FPC Blog

Ripping Off the Band-Aid: Why Payment Protection Programs are Not Good in The Long Term


With speculation that another grand wave of COVID will strike again by fall, business owners and entrepreneurs should be stirring up a plan on how to handle it. When COVID originally swept the nation, it came as a surprise for most and suddenly caused major disruption for nearly everyone as a result of nation-wide stay at home orders. And even as things slowly begin to open back up, it will be awhile before we re-establish a sense of normalcy. That being said, if a second spike in COVID rates come about and the nation shuts down once again, you should not be caught off guard. Now is the time to prepare and set up your course of action.

If your business has survived up until this point, it is not just by chance. It is because you have a strong ability to adapt and adjust. However, one of the hardest parts of adapting has been finding funding sources that would allow you to press forward during these high pressure times. One of the first sources that many businesses turned to was obviously the government and they responded by establishing Payment Protection Programs aka PPP’s. While in theory this sounded like a good plan, when put into action it’s not going to turn out well for many of the small businesses and entrepreneurs out there.

Let me explain why.

For starters, a lot of the funds dedicated to the PPP were not distributed to the people who needed it the most. It comes as no surprise that a lot of the funds went to big corporations that already have investors and money in reserves. Meanwhile, hundreds of thousands of small businesses have had to close their doors because the government either left them with empty promises or the assistance came way too late. And even if you were able to receive PPP funding, the danger doesn’t stop there.

There are millions of small businesses still at risk.

As I have watched Congress scramble to get working capital to businesses across America, it’s clear to me that we’re now seeing a gigantic exercise in bridge lending. For those of you who don’t know, bridge lending is putting money into a company in an attempt to “Bridge” the otherwise normally healthy company into a time in the future when they are financially self-sustaining. In venture capital, start-up companies routinely commit to short-term loans that bridge their negative cash flow into a larger equity financing (i.e., “permanent capital”).

However, lending to an ENTIRE economy of normally healthy, mainstream businesses isn’t normal. It’s a new drill for our government and for the private investment community, both institutional and HNW retail investors. This is why it has come with so many kinks along the way. Usually evaluating an investment, in particular, a bridge loan, is all about expectations and the data supporting those expectations. Sometimes you are right (generating investment income) and sometimes you’re wrong (you lose on the investment).

However, with COVID, there are so many unknowns, that investors have to shift their thinking a bit. There needs to be talks about bridge lending or other investment structures that give businesses a sufficiently long window to either A) return to their “old normal” (pre-2020) or
B) find their “new normal.” My guess is that it will take 2 years or more to find financial equilibrium, considering the disruption to supply-chains that has occurred.

With the PPP, there just isn’t enough time for businesses to regain their footing. Yes, it is a necessary band-aid. But, in two months, one of the following will have happened:

  1. A very high level of small business bankruptcies
  2. Another massive PPP-like infusion has to be established
  3. Longer-term loan and equity investments have to be put in place.

Personally, I’d rather have individual investors determine which companies survive COVID through thoughtful, case-by-case investment analysis, rather than the government, provide an ongoing “Get out of Jail Card” for all. While the government is making an effort to help, their methods are actually doing more harm than anything. Leaving the small business financial aid in the hands of investors who know the best ways to efficiently funnel money into a company, is much more useful. It’s tough, but it’s the only way to beat the odds– it’s why capitalism works.

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