Our Main Streets are rightfully empty, but we need to be very careful that small business is not another victim of Covid-19
For a long time now we have hesitated to write about the impact of running a small business during pandemic-related shutdowns. This is a time when everyone is making sacrifices. Geoff and both of our son’s have asthma and a genetic mutation (alpha-1 antitrypsin) that makes them especially vulnerable to upper respiratory infection. We spent days in the ICU with our preschooler just this past December because of acute respiratory distress from a pneumonia that actually collapsed his lung, an ordeal you can read about here. We have a real, visceral understanding of what it is like when the maximum supports a regular hospital room offers is insufficient, and a family member is literally dying to get into an already-full ICU. As you can imagine, we take all of the warnings with great seriousness, and safety for the community drives our decisions. We have so much love and respect for our medical care workers who are truly on the front lines of this, working overtime and at their own risk. We are following rules and washing our hands and keeping a social distance.
Our child ended up in the Pediatric ICU this December when a severe pneumonia collapsed his lung. Even then the ICU was full, and it took him crashing while on the highest supports a regular hospital room could provide to get full treatment. We definitely understand why folks need to be cautious.
But at the same time, we are deeply worried for the small business community. As this situation has unfolded, we have been in conversation with dozens of small business owners in our circle who work in a variety of sectors. In a country where small businesses were already fighting to make a claim for their communities against the sheer power of Walmart and Amazon, well…let’s just say that Walmart and Amazon might be some of the only businesses thriving in these times. Meanwhile, the beauticians and barbers, gyms, tattoo parlors, and even dentist and PT offices are forced to close entirely. Other businesses, like restaurants, are struggling to achieve a new normal by completely revamping their services. It is new and uncharted territory, and none of us know how long it will last. As a couple who own a few small business, including a retail store, an event space, a bar, and a coffee shop, we would love to help others understand some of the big issues affecting small businesses right now and to offer some recommendations on how policy can help small businesses, like ours, survive.
What are the losses like?
The losses small businesses are facing vary. For small brick-and-mortar retail, we hear about sales being down 60 to 80%. In restaurants and coffee shops, like ours, we are seeing losses of around 40 to 60%. Other businesses that involve working closely with clients have had to close entirely, meaning there is no revenue coming in. For example, we have friends who are parents of three children. The mother is in fitness, leading yoga classes; the father owns a tattoo parlor. Right now, their only source of income is online subscriptions to classes. The self-employed are not eligible for unemployment, so there is no option to lay themselves off. They simply don’t have an income.
We built our businesses with our own hands. This former JC Penney building in Corbin, Kentucky, was painstackingly renovated to become a wedding and event venue, 2nd & Main
We have seen impacts across all of our businesses. Our retail store, Moonbow Mercantile, was forced to close early because it contains a bar and our type of license does not allow package sales. We are working on online sales, but right now the revenue is at zero. The sales at our coffee shop, Moonbow Tipple, have dropped by around 70%. The event space, Second & Main, is the worst hit. Not only is there zero revenue right now because no gatherings can take place, we have processed over $700 in refunds and expect that number to go up. All of the rescheduled events are cutting into future dates, severely limiting future sales, so we will definitely be lean the entire rest of 2020. Meanwhile, we still have all of our regular expenses, including a loan to repay at around $3,000 per month and utilities that are well over $2,000 per month. We have 5 employees on payroll to think about – something we will talk about more in just a moment.
To make the kinds of hardships businesses are facing more clear, let’s talk about the coffee shop for a moment. Moonbow Tipple Coffee & Sweets is located on Main Street in Harlan, Kentucky. We worked hard to create an online ordering platform so that we can remain open for curbside pickup and takeout orders, but we are absolutely experiencing losses. Sky recently wrote about how the shop often operates at around $200 in revenue per day, which comes close to breaking even, since we spend about $100 per day in staffing costs and $100 in the costs of the goods we sell (those cups and lids aren’t free; in fact, our costs are rising due to panic-buying). Well, this past Wednesday we made $109.90 in sales. You can tell right away that we operated at a deficit: that isn’t enough money to recoup our costs and cover labor. Some days have been better, some have been worse, but every single day we have been cutting into our cash reserve by anywhere between $10 to $90 per day. When you think about utilities and other expenses, we are losing around $500 per week. This is why businesses are closing. We are having conversations with other business owners daily about how long they can sustain losses like these and remain open. Ultimately it is about cash flow and the kind of cash reserve the business has. Our cash reserve is $6,000, and when it is gone it is gone. We could drain our account dry and stay open for a couple of months at most. But as we look at a recession ahead, we will certainly be vulnerable once our cash is gone.
Employees and the Self-Employed
Why haven’t we closed the coffee shop, if it is operating at a loss? Well, we, like so many others, have employees to think about. We have a staff of 4 at the coffee shop and 2 at our event space and retail store (we don’t pay ourselves, so we didn’t include ourselves in that figure). They are an amazing team of women who have stepped up beyond our wildest imaginations during this time of crazy transition. They have taken on new roles, helped create and follow entirely new protocols, and continue to show up to work when others are staying at home.
Obviously, reducing staff hours is the easiest way to reduce costs. This could mean laying staff off or cutting hours. Many businesses are going to be forced to do layoffs, no doubt – several have already begun. But there is a balance to maintain, because Unemployment is not straightforward for either the recipient or the business—we will talk about that next. But let’s remember that not everyone is even eligible for Unemployment Benefits. Most self-employed individuals are not eligible to cover themselves, and neither are contract workers. Most tattoo artists and beauticians work as contractors, or 1099’s. Unless you are a W-2 employee, this is not even an option. Their only avenue of help right now is SNAP – the program that provides money for food in times of crisis. But how will they pay their rent or mortgage? This is a very serious situation, especially when Goldman Sachs is predicting that around 2.25 million Americans will be jobless by next week. And remember that while each small business may only have a few employees, taken together small businesses provide almost half the jobs in the United States.
Unemployment Insurance
Small businesses owners pay for Unemployment Insurance for their W-2 employees, but it may not work in the ways that you think. The unemployment compensation program is intended to help tide folks over while searching for work; it never pays for 100% of the salary you received before, but rather a smaller percentage. For example, if you have a fulltime (40 hours/week) job that pays $12/hour and get laid off, guess how much unemployment you’ll collect a week? $297 a week or about $1,200/month. No matter how frugal you are, that’s barely enough to buy food after you pay rent and utilities. The benefits also max out at $552/week, no matter how much you made in the job you lost.
Not only that, not all workers are eligible for unemployment. For example, in Kentucky you have to have been employed for 2 quarters (6 months) to be eligible. If you got that $12/hour job 4 months ago—and didn’t come straight from another job—your weekly unemployment benefit is $0. For us, our Coffee Shop has not been open for 3 months yet. That means if we lay our baristas off, they cannot receive any unemployment benefits since none of them were working before. They simply aren’t eligible.
Moreover, it hurts small businesses to have former employees apply for benefits. The premium you pay is based off the percentage of employees who have made claims. When you only have a handful of employees and they file for unemployment, your premiums go way up in the long-term, increasing your costs. Again, as we go into a recession we are asking small businesses to shoulder additional burdens. Will that extra premium be the straw that breaks the camels back? We often literally count dollars before we run payroll, and we are not alone. These small additional expenses can be incredibly burdensome for small businesses.
Access to Emergency Loans
We have all heard that the Small Business Administration (SBA) is going to offer loans to small businesses to help them through. A loan could increase the cash cushion to cover costs like payroll. Still, most small business owners we know are very reluctant to apply for another loan. After all, most of us have maxed out loans and credit cards to open our businesses in the first place. Remember that $3k we pay each month to repay our loan for renovation and startup costs? If we add to it, we are adding to our expenses at a time when our country is going into a recession.
Not only that, but our good friends at the SBA (who are doing the very best they can) tell us that after a complete application is submitted it will take 3 weeks for any funds to be disbursed. That is actually quite fast if you’ve ever applied for a business loan, but it’s a lifetime for small businesses operating without revenue. If and when we do qualify for these loans, their uses are specific and limited. For example, the SBA emergency loan has a below-market interest rate (3.75%), but you can’t use any of it to pay off higher-interest debt. We are actively seeking out funds at this time, and are hoping that we can find something better.
Payroll taxes and other mechanisms of relief
Geoff works with a variety of promising small businesses in Eastern Kentucky through his small business accelerator, Invest 606. All of these small businesses are facing difficulties and they need the support of decisive leadership.
Payroll taxes are mysterious to many. To keep it simple, payroll taxes are paid on the wages of any W-2 employee and they are used to help fund social insurance programs, like Social Security and Medicare. As a small business, we typically pay $5,000 per month in payroll, and about $1,000 of that is in payroll taxes. Our employees make their own contributions, which are eligible for a tax refund if they earn under a certain amount. But small businesses never receive a refund on payroll tax. Keep in mind that we employ four people in a county that already had a 46% poverty rate – literally one of the poorest counties in the United States. When we opened up 2 barista positions, we had 96 people apply because there is such a severe shortage of jobs in the coalfields of Central Appalachia. But there are no relief programs for businesses like ours, and the higher wages you pay your staff the higher payroll taxes you incur. Instead of tax breaks, we pay thousands of dollars per year in licensing and permit fees, and the full amount of payroll tax.
Would suspending the payroll tax help us out? Heck, yeah! With the amount we pay in payroll tax each month, we could hire an additional person. It would certainly allow us to continue to pay our staff longer. Not only that, but suspending the payroll tax would also put more money in employees’ pockets. Take a look at your check stub and imagine what you would do in this crisis if all the taxes beyond state and federal income tax went back to you.
Recommendations
We got a little bit in the weeds in explaining unemployment insurance, emergency loans, and payroll taxes, but these are the things small business owners are thinking about right now. So, what can be done to help before Walmart and Amazon take over the world? First, if you are able, please continue to buy from local businesses. Every coffee, burger, and gift you buy from a local business right now feels like a gift from God. Second, there are some specific things that really only the state and federal government can do. We thought we would list those out here:
Immediately offer Disaster Unemployment Insurance. This is a federal move that would allow the self-employed to claim Unemployment Insurance without the usual liable employer.
Immediate suspension of all employer and employee payroll taxes for businesses with less than 50 employees. 50% reduction for businesses with 51-400 employees.
Freeze unemployment insurance rate for 18 months for all businesses with fewer than 500 employees
Immediate $3,000 non-dilutive (grant) funding to all businesses mandated to close entirely (e.g. hair salons, dentists,). $1,500 non-dilutive funding to all businesses still open with fewer than 50 employees.
Emergency loans up to $10,000 with a 72-hour turnaround, 0% interest rate, no collateral required, with 2-7 year terms for any business with fewer than 50 employees
These may sound extreme to some, but without significant intervention tens of thousands of small businesses will close forever. Plus, the amount of money it would cost isn’t anywhere near the nearly $1 trillion we spent bailing out big banks in the 2008 financial crisis. Maybe this round we can actually help the businesses that make our community and lives better?
A Note on Resilience
Owning a small business is hard work that takes a good deal of ingenuity and fortitude. We have been in some tough situations to keep our businesses going. You can read here about the winter we lived without heat—our children were 3 and 8 years old—because we simply could not afford both heat and keeping our businesses going. These are the kinds of decisions that small businesses owners are making right now, and believe me, many are pulling their belts as tight as they can get. We know that we aren’t “too big to fail.” Many of us will not survive this time.
But small businesses are the lifeblood of our community. Our coffee shop is the safe place teens hang out after school, and the place where the nurse gets some sustenance to keep going through that 12-hour shift. Our event space hosst weddings and memorial services, and our retail store sells the handmade items of over 50 different artists. These are services that cannot be replaced by Amazon and Walmart. If our country decides to hold up only those that employ 500 or more, we all stand to lose. As we strive for unity, let’s find ways to keep America’s Main Streets going.
Sky and Geoff Marietta are passionate about rebuilding Main Street businesses in Appalachian Kentucky. Look for some of our blog posts below, or find out more about our start here.
