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  • KPB & Co Research

Summary

Small businesses are among the companies that are most at risk from the spread COVID-19. Consumer demand is declining substantially, the global supply chain is being disrupted, workers are being sent home, and some businesses have been forced to shut doors due to government controls. In this type of situation, many small businesses will likely not reopen. Though governments have been working hard to come up with short term funding for small businesses through loans and tiny grants, the small business owner will do well to diversify his/her options given that the criteria for government programs can be unpredictable. Additionally, governments have a vested interest in channelling most of the benefits to employees in order to secure votes in the future. So when a private company like Facebook commits to hand out US$100Mn in grants, many entrepreneurs should consider throwing their hat into the ring.

Government Aid Are You Sure?

Most governments have proposed plans that will provide support to individuals and businesses, but it is risky to assume that this support will be handed out fairly. A lot of the support that will be given to businesses will be distributed through commercial banks rather than directly. Governments have committed to pump billions of liquidity into the financial system hoping that banks will then lend more to businesses. However, in times of economic stress, banks and credit rating agencies will assign a higher credit risk to small businesses because they are the most vulnerable. This means that if banks do lend, and in many cases they will be reluctant to, the interest rates on these loans will be high even in a context where central banks have slashed their policy rates . The more popular government policies, such as the UK's commitment to cover 80% of employee's salary and Canada's commitment to cover 75% is more directed at protecting jobs as opposed to protecting companies. On the positive side, protecting jobs means protecting consumer demand for a businesses product or service, at the same time a small business can get lost in the crowd as consumer demand is not often shared equally among suppliers.

Facebook's Offer

Facebook's chief operating officer Sheryl Sandberg announced that Facebook will set aside US$100 million to provide to small businesses in 30 countries. The grants will be provided through a combination of advertising credit and cash, and will be distributed based on size and need. More details are scheduled to come. Let us be frank now, Facebook is doing this because they expect to be in a win-win situation. As such we can expect that a lot of the benefit will likely flow through advertising credits as opposed to cash, given that this will force businesses to spend the benefit back on Facebook's products while making Facebook appear to be "saving the world". Regardless of the construct, advertising credits is as good as gold if it is coming from Facebook. The company's global reach of well over a billion active users is an enormous value add to small businesses. In times of economic hardship, advertising is very important to remind customers of a business' value proposition just in case customers are considering that the business' product or service is non-essential. Cash grants are expected to go towards paying for rent, interest payments, and other operating costs. Facebook has created a portal through which businesses can apply and get more updates on the program.

In closing

Murphy's law - if anything can go wrong it will - is apt in these times as many of the "help" that small businesses expect to receive will likely not arrive. Going forward, the "you don't meet the criteria" remark will be used a lot. Small businesses therefore should look for help anywhere and in any form, as such help could mean their survival. Supplier credit and grants are a good source of short term capital, and can present win-win situations where the supplier is looking to strengthen their relationship with their customers and the small business is looking to survive.

For businesses in the retail sector that are seeking ways of adapting to the changing economic landscape, here is a podcast that can provide some ideas.


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