When the U.S. Small Business Administration relaxed some of its rules around which entities could qualify for the $349 billion Paycheck Protection Program, it paved the way for as many as 150 public companies, including Shake Shack and Ruth's Chris Steak House, to get an estimated $600 million in relief funds that had been earmarked specifically for small businesses. Meanwhile, thousands--if not millions--of struggling business owners have been unable to secure PPP loans.
On Friday, President Trump approved a new $484 billion stimulus measure, including a $320 billion boost for the PPP, which the SBA and U.S. Treasury anticipate redeploying April 27. Given the massive interest in the first tranche of the program, business owners once again worry they will be shut out of the program.
They've already begun trading stories with fellow business owners in their communities and posting their disheartening banking experiences on social media via the hashtags #PPP and #PPPloan. Some business owners are even suing lenders for allegedly putting larger business interests before their own.
While lawmakers, the SBA, and U.S. Treasury are attempting to right some of the wrongs that have plagued the program, whether it will be enough to ensure more small businesses access emergency funding remains an open question.
New Guidance, No Guarantees
In this latest deal, Congress is directing $60 billion in PPP funding to community lenders, which tend to be more geographically dispersed than larger banks and as a result tend to make smaller loans to smaller businesses. The funds will be split, with half going to institutions with $10 billion or less in assets and the other half to those with $10 billion to $50 billion in assets.
Separately, the U.S. Treasury issued new guidance this week requesting that businesses with alternative ways to raise funding--say, from investors via the public markets--return the money. It also encouraged companies to look deeply at whether they really need federal funds to guard against economic uncertainty going forward. It added that "a public company with substantial market value and access to capital markets" would likely not meet the standards required for attaining a government-backed loan.
The SBA further issued a new final interim rule on Friday noting that hedge funds are not eligible for federal assistance through the PPP. It also indicated that private equity-backed companies would face a similar level of scrutiny as public companies when applying for a PPP loan. And it noted that companies considering whether to give the money back will have until May 7 to do so without facing any penalties.
Taken together, the new guidance tamps down on bigger businesses' access to the program, but it doesn't specifically bar them from applying. Chuck Morton, partner and co-chair of the corporate group at Venable, a Washington, D.C.-based law firm, is asking his clients to err on the side of caution with Round 2 and perform a gut check before applying. "The bottom line is if it feels like a windfall to a company, they probably shouldn't take the money," Morton says.
Ami Kassar, the founder and CEO of MultiFunding, a small-business loan adviser based in Ambler, Pennsylvania, thinks the rules need to go a step further to truly keep larger businesses out. "I don't think any of this would hold up in a court of law. How do you define adequate sources of liquidity to support businesses' ongoing operations?" he asks. "If you are a bigger company, yes, you have the liquidity available today. But you don't know what's going to happen to your business in the future."
The Problem With Recycling
While the U.S. Treasury and SBA have granted safe harbor for businesses that return PPP funds before May 7, it's not clear how the returned funds will actually get recycled back into the system--if at all.
If a bank issues a loan and the funds aren't yet disbursed, the money can be pulled back and recycled rather easily. However, if the money makes it all the way to the borrower, it's not immediately clear whether or how those funds can be recirculated back through PPP. According to updated guidance to lenders from the National Association of Government Guaranteed Lenders, or NAGGL, a national trade association, if a loan has been disbursed and must be repaid based on the Treasury's new guidance, "those funds will be lost to the program and will not benefit other borrowers."
The problem gets more complicated if the borrower attempts to return the funds before May 7 but after the program runs out of money again, which it's likely to do quickly. "If money goes back on May 6 and the program is otherwise shut down, there will have to be some mechanism in place for that money to be redeployed," says Morton, who adds that he's unaware of any mechanism to do this.
It's further unknown if banks will be required to return the money they collect in fees for making the loans that must get returned. Banks receive an origination fee from the U.S. government of differing values, based on the size of the loan. For loans under $350,000, banks receive 5 percent of the loan's value. For loans between $350,000 and $2 million, banks make 3 percent. For loans valued at more than $2 million, banks collect a 1 percent fee. Presumably a bank needs that money to pay its staff and, say, fund the buildout of the portal through which it processes PPP loans.
"I think that there would be pushback from the lenders given that the origination fees are largely designed to compensate the banks for the efforts related to the origination of the loans," says Morton. Shake Shack and Ruth's Chris lender JP Morgan Chase did not return a request from Inc. before publication about whether it would return the $300,000 in fees it received from the companies.