Five Issues With The Payroll Protection Program Rollout.
The Paycheck Protection Program (PPP), a $349 billion forgivable loan program within the CARES Act, is designed to provide much-needed relief to American businesses dealing with the severe economic impacts of the COVID-19 pandemic. The basic idea of the PPP is this: the federal government’s Small Business Administration (SBA) will provide loans to eligible small businesses in the amount of two and a half months of the business’s average monthly payroll expenses up to $10 million. The loan can be forgiven if at least 75% of the proceeds are used for payroll costs while the remaining amount can be used on other expenses such as rent.
From a practical perspective, however, the PPP loan rollout has frustrated small businesses for many reasons, including:
- Sites unprepared for launch
While the government easily allocated hundreds of billions of dollars by just writing a few lines into the new law, the government didn’t have the systems, nor the employees, to get that money quickly to the right businesses. Accordingly, they leveraged the U.S. banking system, issuing rules just hours before instructing banks to begin taking applications.
Regardless of which bank small businesses used, the results often were similar: the application page was not available, or crashed, the rules were unclear, and many couldn’t even find the right link. For those lucky enough to submit an application, the details of the approval process often were absent as banks themselves were still developing them. Some small businesses would call back daily for updates, but often end up frustrated and disappointed at the lack of answers.
And it wasn't just website problems. Apparently, there were different rules for borrowers and for lenders, and no one knew which one was right. And some banks were only taking applications from people who already had loans from the bank. And everyone was getting frantic as the PPP is structured on a first-come, first-serve basis.
Banks also complained the SBA had not provided them with the template of a key form needed to close out loans, and the SBA system asked for loan documentation that lenders didn’t think they’d have to provide (and weren’t required in the law).
- Banks afraid of new risks & low profits
Since the program was largely forced upon banks, many banks are hesitating to participate due to concerns about taking on too much legal and financial risk and a low profit potential.
From a risk perspective, banks will be responsible for preventing fraud, money laundering and terrorist financing, but are largely relying on taking small businesses at their word. Banks are concerned they could face regulatory penalties or legal costs down the line if things go wrong in the haste to get money out the door. But at the same time, banks are worried they will be blamed for not moving funds fast enough if they follow their normal due diligence procedures.
From a profit perspective, Treasury’s guideline interest rate of 1.0% may be too low for banks to turn a profit, and many small banks may not have sufficient liquidity to front up the loans, or regulators won’t let them expand their balance sheets.
Moreover, what incentive do banks have for administering loans, assuming most small businesses plan to take advantage of the loan forgiveness provisions? Banks do not want to deal with the administrative hassle or with angry customers who learn their loan doesn’t qualify for loan forgiveness. Accordingly, banks have been prioritizing those with existing relationships and the larger, more lucrative clients.
- Challenging loan forgiveness and qualification terms
Business owners must spend 75 percent of their loan on payroll expenses should they want their debt washed away. While labor is certainly a sizable portion of a small business’s expenses, there are several other costly expenditures, such as rent. Successful applicants will be faced with a difficult choice. Do you lay off your workers—who can apply for unemployment—and pay to keep the lights on, knowing that you'll be digging a financial hole for yourself? Or do you pay your employees when there is no work to be done, so you can come out of this debt-free? What’s the point of emerging debt-free, and incurring all the administrated hassle, if you no longer have a building from which to operate?
Separately, the SBA has deemed ineligible any applicant if “[a]n owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years[.]” Many, including Senator Jeff Merkley, Oregon, have commented the breadth of this provision is unconscionable, as it punishes individuals who should be innocent until proven guilty and those who have already served their time and, due to the well-known racial disparities in our justice system, disproportionately disqualifies minority-owned businesses.
- Application Deadlines and the First-Come First Serve Structure
This program has both an application deadline (June 30, 2020) and limited funding ($349 billion). This has resulted in a first-come, first-serve structure, which means it could run out of money before everyone gets what they need. Businesses with lawyers and accountants and financial advisers, who know how to work the system, are moving to the front of the line, at the expense of smaller businesses. While Congress may pass additional laws to increase funding, nothing is certain.
- Technical Issues
A final issue, which really slowed down the process, was a technical one. Once banks got the applications from small businesses, they were supposed to clear them with the SBA. However, the banks' computer systems were having trouble talking to the government systems.
While the federal reserve has been addressing the loan rollout issues aggressively, many small businesses continue to be frustrated and disappointed.
Do you really need the loan?
Given all the issues with the PPP, before applying for a loan, small businesses should really ask themselves do they really need the loan. If you are not getting new business or additional work, what’s the point of paying additional employees that may end up doing nothing and potentially causing trouble? Some employees might find that they can receive more money through unemployment. And importantly, if you decide to move forward, ensure you have a plan to pay back the loan in case you are required.