Best of intentions: PPP and SMB loans

SBA gift cashPrecautions taken by state and local governments during the pandemic have ranged from stay-at-home recommendations to stay-at-home orders, some under threat of citation.

Although some groups have erupted in protest, most Americans seem to have willingly placed themselves under a sort of house arrest. 

There’s no need to recite the long- and short-term economic consequences of the closure of non-essential businesses, the slowing to a crawl of essential ones, and the dire straits of, as I noted two weeks ago, some 74 percent of households living paycheck-to-paycheck. Readers are well aware of what all of the above portends.

To their credit, our current Congress, where both sides of the aisle seem to have a policy of “what the other side likes ours hates,” managed to pull off a couple of rescue packages. Notably these include a forthcoming $1200 per household and Coronavirus Relief Options, which the SBA recently announcedPer

Facing an economic emergency tipped off by the unprecedented coronavirus pandemic landing on American shores, the federal government in an uncharacteristic burst of speedy bi-partisan cooperation passed the $2.2 trillion CARES Act, a massive stimulus effort meant to keep citizens and businesses whole and afloat while the world rides out the outbreak.

The SBA’s relief options are of four kinds: 

• Paycheck Protection Program or PPP (loan forgiveness for retaining employees by temporarily expanding the traditional SBA 7(a) loan program); 

• EIDL Loan Advance (up to $10,000 of economic relief to businesses experiencing temporary difficulties); 

• SBA Express Bridge Loans (quick access to up to $25,000 for small businesses with a relationship with an SBA Express Lender); 

• and SBA Debt Relief (covers principal, interest, and fees of current and new 7(a), 504, and microloans for six months).

For small to medium size businesses (SMBs), “grant” might be more apt than “loan,” albeit potentially more politically explosive. I recently asked a high-profile banker who prefers not to be named about the near-given that many SMBs will not be able to repay their loans. “They’re counting on the loans being forgiven,” he told me. The above-referenced piece all but confirms his hunch:

… “loans”  … is a bit of a misnomer in a variety of ways. Firstly, few of the firms taking them intend to repay them; they intend to keep their staff on the payroll and apply for the loan forgiveness program baked into the offering.

Even when a divided Congress acts swiftly, snags are sure to raise their ugly heads (as are mixed metaphors like that one).

For one thing, the funds are not unlimited. The moment PPP options were officially on the table, applicants gobbled them up faster than fans gobble up tickets to see Taylor Swift in concert. Intentions aside, this meant that businesses receiving help from the PPP—and fans getting to see Swift in person—were vastly outnumbered by those who didn’t receive help or tickets.

Indeed, on April 5, The Salt Lake Tribune’s Washington Bureau Chief Thomas Burr reported:

A much-heralded government program to provide bridge loans to small businesses to keep their employees on the payroll during the coronavirus-caused economic downturn has run out of money while Congress remains deadlocked on how to pour in more funds. 

… The White House said earlier that the $350 billion fund—meant to shore up businesses with fewer than 500 employees during government-mandated closures because of the virus outbreak—was empty and no new loans would be accepted. The program had allowed small businesses to apply for government-backed loans through banks that would later be forgiven if the money was used to keep employees on staff during the shutdowns.

Inevitably, someone who didn’t manage to tap the program was bound to call foul. In fact, plenty of someones have already done exactly that. Already named as defendants are Bank of AmericaWells FargoJPMorgan ChaseU.S. Bancorp, and a host of others. According to a report in Dallas/Fort Worth Metroplex Social, allegations include: that banks unfairly favored larger, existing clients; that larger clients made off with funds that should have gone to smaller businesses; and that “businesses seeking lower loans were deprioritized.” For the record, I am not averring that the plaintiffs’ cases are valid. I am only reporting that they have filed them.

The Treasury Department is well aware of cases in which funds earmarked for smaller businesses went to larger ones that arguably didn’t need them. Business Insider has reported:

The Treasury Department is asking publicly traded companies who received loans from a fund intended to help small business recover from the pandemic to return the money by May 7 or face consequences, according to new guidance issued on Thursday … The request … came after large companies who took loans from the program were criticized heavily as the fund ran out of money—and many small businesses, which the money was intended to help, were unable to get a loan. Large companies were able to access the funds through a loophole in the restrictions that was meant to save the loans for small-business use only.

Accordingly, as The Hill reported yesterday, companies like Shake Shack and Ruth’s Chris Steakhouse have returned the funds. Others, however, have dug in their heels:

Ashford Inc., Ashford Hospitality Trust and Braemar Hotels & Resorts, all of which are tied to Texas hotel mogul Monty Bennett, said they will not return a total of $69 million received through the Paycheck Protection Program (PPP), The Associated Press reported.

In the meantime, the banking industry stands to, well, make bank on the Paycheck Protection Program. If ever there was a product you’d call a loan officer’s dream, PPP is it. Applicant businesses needn’t submit to a credit check, needn’t submit proof of revenue, need only have opened within the last quarter—and may not be required to repay the “loan.” In short, just about any business can qualify, as well as sign without fear on the dotted line. And banks, for their trouble, Financial Times reported … 

… stand to collect billions of dollars in fees on the $350bn in loans that are being offered to US small businesses as part of the federal response to the coronavirus pandemic … Banks will receive processing fees, paid by the federal government, for making the loans. The fees will vary with loan size: 5 per cent for loans under $350,000, 3 per cent for loans under $2m, and 1 per cent for loans greater than $2m. The loans will not incur a capital charge.

No wonder, another piece reports, that “portfolio firms want a cut of coronavirus SMB rescue funds.” It is money waiting to be made. 

Which, these days, is more of rarity than ever.

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