By: Sarah Johnson
The Paycheck Protection Program is one aspect of COVID legislation getting a lot of coverage over the last couple weeks. This week, we’ll take a deeper dive into what it is, what issues have arisen from it, and what the second round of funding is currently looking like.
What is the Paycheck Protection Program?
The CARES (Coronavirus Aid, Relief, and Economic Security) Act passed in late March approved allocated $2.2 trillion to a myriad of items, one of which was a first-come-first-served $349 billion Paycheck Protection Program (PPP). According to the Small Business Association, the PPP “is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. The SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.” Essentially, it is a SBA loan to help affected businesses keep their workforce employed during COVID-19 pandemic.
Unlike a standard loan, businesses are not required to provide collateral or personal guarantees, and no one involved with the lending process (the government and the lenders) can charge fees to the small businesses who apply and receive these loans. Most importantly the loans are simply forgiven if at least 75% of the loan must be used for payroll, and any remaining amount used to pay for interest on mortgages, rent, and utilities.
The loan that the SBA would give a business has a maturity of 2 years and an interest rate of 1%, payments are deferred six months, and, the loan can be forgiven if it is used for its express purpose. The forgiveness is based upon whether or not the employer maintains or quickly rehires employees and maintains their salary levels from before COVID after receiving the loan. If a company reduces its full-time headcount or reduces employee compensation, the amount forgiven will also be reduced.
The SBA explains who can apply for this loan on their website. This loan program is specific to the COVID-19 pandemic, so it is available to certain entities which are affected by Coronavirus. These entities are:
- Any small business concern that meets SBA’s size standards (either the industry based sized standard or the alternative size standard)
- Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
- 500 employees, or
- That meets the SBA industry size standard if more than 500
- Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
- Sole proprietors, independent contractors, and self-employed persons
What are issues with this program?
The first round of the Paycheck Protection Program ran out of funds in just 13 days. That’s right, all $349 billion lasted not even two weeks. We all know the strain the shelter in place orders are putting on on small businesses especially, so, yeah, of course everyone needed that money in a hurry!.. Right? Not necessarily. After the SBA announced it was “unable to accept new applications for the Paycheck Protection Program based on available appropriations funding” on their website, a combination of publicly traded companies announcing they were returning money they received from the program and reporting shed more light to who received this money.
According to the US Department of Treasury, starting April 3, 2020, small businesses and sole proprietorships could apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. Starting April 10, 2020, independent contractors and self-employed individuals could apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. Generally, all recipients of PPP funds are anonymous, but thanks to public filings by Morgan Stanley and reporting done by CNBC, we can know some publicly traded companies applied for received this funding. CNBC’s reporting found that at least $243.4 million of the $349 billion was given to publicly traded companies. Here is a graph from CNBC’s reporting showing allocations amongst publicly traded companies:
Aside from the funds being dispensed to businesses that one, are not small my any means, and two, probably have access to other resources to help them stay solvent, there has been a suit filed claiming larger banks gave existing lending customers priority. Bank of America, Wells Fargo, JPMorgan Chase, and US Bank were the subjects of this suit filed in California mid-April. If the banks did do this, they essentially locked out other potential borrowers, who may have gotten there first (re: program’s “first-come-first-served” rule), and, had a greater need for the funds. There were even reports of banks rejecting borrowers because of a lending history with a different bank. Finally, although the 75% employee pay allocation requirement seems like a good idea in theory, some businesses have high rent and low wages. This makes abiding by this rule difficult for some and can jeopardize their ability to have the loan forgiven, further harming the business down the line.
What is being done now?
Last week, the House and Senate passed a $484 billion relief package to help aid small business and allocate more funding for hospitals and testing title the Paycheck Protection Program and Health Care Enhancement Act. The deal gives an additional $320 billion to the Paycheck Protection Program. The bill specifically allocates $60 billion for small institutions; allocating $30 billion to lenders with assets of less than $10 billion and $30 billion to lenders with assets between $10 billion and $50 billion. The remaining $250 billion will be unrestricted. The bill then allocates around $60 billion to the Economic Injury Disaster Loan program, setting aside $10 billion specifically to be given in the form of EIDL grants (a program which offers disaster relief for small businesses). The bill also gives the SBA $2.1 billion for administrative expenses.
Additionally, it has been self-reported by many of the companies who received funds from the PPP, that they will be giving that money back. In an interview with CNN, Shake Shack CEO explained why they were returning the $10 million they received from this program, “[The program] gave us the opportunity, as we understood it, to keep as many of our team members off of the line as possible.” He then when on to say that after they saw how the funding was actually being allocated and small businesses were having a hard time securing the funds that, “that doesn’t seem right to us. As we watched this opportunity play out over the weeks, it was very clear that the program was underfunded and wasn’t set up for everyone to win.” The company said they would raise capital to help support their locations by selling shares. Ruth’s Chris Steak House also decided to return the $20 million they received saying, “We intended to repay this loan in adherence with government guidelines, but as we learned more about the funding limitations of the program and the unintended impact, we have decided to accelerate that repayment. It is our hope that these funds are loaned to another company to protect their employees.”
It will be interesting to see how the second round of funding from this paycheck protection legislation goes. I hope that the weaknesses exposed during the first round have been adequately addressed, and that this second round will more successfully target actual small businesses. Reports on the first week of this second round have said the site is slow and lagging, making it frustrating for people who need these loans, as they are allocated on a first-come-first-served basis. Only time will tell!
Cover Photo by The New York Public Library on Unsplash
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