By ARTHUR VIDRO
By Arthur Vidro
Times are tough for everyone. Unemployment – sometimes disguised as a “furlough” – is way, way up. A huge number of businesses have shut their doors to the public. That usually means eliminating paychecks to staffs.
Eventually, conditions will improve. Most shuttered businesses will re-open. But not all of them.
Businesses in trouble before the coronavirus struck will still be in trouble after it abates, probably more so. If your shop is closed, your income is a thimbleful compared to what it used to be. Yet you still have major bills to pay. Rent on your store. Payments on the loan you took out to open your business. Payments for leased equipment.
Those bills aren’t going away.
It is comparable to what individuals face at home. Paychecks not coming in. But the rent or mortgage is still due. The property tax is still due. Utility bills are still due.
Yes, there are provisions from various levels of government to keep tenants from being evicted or their power turned off. But that doesn’t do away with the debt the individual is amassing.
Programs that “defer” your rent payments for three months do not lessen the amount you owe. You will still, after three months, owe three months’ worth of rent.
“Forbearance” is another fancy term bandied about. Forbearance merely means no legal action will be taken against you, for a given term, if you fail to pay your creditor. But the full debt remains, and with each passing month your debt-load will increase, because interest will continue to be added to your debt. Whatever you owe now, you will owe more later.
Yes, some businesses are being helped by congressionally approved programs, allowing them to access money. But if you read the fine print on these deals, you will see that even free money isn’t always free. There are strings attached, as perhaps there should be.
Free money that covers eight weeks of expenses turns into an interest-bearing loan unless at least 75% of the money is used to pay salaries. But for some businesses, salaries are dwarfed by other fixed costs. Some businesses don’t even have employees. A one-person tailor shop; a cobbler; a photographer; a printing shop. The federal loan programs won’t help them, though filing for unemployment might help.
Also, what will a business do after eight weeks are up and they are still not in a position to re-open?
Some small businesses are learning that banks administering the government’s loan program are favoring those companies that already do business with the bank, or that are very large (the larger the loan, the higher a bank’s fee). Some wannabe borrowers feel they have gotten pushed to the back of the line.
If you are a small business that was struggling to survive, you might not want to borrow. You might be uncertain your business will survive. Even if you do re-open, your customers might be slow in returning, with some not returning at all. If the business goes under, you don’t want to be liable for more debt than necessary.
Truly large companies, on the other hand, are having money showered on them. But they, too, are finding some strings attached. They might have to do what General Motors did back in 2009 – allow the government the option to get an ownership interest in the firm.
Shake Shack, an international chain of tiny fast-food shops (though no outlets in Vermont or New Hampshire), received $10 million last month through the federal government’s Paycheck Protection Program (PPP). Yet the company is returning the money. Company leaders wrote, “The PPP came with no user manual and it was extremely confusing.” Guess they didn’t care for the attached strings. Instead, the company will raise money by selling stock.
I usually root for the stores I frequented in my childhood, such as J.C. Penney. If that department store emerges from the virus crisis and re-opens, I would be pleasantly surprised. But I don’t expect them to be around much longer. Too much debt taken on over the years.
One reason Sears held on for as long as it did, before declaring bankruptcy, is they owned a large number of their stores. They weren’t paying rent on those stores. Sears could even sell the land itself to raise funds. Not so with Penney.
For people and businesses, large or small, if you entered the crisis with heavy debt, you’ll probably emerge from it with even heavier debt.
And some businesses won’t re-open.
Ifyou have consumerism questions, send them to Arthur Vidro in the care of this newspaper, which publishes his column every weekend.
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