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Warning: Why Small Business Bailouts could Lead to Mass Bankruptcies

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Let’s talk bankruptcy. Investing & Negotiating.

The real bankruptcy risk to businesses is highly understated. The current bailout programs and systems setup for small businesses, medium sized businesses, and large businesses are highly flawed and risky, especially the PPP.

The PPP (paycheck protection program) could end up being a large scam for employers as employees are incentivized not to return to work thanks to substantial unemployment benefits, building up massive debts for businesses that’s entirely due in 2 years. Yet these loans may not be functional at all.

Ironically though, it’s not just the paycheck protection program. Even programs like the newly announced Main Street Lending program would likely have similar strings attached as for what we are seeing with the paycheck protection program and the airline bailouts. The airlines are already warning that strings attached to the airlines to massive bankruptcies.

Right now, the entire bailout system is a complete disaster. Maybe we need to look to countries like Germany and Switzerland who seem to have things more under control. At least in terms of bail outs. Because this, is unsustainable and could lead to a W shaped recovery instead of the V-shaped recovery or U-shaped recovery we are expecting.

What is the potential impact of small business bailouts on the allocation of resources?

In response to the economic impacts of the ongoing COVID-19 pandemic, governments around the globe have rolled out a suite of relief programs targeted at the business sector. Small businesses, in particular, have been identified as one of the most vulnerable segments in the economy and therefore, have been the primary beneficiaries of these government bailouts. While there is no denying that the small business bailouts have provided a temporary lifeline for many struggling companies, there is a growing concern that they could lead to mass bankruptcies in the long run.

Perhaps the most obvious reason why small business bailouts could lead to mass bankruptcies is that it creates a false sense of security among business owners. By providing grants or loans to help cover their expenses, small businesses are given the impression that they can survive even in the absence of a viable revenue stream. This, in turn, could lead to complacency and a reluctance to make the necessary changes that are required for survival in these challenging times.

In addition to this, small business bailouts also run the risk of perpetuating a cycle of debt. For some small businesses, taking on additional debt may be the only way to weather the current economic storm. While this may be a viable short-term solution, it could ultimately lead to insurmountable debt burdens that could push these businesses to the brink of bankruptcy.

The negative effects of small business bailouts could also extend to the banking sector. If too many small businesses default on the loans they have taken out under the bailout program, it could have a ripple effect that could eventually lead to mass bankruptcies in the banking sector. This could be particularly problematic in countries where banks rely heavily on small business loans to generate revenue.

Furthermore, small business bailouts could lead to a misallocation of resources away from viable businesses that are capable of surviving without government support. In some cases, businesses that are beyond saving may continue to be propped up by government bailouts, while more promising ventures are left to fend for themselves. This could have long-term consequences for the economy as a whole, as it could stifle innovation and growth.

In conclusion, while small business bailouts have undoubtedly provided much-needed relief for many struggling companies, there are valid concerns that they could lead to mass bankruptcies in the long run. It is, therefore, imperative that governments carefully consider the potential risks associated with these programs and ensure that they are designed in a way that promotes long-term viability rather than short-term survival. By doing so, they can help protect small businesses from the worst effects of the economic crisis while also safeguarding the long-term health of the economy.