The Paycheck Protection Program Is Indeed Working, But It’s Not Perfect

Although the launch of the CARES Act Payroll Protection Program (PPP) was a bit of a mess during the initial stages in early April, the Treasury Department and the SBA have ironed out a lot of the kinks, and small business owners are getting cash infusions to keep their operations going.

During the launch phase (what most people have been calling Round 1), small business owners reported not being able to get through, while large companies, such as Ruth’s Chris Steakhouse, Shake Shack, and even the Los Angeles Lakers received loans worth millions of dollars with the help of big banks. The public outcry and the audit warnings from Secretary of the Treasury Steve Mnuchin spurred the large companies, who had access to funding via capital markets, to return the money.

In Round 2, the government took appropriate steps to give borrowers applying through regional and community banks a chance to access the government-backed loans. The program now is working as it should. Business owners are reporting that they have received PPP funding, which has thrown a lifeline to their operations.

According to the latest figures available from the SBA (as of May 16, 2020), nearly 5,500 lending institutions have provided more than 4.3 million PPP loans totaling $513 billion.

Forty-one lenders with assets of $50 billion+ have approved 1,527,604 loans totaling $191,704,934,773 (37% of the total amount). Meanwhile, 93 lenders with assets between $10 billion and $50 billion have made 679,898 loans totaling $99,930,243,092 (19%), and 5,362 lenders with less than $10 billion in assets have made 2,133,643 loans totaling $221,635,959,494 (43%).

Banks represent the majority of lenders, followed by credit unions, CDFIs, savings & loans, farm credit lenders, microlenders, Certified Development Companies (CDC), and fintech companies.

Overall average loan size is: $118K. Nearly 2.7 million of the PPP loans (63.7%) are $50,000 and under, while 644,259 loans were between $50,000 and $100,000. Less than 2% of the loans are for $1 million or more.

California leads all the states in PPP loans granted with 505,798 loans totaling $66,500,354,602, followed by Texas, Florida and New York.

To view the full SBA PPP Report, click here.

The beauty of these loans designed to provide relief for small businesses who are suffering from the fallout of the COVID-19 pandemic is that the loans can be forgiven if business owners maintain their staffing levels.

A little over a week ago, the SBA issued a document outlining the criteria small businesses must follow in order to receive forgiveness of the loans. The guidelines provided instructions on how to calculate payroll costs, which must currently account for 75% of loan proceeds.

However, challenges remain. Business owners say that social distancing restrictions preclude them from being able to pay 75% of pre-COVID staffing and still turn a profit. This circumstance affects millions of businesses, particularly those in the restaurant industry, since they will be required to limit their capacity to a 50% maximum (if they are “full”) as states and localities begin the long, slow process of reopening safely.

Realizing this is a serious issue, the House of Representatives recently passed a proposal that would ease the 75% payroll threshold, increase the amount of time available for business owners to use the funds received from PPP and also provide longer timeframes in which to repay loans that aren’t forgiven. However, the bill faces hurdles as it moves to the Senate, which failed to pass its own version before the Memorial Day holiday weekend. Many congresspeople are resistant to what they call extraneous features of the House bill; those not directly aimed at the PPP.

For business owners, the situation is extremely frustrating. I am hearing every day from entrepreneurs who are worried that they either can’t take full advantage of the PPP because of the way the rules are currently being enacted or won't even apply until there is a more attractive prospect for their use of the funds. If Congress can take fast action and pass legislation aimed specifically at helping the PPP run more smoothly, business owners will have much more certainty about their next steps towards recovery. The good news is there seem to be options on the table, such as a recently proposed bill whose authors say would ‘streamline’ the already-passed House version.

In either case, business owners will need clarity on how the next phase of the program is meant to work, or many will remain outside the reach of its assistance.

The system is far from perfect, but it is indeed working for millions of small businesses nationwide. Now is the time to finish the job and broaden the positive impact this program has the potential to make.

Rohit Arora, CEO of Biz2Credit, is one of the nation’s leading experts in small business finance.