Gusto COO Lexi Reese on the push to forgive small business loans amid pandemic
In this episode of Facing Forward, Margaret Brennan talks with Lexi Reese to talk about the state of small business in America during the COVID-19 pandemic. Reese is the chief operating officer of Gusto, a platform used by more than 100,000 small businesses to facilitate their payroll, benefits and HR needs.
Highlights
- On whether federal aid has helped small businesses: "Congress intended the PPP to accomplish two goals: help small businesses cover their near-term operating expenses, which we knew were going through the roof, and two provide an incentive for employers to retain their employees and keep them on payroll. The intent was right. The impact has not been felt well… Tons of businesses, nearly one in four business owners who have not applied for loans in round two, is because they haven't had their first loans forgiven."
- Minority owned businesses disadvantaged by federal program: "75% of Black-owned businesses have not had their loan forgiven. That's compared to 56% of white business owners. Ninety-six percent of Black-owned businesses are sole proprietors or businesses owned and operated by one person. And sole proprietorships struggle to get access to PPP funding again because the documentation requirements are particularly onerous on these businesses. But it's not because they don't need them. So the fix is SBA can prioritize minority-owned businesses and make sure that the access is commensurate with the representation that these businesses have in the American workforce."
- On women forced to leave the workforce during the pandemic: "Women in the labor force is at a 33 year low… women have made incredible gains in the economy over the past decade and they are employing other women, but they've been making gains in industries that are the hardest hit by this pandemic, especially those that rely on face-to-face interactions, salons, spas, education, retail… women dropping out of the workforce or closing their businesses to be able to take care of their kids who can't go to school… this doubles the trouble for women-owned businesses."
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"Facing Forward": Gusto's Lexi Reese transcript
Producers: Richard Escobedo, Anne Hsu, Kelsey Micklas
MARGARET BRENNAN: Lexi Reese, it's great to have you on the podcast.
CHIEF OPERATING OFFICER OF GUSTO LEXI REESE: Thanks, MARGARET. Happy to be here.
MARGARET BRENNAN: So I think one of the most interesting things about you is- is what you did before your current job. When I was reading your bio, I was impressed to learn you started out in filmmaking. Then you became an activist. Then you went to business school, and now you're the chief operating officer of a company that, you know, helps other small businesses get their employees paychecks and the taxes paid and all that. How did you go through that arc of different careers?
REESE: Thanks for asking. I, you know, Gusto where I am today that helps small businesses pay, provide health insurance and financial benefits to their employees, is- is kind of the culmination of all these chapters.I have been- I've spent my life in pursuit of how do you give opportunities and access to capital, to small business owners and the people that rely on them. And the community impact and the economic impact in nations, when you do this well cannot be understated. And those impacts benefit women across all groups and women of color in particular, because for many people, these are the- this is the way to create a path and to create generational wealth.
MARGARET BRENNAN: I love that connecting the dots to- to show how finance is kind of the lifeblood of getting businesses going. So tell me a little bit- I mean, you're a company that works in this field, so you can also see generally who out there is hiring and firing and people's pay rate these days. We're 11 months into this pandemic. How hard is it to survive as a small business?
REESE: It's hard. It's hard. Businesses with fewer than 50 employees account for 95% of businesses nationwide. 95% of businesses nationwide. So really small business as a sector is way too big to fail. And the existing aid and what Congress wants to have happen, this is just- it's not happening. back in March, small business layoffs spiked at 1000% and Congress realized this was a national emergency, which was great. So we had the Coronavirus Aid Relief Economic Security Act or CARES. And the cornerstone of that act was the Paycheck Protection Program, or PPP, which was an emergency lending facility administered by the Small Business Administration to provide small business loans on favorable terms. So Congress intended the PPP to accomplish two goals: help small businesses cover their near-term operating expenses, which we knew were going through the roof, and two provide an incentive for employers to retain their employees and keep them on payroll. The intent was right. The impact has not been felt well.
MARGARET BRENNAN: It was a bumpy rollout, but it was a very popular program. It got bipartisan support. It was renewed in other bipartisan bills. What part of it is not working for your clients right now?
REESE: Yeah, so I think it has- since March been a roller coaster and it's been chugging uphill since the first round of PPP funds were released during the summer months. So summer seemed positive. People were taking the aid. And then colder weather set in. The first package ran out. It took a while to get the second package. We have at Gusto talked to 1100 small businesses about this weird dynamic that's happening right now where Congress says, well we made the aid available, the second round still has 65% of the allotment not taken by small businesses. So we talked to 1100 small businesses to say why, why is this happening? And there's two reasons that are both fixable, and it's around eligibility requirements and forgiveness requirements.
MARGARET BRENNAN: So for eligibility, you have to show what you got, a 25% decline in your revenue year over year.
REESE: Right, but the important part is it's for gross revenue. But gross revenue can make things seem really rosy because it doesn't account for all the costs that you've in- you've incurred as you shifted your business model. So you as a business may have installed protective barriers or supplied employees with masks and gloves and buying heat lamps. And your costs have gone up, but your overall revenue gross stayed higher or may look higher. So I'll give you an example that brings this to light. Silver Branch brewing in Maryland. They are a taproom and they had to shut down during lockdowns, but they pivoted to an e-commerce platform and they started canning beer. It was great. That- their customers loved it. They got more customers. But the cost of canning beer is way higher than just- just providing it in person. So on a gross revenue perspective, they look like they're doing better than on a net revenue when you take into consideration those canning costs. So they went to apply for more aid but, on paper, they didn't meet the eligibility requirements. There are countless businesses--
MARGARET BRENNAN: Because their costs had gone up. The amount they were taking in was actually less--
REESE: Right.
MARGARET BRENNAN: --than what it looked like on paper.
REESE: Right, exactly. The second part of what, again, was intended and was absolutely right in its intent, but that hasn't had the impact on these smaller businesses is around forgiveness. Tons of businesses, nearly one in four business owners who have not applied for loans in round two, is because they haven't had their first loans forgiven.--
MARGARET BRENNAN: Yeah.
REESE: --and we're hearing this- we're hearing this all over the place.
MARGARET BRENNAN: But why? Why haven't their loans been forgiven? Because, I mean, the whole dirty secret of this program is supposed to be that it was essentially free money from U.S. taxpayers. That even though they were being called loans, that really in the end, you weren't truly on the hook for the money in the same way you would be if you were going to a private lender outside of a government program.
REESE: MARGARET, you are exactly right. Banks are financially incentivized to extend new loans rather than forgive existing ones. So Congress needs to incentivize banks and lenders to approve loan forgiveness and push lenders to approve loan forgiveness applications within the next six weeks. Time matters for small businesses.
MARGARET BRENNAN: So I was speaking in the spring to a very prominent economist who said, look, like, this is good we're doing programs like this for small businesses. But at a certain point, we are going to have to make some tough choices and make- and- and basically stop subsidizing businesses, that some businesses are going to have to fail and we are going to have to hit the reset button. I mean, I know you like this program, but what's the counterargument to that idea that taxpayers should keep subsidizing small businesses, if you're saying the program is flawed anyhow?
REESE: I take the point of, hey, even though our economy depends on these small businesses to survive and even though 95% of all businesses fall in the category of 50 employees or less, and even though that's 50% or more of all American employees are employed by small businesses. But, you know, let's just see how they do and let's not forgive them, I think you'd have a catalytic effect on people who are unemployed and now don't have health insurance. And, oh, by the way, this disproportionately impacts Black and Latin-X owned businesses and women across racial lines. Then you are just punting an issue of an economic- an economic pull down in having folks who have no jobs, have no health insurance during a global pandemic. At some point that's a societal cost. I would argue that helping people with, again, it's not a- it's not a handout. It's a loan to get people to be able to provide jobs and health insurance to get them through a crisis only makes America stronger.
MARGARET BRENNAN: We continue to hear from the administration in particular that there is just this mass exodus of women, in particular from the workforce. The vice president called it a national emergency. This week she said, you know, it's small businesses in particular that are closing and hurting women. And she- she went into great detail about that at an event on Thursday.
*ROLL CLIP*
VICE PRESIDENT KAMALA HARRIS: Small businesses are closing. Last February, around 5 million women were business owners and 2 months later, by April, 1 in 4 had closed their doors. So, my first week in office I spoke with a group of small business owners, many of whom are women. And they talked about how tough it is for them right now, to keep their businesses up and running while balancing all of their businesses at home.]
*END CLIP*
MARGARET BRENNAN: From what you're seeing, what are companies that you work with doing? I mean, are they truly seeing this exodus of women in small business in particular?
REESE: Yes. A year ago, US- the US hit a milestone for the first time and women outnumbered men in the workforce. Just one year later, women in the labor force is at a 33 year low. Here is why: because women have made incredible gains in the economy over the past decade and they are employing other women, but they've been making gains in industries that are the hardest hit by those- this pandemic, especially those that rely on face-to-face interactions, salons, spas, education, retail. So when you then factor in school closures and- and women dropping out of the workforce or closing their businesses to be able to take care of their kids who can't go to school. And I loved your podcast last week on this. This- this doubles the trouble for- for women-owned businesses.
MARGARET BRENNAN: What are you seeing in terms of how small businesses are impacted along racial lines?
REESE: So for- for Black-owned businesses, 75% of Black-owned businesses have not had their loan forgiven. That's compared to 56% of white business owners. Ninety-six percent of Black-owned businesses are sole proprietors or businesses owned and operated by one person. And sole proprietorships struggle to get access to PPP funding again because the documentation requirements are particularly onerous on these businesses. But it's not because they don't need them. So the fix is SBA can prioritize minority-owned businesses and make sure that the access is commensurate with the representation that these businesses have in the American workforce.
MARGARET BRENNAN: But you know that the businesses are asking for the loans to be forgiven?
REESE: One hundred percent. There is no question in which the businesses are waiting, you know, to ask for forgiveness.
MARGARET BRENNAN: All right, we're going to take a quick break. Lexi, stay with us. I want to talk more about some solutions.
*COMMERCIAL*
MARGARET BRENNAN: So, Lexi, we've been talking about the problems with the existing programs that taxpayers are helping to fund. The Biden administration's now proposing another rescue package and in their bill, they have about $440 billion earmarked for small businesses and communities and 15 billion of it to go into a grant fund for small businesses. That typically implies it's money that doesn't have to be paid back. Does what they're proposing address the problems that you're seeing?
REESE: I think a grant program is an amazing addition. We just want to make sure that that is used to actually keep people on the payroll, as well as to manage the increase in operating expenses from shifting business models and COVID requirements.
MARGARET BRENNAN: One of the things that is also being talked about right now that would impact small businesses is this debate over the federal minimum wage, which hasn't been increased in a decade. The administration is talking about hiking it to $15 an hour. And the president was asked Tuesday a question by a small business owner at a town hall, and this owner was really worried about how it would work.
*ROLL CLIP*
PRESIDENT JOE BIDEN: So let's say -- you said you're going to increase the minimum wage from $7.25 an hour between now and the year 2025 to $12 an hour, to $13 an hour. You double someone's pay, and the impact on business would be absolutely diminished.
*END CLIP*
MARGARET BRENNAN: So that was President Biden saying that if you gradually increase the minimum wage along these lines that he laid out that it would offset any concern small business owners might have. So the impact would be de minimis. Is that what the small business owners you work with think?
REESE: The 44% of Americans paid by small businesses of one hundred employees or less, many of them are- are certainly not living with a living wage. And small business owners generally want to help their employees not just survive, but thrive. If we just talk about really taking a holistic view, for small business owners to be able to do it, one, they need to stay in business. Two, to stay in business, they need to get the access to capital they need quickly and they need to, when they get access to capital that comes in the form of a loan, not have that debt hanging over their head for too long. And then three, the minimum wage being raised would make sense only after those two things happen. Because if you added that in right now from a tops-down approach, small business owners would say, are you guys not getting it? Come on man. All my expenses are going up right now. I still can't get access to the money that I need to make all of this math work. And I'm under even further debt. So I think it is a three step process. I think it's an important third step.
MARGARET BRENNAN: So now's not the time is- is your bottom line.
REESE: Honestly, we could be ready for this on Monday if we actually took, with extreme alacrity, the considerations that I've just laid out here.
MARGARET BRENNAN: Yeah.
REESE: It's- it seems- it seems too complex, but it's actually that simple. And we would see a huge difference. And then a gradual rollout of this could make a lot of sense.
MARGARET BRENNAN: Right. Which is why, like a big business like a Walmart can afford to do this. A small business that's just struggling right now anyhow can't afford to do this--
REESE: Right.
MARGARET BRENNAN: --as well intended as it is--
REESE: Yeah.
MARGARET BRENNAN: --is what you're saying.
REESE: Yeah. So, I mean, there's- I just think this is done well in data, but it's also in stories. So Melissa Wirt is a working mom. She actually runs a business called Latched Mama. It's an e-commerce company that sells clothes for nursing moms. She employs a team of 40 at her warehouse in Virginia. And before the pandemic, Latched Mama was on its way to eight figures in income. They were doing great. The pandemic hit, Melissa shifts her focus from growing her revenue to ensuring, as many small business owners do, that every single one of her employees remained on payroll. All of her employees are allowed to bring their kids to work. They're moms with their baby strapped to their chest and they're typing on their laptops. There's playpens in the warehouse for babies while their parents are short on- are sorting inventory. And she even offered new parents a benefit during the pandemic, in-home pediatrician visits.
MARGARET BRENNAN: Wow.
REESE: So no one had to leave their homes to do newborn checkups. Now, she- she is a great case of somebody who is- we need to keep Latched Mama in business. She needs to be able to continue to pay and insure her- her- her folks with great health and financial benefits. If folks- if folks' wages need to be increased, that's her choice. But she's doing things in the right order.
MARGARET BRENNAN: Right. So you talked about one thing there that I always like asking about, because, you know, I'm a mom and I- every woman I know with a child is trying to figure out how to juggle it all. They always are. And then the pandemic hits and it's like- just makes the crisis that more acute. We hear a lot about, you know, frankly, lip service of- of admiring this problem we have as a country of not having, as other developed economies do, paid leave or just caregiving leave, you know, a federal standard for it. And we know the administration, Janet Yellen told us this on FACE THE NATION, that it's their ultimate goal to get there. But I've also had conversations with lawmakers, with Republican women who are pro-family, who are pro-business, who say the reason they oppose some of these proposals is because small business owners cannot afford it. Is small business the blockage truly? Is that an excuse? Can small businesses afford to be able to provide this kind of social safety net that the big corporations are expected to?
REESE: That is- they're absolutely not the blocker and that's a huge logic wobble. So thank you for bringing up the phrase that people admire this problem from afar, but are- are sort of unwilling to tackle the basics. The logic wobble is when people are healthy in mind, body and spirit and they have health- and they have child care, they can be productive workers in the workplace. And small business owners want to be able to insure their health- their employees with health benefits, with financial benefits and with child care, because that makes for a thriving workplace and hence a thriving economy. Small businesses know how to make tradeoffs to pay for taking care of their employees. And they want to make that trade off all day long because they need those employees to grow their business.
MARGARET BREENAN: So what you're saying is it's really up to whether the business owner wants to do it or not and make it a priority?
REESE: And whether there is a national safety net in order to be able to do this. So I think, you know look, work- women and working moms leaving the workforce is an epidemic in its own right. And we need to ease the economic burdens on these business owners.
MARGARET BRENNAN: And then it's figuring out how taxpayers pay for it or offset it as well?
REESE: The recession- the- the- the economic conditions right now are changing our livelihoods and we are putting a lot of money to work to increase the likelihood of success for the American workforce. If we can help make sure that the access to capital that the PPP provides is- remains accessible to all business owners, including those who are underrepresented- women and across Black and Latin-X workers across genders. And if we can make sure the forgiveness happens, we're going to incur a lot less taxpayer overall income than if we continue to let these programs sort of muddle along and then not have the impact that they ultimately could have, which is keep people employed and thriving and ensuring that they have access to affordable health care that their employers are willing to provide.
MARGARET BRENNAN: All right, Lexi Reese, Chief Operating Officer of Gusto, thank you for your insights. We'll be right back.