worth more than half a trillion dollars in about six weeks. A PPP loan can be granted if owners spend the money within eight weeks of receiving it, using at least 75% of that for employee salaries and the remainder for rent, mortgage interest and utilities.
However, for those who own and operate restaurants, these terms may not match the reality of their business. Many restaurants either stay closed or do a fraction of their previous business as cities and states are just beginning to take home stay orders. Instead of essentially paying the workers not to work, the owners may want to keep the loan or use it for more urgent purposes, but there is a risk in doing so.
Sarah Trubnick’s San Francisco restaurant has been closed since mid-March. She recently got an aid loan – but she hardly celebrates.
Trubnick hopes to reopen The Barrel Room within eight weeks, but it will cost thousands of dollars to buy the groceries and equipment needed to get back up and running. She must use some of the loan money to pay for these expenses. But that part of the loan may not be granted so in two years she will have a large debt to pay off.
“The conditions are not realistic for us,” says Trubnick. “I think that will put us in a worse position than before.”
The catering industry is hardest hit by the virus outbreak. Thousands have been completely closed, meaning there is no revenue but bills such as rent, utilities, and insurance are still payable. Many others have been restricted by state and local governments to serving take-away and delivery customers, but that’s only a small fraction of their usual business. And the reopening doesn’t mean a return of the lunch and dinner crowds – the social distancing requirements mean restaurants can’t serve the usual number of guests.
All of these obstacles hinder an industry that operates on the thinnest of margins. The shutdowns and reduced revenue resulted in the layoff of 6 million workers in March and April.
According to a study published in April by the National Bureau of Economic Research, many restaurants fear for their survival. The study found that restaurateurs believed they had a 72% chance of survival if the crisis caused by the virus outbreak lasted a month, but if it lasted four months, they believed they only had a 30% chance of survival. And after six months, a 15% chance.
A PPP loan could improve the odds – given the right terms.
A report by the Inspector General of the Small Business Administration released this month without mentioning the restaurant industry criticized the rules and predicted they would force tens of thousands of businesses to repay some of their loans.
According to the recently released report, the law that created the loan program did not set the amount of loan that must be used to pay employees; the SBA added the restriction. The SBA responded in the report that “75% is a fair percentage” as the law puts an emphasis on keeping workers paid and employed.
The report also noted that while the law allowed loan terms of up to 10 years, the SBA required loans to be repaid within two years, which significantly increases payments.
“The Paycheck Protection Program is a great program, but it doesn’t work for restaurants,” said Sean Kennedy, executive vice president of the National Restaurant Association, an industry group.
Restaurant owners could get help from Congress. A bill passed by the House Democrats last week would give small businesses, including restaurants, more options and leeway in how they use their loan proceeds.
The house law would allow business owners to use their loan money on any bills they need to cover. The bill would also give companies 24 weeks or until December 31, whichever comes first, to spend the money.
Right now, the eight-week cash-out window poses a dilemma. For example, if restaurants call all of their employees back after receiving a loan in mid-April, they would use up the money before government officials allow them to function properly. At the end of the eight weeks, many could no longer afford their employees and would have to fire them again.
“It would be wiser to use these funds in a few months as the restrictions wear off and we have more revenue from the dining room,” said Michelle Courtright, owner of Fig & Farro, a Minneapolis restaurant. She struggled to meet the time and salary requirements as key employees decided not to return to work for health reasons.
“I spent several weeks of valuable PPP time hiring and trying,” says Courtright. Her restaurant only offers pickup and delivery while she waits to be seated again to dine. In the meantime, their sales have fallen by 90 percent.
Treasury Secretary Steven Mnuchin admitted that many restaurants wanted to keep their money and use it when it was most beneficial to them.
“We will look at a technical solution,” he said in an interview with CNBC.
The Democrats’ bill would also give business owners more time to repay their unspent loan amounts, at least five years.
Kennedy called the House of Representatives proposal “a strong step to make the PPP better suited to the unique business conditions of the country’s restaurants”.
The industry group is seeking a separate $ 240 billion recovery fund for the restaurant and hospitality industries.
Dave Orenstein already knows his restaurant chain will not be fully lent on their loan, and at this point he cannot even estimate how much Fish City Grill, which has Arkansas locations in Rogers and Fort Smith, will end up owing. The Dallas-based chain began reopening May 1, and while the majority of his company’s 450 employees are back, he doesn’t have enough stores to reinstate them all.
“If the loan is not granted, it will be virtually impossible to repay the money in two years,” said Orenstein, president of the 20 restaurant company.
Sunday Monday business on May 17, 2020