Sharks swimming with minnows. That, in a nutshell, is just one problem with the Paycheck Protection Program, the $349 billion ‘forgiveable loan’ program designed to help rescue small businesses. But it’s not the only problem. America needs a “small business survival” program, not just a “paycheck protection” program.
Though Congress just approved an additional $322 billion in PPP funds, these funds will run out quickly too. Fortunately, Democrats insisted $125 billion be specifically earmarked so it can reach smaller businesses served by community financial institutions rather than big banks.
But Congress needs to do more. We need an action plan for recovery of all small businesses.
The PPP has major flaws:
- Big corporations can get their hands on the money.
- It’s too complicated.
- It’s a “paycheck protection” plan, not a “small business survival” plan.
- It’s a loan, not a grant.
1. Where the money went
PPP had what seemed like a huge allocation: $349 billion, but that money goes fast when it’s given out millions at a time.
The formula was supposedly simple: a small business qualified for a “forgiveable loan” for 2.5 times their average monthly payroll costs. “Small business” was not only defined as businesses with fewer than 500 employees, but, bowing to industry pressure, the Senate Small Business Committee under the direction of Marco Rubio added language allowing hotel and restaurant companies with fewer than 500 employees IN ONE LOCATION to qualify.
Anyone could predict what happened next. On March 30, I wrote: “an owner of 300 burger franchises could still qualify for these ‘small business’ forgiveable loans.” Sure enough: Potbelly Sandwiches with 400 locations and Shake Shack with 189 locations each received $10 million loans. (Shake Shack has since returned the money)
Worse, though the loans were supposed to be limited to $10 million, some got much more. Alexander’s Holdings consumed $15.1 million; Brazilian steakhouse chain Fogo de Chão sliced another $20 million. Ruth’s Chris Steak house announced on April 7 they chewed up $20 million. Because they had more than one corporate entity, they could get more than one loan.
Look at that date: April 7, merely 4 days after PPP was supposed to launch. By April 7, many banks didn’t yet have applications available. Most small businesses probably hadn’t yet heard of the program. Not only were big corporations able to grab more of the funds, they muscled their way to the front of the line.
Treasury Secretary Steven Mnuchin touted that 74% of the 1.6 million PPP loans were for $150,000 or less. Ah, but the situation is much different if you look at the how the MONEY was actually distributed. As of April 13, nearly half the funds were in loans of over a million dollars, nearly 10% over $5 million. Nearly half the money went to pretty big businesses.
Here’s the breakdown as of April 13 of where the funds went:
| Loan Size | Total dollars | Percent of Dollars Funded |
| Under $150,000 | $37.18 billion | 14.9% |
| $150,001-$350,000 | $35.74 billion | 14.4% |
| $350,001-$1 million | $59.29 billion | 23.9% |
| $1 million-$2 million | $43.28 billion | 17.5% |
| $2 million – $5 million | $49.29 billion | 19.87% |
| $5 million and over | $22.77 billion | 9% |
*source: Small Business Administration
Loans were available for 2.5 times a company’s average monthly payroll costs. Let’s be generous and assume the average total cost per employee is $5,000 per month.
- $10 million loan = $4 million a month payroll costs, minimum of 800 employees.
- $5 million loan = $2 million monthly payroll costs, minimum 400 employees
(Why is $5k generous? The median personal income in 2017 was $31,099 and the average annual small business employee wage in 2018 was $21,750)
2. It’s too complicated
“The ‘PPP’ came with no user manual and it was extremely confusing,” wrote Randy Garutti and Danny Meyer of the Union Square Hospitality Group and Shake Shack. And that’s from a company with plenty of accountants and lawyers. Imagine what it was—is—like for small businesses and sole proprietors who do their own books and don’t understand banker’s language. Help for small businesses could have been simpler. Both Republican Josh Hawley and Democrat Pramila Jayapal proposed plans that would have channeled funds through systems small businesses already use, such as payroll or quarterly taxes.
3. It’s a loan, not a grant
No one knows what our economic future looks like, whether and when businesses will bounce back. Asking small businesses—many of whom already have credit card debt, lines of credit, equipment leases, and loans—to take on more debt just isn’t realistic in this environment.
Senators Ben Cardin and Ron Wyden initially proposed a very simple grant program for the smallest business. Companies with fewer than 50 employees and less than $1 million in revenue would be eligible for a grant of 30% of their previous annual gross receipts, up to a maximum of $75,000. Delivered by the IRS as a tax rebate. Simple.
Congress should still consider this type of grant, especially for those who haven’t been able to acquire a PPP loan or for whom it doesn’t fit.
4. It’s a “paycheck protection” plan, not a “small business survival” plan
For many small businesses, the problem isn’t payroll—it’s rent, utilities, inventory, equipment, marketing, more. And for many, needing to rehire employees within 8 weeks for the loan to be forgiven is unrealistic. Let’s think of programs that help ALL small businesses survive.
What would a Small Business Survival package look like:
- Grants for the smallest businesses.
- Fix the PPP forgiveness provisions. Many businesses will not be able to utilize employees in the next 8-10 weeks. Let them use the money to survive in other ways.
- Small businesses re-open first. Germany is allowing small retailers to open first to give them a head start as the economy revives.
- Testing, testing, and contact tracing. I’ve spoken with small business owners in the salon, restaurant, and travel industries, and they do not believe customers will return until their health concerns are addressed and the coronavirus is under control.
- New definitions of small business, independent contractor. Current SBA and Labor Department definitions are outdated. Let’s make the term “small business” actually mean something.
Copyright Rhonda Abrams, 2020
This article originally ran in USA Today on April 22, 2020
