WASHINGTON (Sinclair Broadcast Group) — As the White House and Congress inch closer to a deal on providing more funding for an emergency loan program aimed at saving small businesses shattered by the coronavirus outbreak, experts and business owners say it might take more than a few hundred billion dollars from Washington to ensure the program helps those who need it most.
Democrats and Republicans continued to haggle over funding and policies for testing Monday, but they have reportedly settled on about $300 billion more for the Paycheck Protection Program, with about 20% of that earmarked for smaller lending institutions. According to The Washington Post, they have also tentatively agreed on a $60 billion infusion for the Economic Injury Disaster Loan program, which offers smaller grants with a quicker turnaround.
“I would say that the very things that we Democrats have been fighting for, are now going into the bill. If you had a connection with a bank, it was pretty easy to get a loan,” Senate Minority Leader Chuck Schumer, D-N.Y., said on CNN’s “State of the Union” Sunday. “If you didn’t, from one end of the country to another, we have been hearing that people can’t get the loans.”
Under the Paycheck Protection Program, small businesses are eligible for loans of up to $10 million to cover eight weeks of expenses related to payroll, benefits, rent, mortgage interest, and utilities. If they maintain or return to pre-outbreak staffing levels by June 30 and spend at least 75% of the funds on payroll, their entire loan can be forgiven.
Congress initially allotted $349 billion for the loans, but it became clear within days after banks began accepting applications that amount would be insufficient. The Small Business Administration announced late last week that the program was officially out of money after approving more than 1.7 million loans, with many business owners either still waiting for approval or still cobbling together their applications.
“We will not know how well it worked until after the economy has partially reopened and PPP loan recipients filed for partial loan forgiveness,” said Daniil Manaenkov, chief U.S. economist for the Research Seminar in Quantitative Economics at the University of Michigan. “The higher the percentage of forgiveness—the higher the share of pre-COVID employment recalled by June 30th—the better it worked.”
Many businesses have welcomed the PPP loans as a lifeline at a moment of unprecedented crisis. Others had vented frustration after being frozen out of loans, either because the initial tranche of funding ran out before their applications were processed or they encountered obstacles like lack of an existing lending relationship with a major bank.
“The bottom line is that a lot of small businesses haven't gotten their money yet, due to logistical problems,” said Roland Rust, executive director of the Center for Excellence in Service at the Robert H. Smith School of Business at the University of Maryland, adding that the banking system was not equipped to handle the volume of loan applications seen in the last two weeks in an efficient way.
Some business owners and small business advocates warned when the $2.2 trillion CARES Act was passed that well-connected large businesses with savvy accountants could swoop in and secure loans before smaller businesses the legislation was intended to help had a chance. In some instances, at least, that appears to be what has happened.
“That is a concern because some of those larger small businesses are likely customers of these banks that have those lending relationships,” Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council, said in an interview earlier this month.
According to Forbes, more than 70 publicly-traded companies have already received loans through the program. Pensacola interior designer Cheryl Clendenon has started a petition urging Congress to help “real” small businesses like hers by allocating a percentage of funds to businesses with $3 million or less in overall revenue.
"These businesses are being overlooked," Clendenon told WEAR Sunday. "The majority of the money in the program went to businesses with millions in profits and hundreds of employees."
One such larger business is Shake Shack Inc., a burger chain with 120 locations, 7,600 employees, and $500 million in annual revenue. The company initially obtained a $10 million PPP loan, but it announced over the weekend it is returning the money because other restaurants facing dire financial circumstances need it more.
In an open letter posted on LinkedIn Sunday, Shake Shack CEO Randy Garutti and founder Danny Meyer attempted to explain why they sought the loan in the first place and to highlight concerns they have about how the program is operating. They also recommended several reforms they believe would make it easier for smaller businesses to obtain loans.
“This opportunity came, on its face appeared to be a great opportunity for companies like us, big and small, but I think what played out, over the last couple of weeks... the very people, the small businesses, our friends who own small businesses, couldn’t get access to that capital,” Garutti told CNN Monday.
When the program was first announced, Shake Shack executives saw it as a way to ensure they could keep workers employed and set themselves up for recovery on the other side of the crisis. Once the company lined up private investments last week, though, they decided other smaller restaurants needed that money more urgently.
“It was very clear this program was underfunded, and it wasn’t set up for everyone to win,” Garutti said.
Garutti and Meyer called for Congress to increase funding and prioritize businesses with limited access to outside capital. They also recommended assigning applicants without existing loan relationships to a local bank that can process their request and eliminating the requirement that employees be rehired within eight weeks since many businesses might not be able to reopen to the public by then due to stay-at-home orders.
“With adequate funding and some necessary tweaks, the PPP program can provide the economic spark the entire industry needs to get back in business,” they wrote.
Despite Garutti’s intent, a spokesperson for the Small Business Administration told Forbes the money returned by Shake Shack cannot be used to make new loans until Congress authorizes additional funding. Shake Shack, which has furloughed more than 1,000 employees while keeping many locations open, faced a swift public backlash and calls for boycotts when news of its loan was reported last week.
“This deplorable move comes at a time when our mom-and-pop small businesses are fighting for survival and is unacceptable, millions of small businesses were left out of relief. I will never eat at Shake Shack again. Take your $16 burger combo and die off in peace,” food blogger Carlos Hernandez wrote Sunday, though he later applauded the company for giving the money back.
Garutti declined to say whether other large chains that promptly applied for PPP loans should return them. Potbelly and Ruth’s Hospitality Group, which operates Ruth’s Chris steakhouses, have also come under scrutiny for receiving loans. Barry McGowan, CEO of Fogo de Chao, a restaurant chain with 43 locations bringing in more than $300 million a year in revenue, defended the two loans his company obtained totaling $20 million because the restaurants play a major role in their local economies.
“The scale of our business doesn’t matter,” McGowan told The Wall Street Journal. “All of our restaurants count.”
Under the CARES Act, loans are supposed to be capped at $10 million, but companies like Ruth’s Hospitality and Fogo de Chao have obtained separate loans under multiple subsidiaries. The Small Business Administration determined that was allowed last week as long as each subsidiary operates as a separate legal business entity.
While the PPP loans are intended for businesses with 500 employees or fewer, larger hotel and restaurant chains with less than 500 employees per location are also eligible. The National Restaurant Association lobbied for that exemption, but many individual chefs and restauranteurs have urged Congress to revisit the issue after smaller establishments struggled to get cash.
“I am concerned that many businesses with thousands of employees have found loopholes to qualify for these loans meant for small businesses,” Sen. Rick Scott, R-Fla., said in a statement Monday. “Unfortunately, when it comes to PPP, millions of dollars are being wasted.”
Scott also criticized banks for limiting which businesses they will provide loans to, making it harder for those truly in need to access funds. He called for new conditions mandating applicants prove they have faced a substantial loss of revenue due to the outbreak and restrictions on the requirements lenders can impose on applicants.
According to a survey conducted by the National Federation of Independent Businesses, 70% of small-business owners have already tried to apply for PPP loans, and more than half of the rest are at least considering it. Many have encountered problems because their existing banks are not yet participating in the program, while some have found the process too complicated.
“As Congress debates the next steps for providing funding for small businesses, it is crucial they do it in a manner that truly aids the smaller firms in this country. These are the ones that faced the most challenges accessing PPP and disaster loans, something we can’t afford to let happen again,” NFIB president Brad Close said in a statement. His organization has recommended setting aside a portion of the funds for businesses with 20 or fewer employees.
Wafa Hakim Orman, associate dean of the College of Business at the University of Alabama in Huntsville, stressed larger businesses are facing financial strain in this crisis too, and not all can attract private investment as easily as Shake Shack did. However, there simply was not enough money in the loan program to go around to all the employers that needed it.
“There is no doubt that small businesses are the worst affected by the shutdown and should be the priority when disbursing limited funds. But not all large companies are equally able to access private capital,” she said. “Many, particularly in already-precarious industries like retail, operate on razor-thin margins.”
Orman noted Germany’s economic relief program is providing nearly $550 billion in loans in an economy one-fifth the size of the United States, so the PPP might need to be scaled up even more than Congress is considering. Also, the loans are currently being distributed on a first-come, first-served basis, which greatly simplifies and speeds up the process for all involved and ostensibly prevents lenders from choosing favorites, but it means economic need has not been a factor.
“Anything that increases documentation requirements makes it more burdensome for small businesses, who are left navigating a maze of paperwork with very little help, relative to large businesses, who have teams of accountants and attorneys on staff,” Orman said. “In an emergency, when you try to parse who may deserve a grant more than another, you lose precious time which might make all the difference for businesses needing help, trying to make payments by certain deadlines.”
It is not yet clear how much more assistance small businesses will need to recover from the coronavirus pandemic. Even for those that have already received loans, the eight weeks of expenses they cover might not be enough if stores and restaurants remain shuttered into June.
“It is likely that just eight weeks will prove insufficient for many to avoid permanently laying off staff,” Manaenkov said. “But it's too early to tell, since the outcome will largely depend on the evolving epidemiology and the timeline of easing mitigation measures across the country.”
According to Rust, the challenges facing small businesses right now run deeper than just their immediate cash flow, and another round of low-interest, mostly-forgivable loans will not keep them afloat for long if they have no customers. After states lift orders for residents to remain at home, people might be reluctant to go out and spend money until they are confident the government has the virus outbreak under control.
“The small businesses need more, but the loan program addresses only the supply side,” Rust said. “The small businesses will not actually recover until consumer demand recovers, and that could take a long time, especially if the consumers do not trust the government's approach to the problem.”