The former Olive + Oak space. photo by Jonathan Gayman

The CARES Act won’t save St. Louis restaurants

Like every other small business owner in the country, local restaurateurs were anxiously waiting for the federal Coronavirus Aid, Relief and Economic Security Act (CARES)which was passed on Friday, March 27. CARES provides $2.2 trillion in economic stimulus to counter the devastating financial effects of the COVID-19 pandemic on the U.S. economy. The act contains multiple provisions for small businesses and workers that could benefit restaurants and service industry employees, but that aid is just a drop in the bucket of what is needed.  


Benefits to workers come directly in the form of expanded unemployment benefits applicable to a broader range of folks, including those who are part of the so-called “gig economy” and part-time workers. This includes an additional $600 per week to regular unemployment benefits for qualified applicants. This is good news for the staggering number of hospitality workers laid off when restaurants were mandated to close their dining rooms. 


The key benefit for restaurant owners outlined in CARES is a series of loans offered through the Small Business Administration (SBA) to businesses, some of which are forgivable. The Paycheck Protection Program (PPP) allows businesses with 500 or fewer employees to apply for a federally guaranteed loan that can be used for payroll, mortgage interest or rent, benefit costs and utilities, among other items. The loan is based on 250% of a business’ average monthly payroll costs.


“My general sense is that it’s a pretty straightforward ‘yes’ on whether or not to take this [PPP] loan,” said Peter Boumgarden, professor of practice, strategy and organizations at Washington University’s Olin School of Business. Boumgarden worked with a group of restaurateurs from St. Louis and Kansas City, along with representatives from Missouri Sen. Josh Hawley’s office in the lead-up to the CARES Act, attempting to get restaurants’ specific concerns addressed in the legislation.  


“It’s a case of no revenue at all versus the possibility of a forgiven loan,” he said. “In my view, for most restaurants, it makes sense. Think of it basically as an eight-week loan. If you maintain payroll at 100%, a good portion of the loan would be forgiven.” He said if payroll isn’t maintained, part of the loan would be forgiven and the rest charged with a small interest rate. 


However, Boumgarden said each restaurant should take its own specific model into account before taking the leap. The equation might be different for a fine dining restaurant versus a fast casual one, for example, and the question owners need to ask themselves is whether their business will be back to normal in eight weeks.  


While CARES is the largest stimulus package of its kind ever passed in the U.S., it’s still only a start. Niche Food Group co-owner Gerard Craft said he doesn’t believe the PPP is broad enough in scope. “There’s not a ton of clarity, but … your options really are to keep all of your people on and keep a payroll for a business that’s not operating.” He said that means restaurants, many of which have fired most their employees, will now have to rehire staff, pay them for two months and then fire them again.  


Craft said two months isn’t enough time for a business owner to recover, especially considering how long stay-at-home orders might be in place. “I know the idea behind it is to keep everyone employed, but the fact of the matter is that this is not what this is going to do,” he said. “Two months of payroll is not going to keep everyone employed for however long this goes.”


“That, ultimately, to me, is one of the key questions people have to wrestle with: the extent to which they think it’ll be back to normal in eight weeks,” Boumgarden said. He and some Washington University students have actually come up with an analytical tool that can help them model how their business might look in eight weeks and implications for the loan. 


“The challenge for the hospitality industry compared to other industries is that consumer confidence is down a bit and people are feeling less stable,” he said. With unemployment skyrocketing, Boumgarden said, it’s likely people won’t be going out to eat as much in the coming months. He said it’s also possible that people coming out of long-term social distancing might not want to be in crowded spaces eating next to each other for a while.  


“The industry is going to be hit harder than some other businesses, where the issue is just delayed revenue,” Boumgarden said. 


Boumgarden said restaurants need to look for alternative revenue streams in order to stay afloat like many have already done by pivoting to carryout and curbside pickup. While there is already talk of pumping more funds into CARES – the Washington Post reported that the Treasury Department is already requesting an additional $200 billion – Boumgarden said what is definitely needed is more targeted funding for the specific needs of each small business, especially those like the hospitality industry that have taken the most direct financial hit from the crisis. 


Craft said another weakness of the act is that it doesn’t address how businesses will start up again once the crisis abates and they have to restaff and purchase food and other items. It takes a significant amount of money to open a restaurant.  


“There’s usually a running inventory, so you’re kind of in flux, but to start all over again from scratch is tens of thousands of dollars in products,” Craft said. “Then add the cost of the labor to produce all that stuff from scratch, as well as training new people because some [employees] have moved on and gone to different industries.” 


Mark Hinkle, co-owner of Olive + Oak and The Clover & The Bee, said CARES is a lifeline.  


It’s good for now, but it’s only scratching the surface of the needs that are coming," he said. "It’s hard for people to understand that $2 trillion isn’t enough. It’s not close to enough. I know it’s a hard pill to swallow.” 


Hinkle said the nature of the restaurant business means there aren’t a lot of cash reserves on hand. His own payroll is approximately $100,000 every two weeks. “We might have that for two weeks, but not two months,” he said. “The well dries up quickly.”


Some small business owners are wary of taking on new loans at all.“Especially at a time when we don’t have any money coming in, it feels strange to take on debt. I think that’s my biggest concern,” said Tiffany Unger, owner of The Wandering Sidecar Bar Co. “We could use the assistance, but I have trepidation about taking on debt right now.” She said she’s taking a wait-and-see attitude and may apply if the crisis drags on.  


“Piling more debt on top of what I already have is not helping,” Hinkle said. “It’ll make us weaker on the other side.” 


While some of the SBA loans can be applied for concurrently, there are restrictions. For example, multiple loans cant be used for the same purpose. It’s imperative that business owners check with their lawyers, accountants or financial planning pros before committing to loans. 


One substantive aspect of CARES that Hinkle does applaud is that the SBA loans will subsidize six months of payments on current non-disaster loans, including principal, interest and applicable fees. This subsidy will apply to new loans taken out within six months of March 27, 2020. However, the aid will not apply to PPP or economic injury disaster loans. 


With so many elements to consider, these choices are already confusing and difficult to make. One of the biggest hurdles businesses and individuals face in accessing relief via the CARES Act is wading through hundreds of pages to find out what it actually entails. 


“Everyone is just starting to figure it out, which I think is one of the big problems right now,” said Craft. “Did they make it so confusing so we’d all just shut up?”  


Hinkle said the process to apply for aid hasn’t been a smooth one for him. “The best attorneys and bankers in the world are trying to decipher this,” he said. “By the time the bill is untangled, it’ll be time for another round of aid.”


Matt Sorrell is a longtime contributor to Sauce Magazine.

Tags : News, Coronavirus