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> Loans, even cheap ones, are a very shity way of "helping" small businesses Really disagree on this point. The primary value of a business is their assets, br

> Loans, even cheap ones, are a very shity way of "helping" small businesses Really disagree on this point. The primary value of a business is their assets, brands and expertise. All of those things will be just as valuable after the pandemic as they were before. Assets don't just disappear because they're not used. This is just as true for small businesses as it is for big business. Any business that was profitable on Dec 31, 2019, will very likely be profitable on Jan 1, 2021. The biggest challenge for those businesses is surviving operating cash flow losses over the next three months. This is extra challenging in the current environment because financial markets are freezing up. Yes, business owners will eat some loss to their personal wealth. Regardless of what happens there's no way to make up for the fact that the economy is shrinking this quarter. At an aggregate level, we'll all be slightly poorer then we expected to be. The point of a well-structured bailout isn't to make sure that nobody anywhere ever loses money. It's to prevent otherwise healthy businesses from permanently failing due to a temporary disruption in credit markets. If a small business owner loses a year of income it sucks. If an entire small business capsizes, that has widespread economic impact because the economy incurs distress costs and loses its organizational and competitive expertise.

ksdale 7y ago
I think you may be underestimating the extent to which a “small business owner loses a year of income” and “entire small business capsizes” are the same thing.
- chii 7y ago
  If the business gets a loan to last them through the crisis, they will pay it back when they earn money after the crisis. It means they are using future revenue to survive right now. The interest for this loan should be very low and if they default in the future, the govt takes the hit. The hope is that not all businesses will default at the same time, and just like the hospital, these loans flatten the default curve, and prevent the economy from spiralling into a deep depression from these defaults.
  - ksdale 7y ago
    I understand that’s how it is meant to work, but I think small businesses are, on average, a lot closer to insolvency than people think. This is like offering low interest loans to... anyone to get through the crisis. It’s definitely better than nothing, but it doesn’t replace income, it just shifts it around (as you mentioned), which doesn’t help very much when you’re so close to insolvency. They’ll come out the other side with debt service payments that make business “survival” kind of pointless, unless there’s a ton of pent up demand and their revenue is much higher.
    - chii 7y ago
      > make business “survival” kind of pointless they continue to survive and make the payments. Yes, profits will tank, but eventually they will pick back up. It's not like there's a better alternative. It's better than shutting doors - you may not be able to pick back up when this all blows over.
      - ksdale 7y ago
        Just as a hypothetical to illustrate my point, it's really common for small business owners in low margin businesses (like retail and restaurants) to have take-home pay of about $50,000 on $1,000,000 of revenue, which means they have $950,000 of expenses in a year. Even if they don't have to pay for certain parts of their business when they're shut down, how many hundreds of thousands of dollars of debt would they need to take on to keep the business in existence for the next few months? How many hundreds of thousands of dollars of debt can $50,000 of net income service, even at .5% interest? Those dollars for debt service come straight out of the dollars for living expenses. It may be better than nothing, but it may also not be. Trying to start over from scratch may be better than trying to start back up with basically any kind of additional debt.
dogecoinbase 7y ago
> Assets don't just disappear because they're not used. This is fundamentally incorrect insofar as the only asset of any small business is typically the labor it employs. Large businesses have intellectual property, capital, real estate, vehicle/equipment fleets, and so on, but nearly all small business have a lease, their on-site inventory (frequently perishable), and their people. All of their ability to continue operations is represented by their ability to retain those people.
- mikeg8 7y ago
  Over generalizing. Small businesses may own all of the same asset types as large corps, just on a different scale.
wayoutthere 7y ago
Most small business owners don't have "wealth" these days; working assets are usually leased so if they're not working, they're an active drain on your cash reserves. Businesses go bankrupt for cash flow reasons all the time. I know a few small business owners with 5-10 employees, and they all take home less annually than I do working a salaried job. The other challenge is that when customers do start buying again, you have to start whatever marketing engine you had back up again at the same time everyone else is doing the same -- which is going to make it really expensive for everyone (while also ramping up the velocity of Google's money printer).
TheSpiceIsLife 7y ago
> Yes, business owners will eat some loss to their personal wealth. You might be overestimating the extent to which many business owners have any wealth at all.
jtdev 7y ago
We’re not talking about Coca-Cola Corporation there buddy, we’re talking about non franchise restaurants, bars, hotels, salons, etc. A year of no income for these businesses will cripple them, and coming back to a mountain of debt (even if low interest) will essentially ensure that they never become profitable again.
buckminster 7y ago
The business may no longer be profitable because it is now servicing a large debt it didn't previously have. And unlike regular business debt, the money wasn't invested into something productive. This could go very wrong. Then again, if the business is going bankrupt anyway, who cares how much it ends up owing?
- smallgovt 7y ago
  SBA loans are backed by personal gaurantees. In other words, the business owner is on the hook if the business goes bankrupt.
- dcolkitt 7y ago
  Let's take a typical small business, and say it does $1 million a year in revenue. Cost of goods sold is $600,000 and fixed operating expenses are $350,000. Net margins are 5%, as is typical in small retail businesses. (These numbers are almost dollar for dollar from a local merchant-proprietor I know.) Let's say the quarantine results in revenue falling by 70% over the next four months. Without a reduction in fixed costs, the business experiences a $76,000 operating loss. (About equal to 1.5 years of pre-tax profits.) Assume a 10-year amortized loan at 4%. The cost of servicing the loan comes out to approximately $9500 a year. Which only reduces the ongoing annual cash flow by less than 20%.
  - brayhite 7y ago
    You’re assuming that four months have gone by and they didn’t have to sell assets to pay bills. Or relocate. Or lay off employees. Or employees quit because they couldn’t be paid with the loss of revenue. You’re modeling makes a lot of assumptions and discounts too many human-driven variables.
    - dcolkitt 7y ago
      > You’re assuming that four months have gone by and they didn’t have to sell assets to pay bills. That's exactly why the government is giving them loans. To cover the fixed costs during a period of temporary disruption.
rguzman 7y ago
> The primary value of a business is their assets, brands and expertise. All of those things will be just as valuable after the pandemic as they were before. this doesn't seem true to me. at least the brand loses value over the pandemic, and there's likely complications from cashflow that eat into other assets.
- AnimalMuppet 7y ago
  Why does the brand lose value? My favorite restaurant is still a place where I want to eat when this is all over. My favorite brand of toothpaste is still the one I want to buy. How does the brand lose value?
  - hnick 7y ago
    By saying the brand itself has value, aren't you saying that if the owner gets into debt and has to sell it off to someone else it'll be just as good? That wouldn't give you pause? In many cases small businesses derive most of their quality from the actual owner. They don't respond well to drop-in replacements of key staff members and owners.
    - AnimalMuppet 7y ago
      Well, in the case of toothpaste, it's not a small company. The restaurant... yeah, if they changed owners and blew up what I like about the place, that would kind of stink. Or, the new owner could be better than the old. That could happen, too. Either way, it wouldn't be the same... unless they hired back the key players.
      - hnick 7y ago
        Yeah it's a bit tough for some small businesses. Anything related to style (cake decorating, floral arrangements, graphic design, sign writing, etc) or other subjective tastes will often have a brand which has value with current customers but will easily lose it if someone else takes over. Even if the work is still solid, it can alienate existing customers.
avip 7y ago
You seem to be conflating some Bezos-level corp. owner with a poor guy cooking Raman down the street.
- selimthegrim 7y ago
  I suppose both are cannibals from a certain point of view
treyfitty 7y ago
Your tone suggests that "small business owners" suggest that they're all better off financially than the average salaried employee. Well, as a former restaurant owner, I can tell you that in good times, the margins across the industry is 5% if you're doing above average. That means, a $2MM restaurant (which isn't an easy feat, even in NYC) will only net the owner $100K. Loans were, and always will be, a false promise. There's too many variables in the equation that make it not appealing. TLDR; Small business owners don't have "wealth." Get that out of your head and be sympathetic to what small business owners that you frequent have to deal with.
pertymcpert 7y ago
How out of touch with the real world can you be to think that small businesses can afford to service enough debt to survive a year? Do you know how small the margins are for many every day businesses? Jesus.

ksdale 7y ago

I think you may be underestimating the extent to which a “small business owner loses a year of income” and “entire small business capsizes” are the same thing.

chii 7y ago
If the business gets a loan to last them through the crisis, they will pay it back when they earn money after the crisis. It means they are using future revenue to survive right now. The interest for this loan should be very low and if they default in the future, the govt takes the hit. The hope is that not all businesses will default at the same time, and just like the hospital, these loans flatten the default curve, and prevent the economy from spiralling into a deep depression from these defaults.
- ksdale 7y ago
  I understand that’s how it is meant to work, but I think small businesses are, on average, a lot closer to insolvency than people think. This is like offering low interest loans to... anyone to get through the crisis. It’s definitely better than nothing, but it doesn’t replace income, it just shifts it around (as you mentioned), which doesn’t help very much when you’re so close to insolvency. They’ll come out the other side with debt service payments that make business “survival” kind of pointless, unless there’s a ton of pent up demand and their revenue is much higher.
  - chii 7y ago
    > make business “survival” kind of pointless they continue to survive and make the payments. Yes, profits will tank, but eventually they will pick back up. It's not like there's a better alternative. It's better than shutting doors - you may not be able to pick back up when this all blows over.
    - ksdale 7y ago
      Just as a hypothetical to illustrate my point, it's really common for small business owners in low margin businesses (like retail and restaurants) to have take-home pay of about $50,000 on $1,000,000 of revenue, which means they have $950,000 of expenses in a year. Even if they don't have to pay for certain parts of their business when they're shut down, how many hundreds of thousands of dollars of debt would they need to take on to keep the business in existence for the next few months? How many hundreds of thousands of dollars of debt can $50,000 of net income service, even at .5% interest? Those dollars for debt service come straight out of the dollars for living expenses. It may be better than nothing, but it may also not be. Trying to start over from scratch may be better than trying to start back up with basically any kind of additional debt.

dogecoinbase 7y ago

> Assets don't just disappear because they're not used. This is fundamentally incorrect insofar as the only asset of any small business is typically the labor it employs. Large businesses have intellectual property, capital, real estate, vehicle/equipment fleets, and so on, but nearly all small business have a lease, their on-site inventory (frequently perishable), and their people. All of their ability to continue operations is represented by their ability to retain those people.

mikeg8 7y ago
Over generalizing. Small businesses may own all of the same asset types as large corps, just on a different scale.

wayoutthere 7y ago

Most small business owners don't have "wealth" these days; working assets are usually leased so if they're not working, they're an active drain on your cash reserves. Businesses go bankrupt for cash flow reasons all the time. I know a few small business owners with 5-10 employees, and they all take home less annually than I do working a salaried job. The other challenge is that when customers do start buying again, you have to start whatever marketing engine you had back up again at the same time everyone else is doing the same -- which is going to make it really expensive for everyone (while also ramping up the velocity of Google's money printer).

TheSpiceIsLife 7y ago

> Yes, business owners will eat some loss to their personal wealth. You might be overestimating the extent to which many business owners have any wealth at all.

jtdev 7y ago

We’re not talking about Coca-Cola Corporation there buddy, we’re talking about non franchise restaurants, bars, hotels, salons, etc. A year of no income for these businesses will cripple them, and coming back to a mountain of debt (even if low interest) will essentially ensure that they never become profitable again.

buckminster 7y ago

The business may no longer be profitable because it is now servicing a large debt it didn't previously have. And unlike regular business debt, the money wasn't invested into something productive. This could go very wrong. Then again, if the business is going bankrupt anyway, who cares how much it ends up owing?

smallgovt 7y ago
SBA loans are backed by personal gaurantees. In other words, the business owner is on the hook if the business goes bankrupt.
dcolkitt 7y ago
Let's take a typical small business, and say it does $1 million a year in revenue. Cost of goods sold is $600,000 and fixed operating expenses are $350,000. Net margins are 5%, as is typical in small retail businesses. (These numbers are almost dollar for dollar from a local merchant-proprietor I know.) Let's say the quarantine results in revenue falling by 70% over the next four months. Without a reduction in fixed costs, the business experiences a $76,000 operating loss. (About equal to 1.5 years of pre-tax profits.) Assume a 10-year amortized loan at 4%. The cost of servicing the loan comes out to approximately $9500 a year. Which only reduces the ongoing annual cash flow by less than 20%.
- brayhite 7y ago
  You’re assuming that four months have gone by and they didn’t have to sell assets to pay bills. Or relocate. Or lay off employees. Or employees quit because they couldn’t be paid with the loss of revenue. You’re modeling makes a lot of assumptions and discounts too many human-driven variables.
  - dcolkitt 7y ago
    > You’re assuming that four months have gone by and they didn’t have to sell assets to pay bills. That's exactly why the government is giving them loans. To cover the fixed costs during a period of temporary disruption.

rguzman 7y ago

> The primary value of a business is their assets, brands and expertise. All of those things will be just as valuable after the pandemic as they were before. this doesn't seem true to me. at least the brand loses value over the pandemic, and there's likely complications from cashflow that eat into other assets.

AnimalMuppet 7y ago
Why does the brand lose value? My favorite restaurant is still a place where I want to eat when this is all over. My favorite brand of toothpaste is still the one I want to buy. How does the brand lose value?
- hnick 7y ago
  By saying the brand itself has value, aren't you saying that if the owner gets into debt and has to sell it off to someone else it'll be just as good? That wouldn't give you pause? In many cases small businesses derive most of their quality from the actual owner. They don't respond well to drop-in replacements of key staff members and owners.
  - AnimalMuppet 7y ago
    Well, in the case of toothpaste, it's not a small company. The restaurant... yeah, if they changed owners and blew up what I like about the place, that would kind of stink. Or, the new owner could be better than the old. That could happen, too. Either way, it wouldn't be the same... unless they hired back the key players.
    - hnick 7y ago
      Yeah it's a bit tough for some small businesses. Anything related to style (cake decorating, floral arrangements, graphic design, sign writing, etc) or other subjective tastes will often have a brand which has value with current customers but will easily lose it if someone else takes over. Even if the work is still solid, it can alienate existing customers.

avip 7y ago

You seem to be conflating some Bezos-level corp. owner with a poor guy cooking Raman down the street.

selimthegrim 7y ago
I suppose both are cannibals from a certain point of view

treyfitty 7y ago

Your tone suggests that "small business owners" suggest that they're all better off financially than the average salaried employee. Well, as a former restaurant owner, I can tell you that in good times, the margins across the industry is 5% if you're doing above average. That means, a $2MM restaurant (which isn't an easy feat, even in NYC) will only net the owner $100K. Loans were, and always will be, a false promise. There's too many variables in the equation that make it not appealing. TLDR; Small business owners don't have "wealth." Get that out of your head and be sympathetic to what small business owners that you frequent have to deal with.

pertymcpert 7y ago

How out of touch with the real world can you be to think that small businesses can afford to service enough debt to survive a year? Do you know how small the margins are for many every day businesses? Jesus.