When the Coronavirus Aid, Relief, and Economic Security Act (better known as the CARES Act) passed in late March, one of the most visible parts of the legislation was the Paycheck Protection Program, an unprecedented emergency lending program aimed to get small businesses across the country the financial assistance they needed to get through the COVID-19 pandemic—and the ensuing economic shutdown.
Administered by the U.S. Small Business Association (SBA), the Paycheck Protection Program initially oversaw nearly $350 in loans for small businesses impacted by the coronavirus. Unlike a traditional SBA loan (like the SBA 7 loan) or an Economic Injury Disaster Loan, small business loans through the Paycheck Protection Program are eligible for loan forgiveness (up to 100 percent) if businesses use the loan amount to cover approved costs (including payroll costs, payroll tax, and utilities).
Unsurprisingly, with those loan terms, the demand for PPP loans was huge. Millions of businesses submitted loan applications through approved lenders—many in the first few days after launching, as PPP loans are first come, first served.
But on April 16, less than two weeks after it started accepting applications, the Paycheck Protection Program ran out of funds, with a huge queue of applications yet to be processed and approved—and thousands of small business owners left without the financial assistance they need to keep their businesses afloat.
Luckily, in late April, Congress passed new legislation that replenished the Paycheck Protection Program with $310 billion in additional funding, so more financial assistance is on the way for business owners. But the first round of PPP funds exposed some serious issues with the business loan program, including a lack of preparation and oversight that saw millions of dollars in loans going to large, publicly traded companies—instead of the small businesses the program was created to help.
But the Small Business Administration took notice and issued new guidance to ensure that PPP loans are going to the small businesses that need the most—and the federal government is taking major steps to ensure compliance.
So, the question is, what are the new PPP directives—and how are these directives going to impact the way the Paycheck Protection Program operates moving forward?
How large companies secured loans through the PPP
When the Paycheck Protection Program launched, the intent was to supply loans to small businesses. But under the loan program’s current eligibility requirements, hundreds of large (and, in many cases, publicly traded) companies were able to apply and qualify for loans, with many arguing that the companies’ large loan amounts and longstanding relationships with major banks allowed them to circumvent the standard application process and move their applications to the front of the queue.
For example, Ruth’s Hospitality Group, owner of national chain Ruth’s Chris Steakhouse, was able to secure a $20 million Paycheck Protection Program Loan because their number of employees per location is less than 500, which meets the SBA size standards—even though their total number of employees is upwards of 5,700. Under similar circumstances, popular fast-food chain Shake Shack secured $10 million through the PPP. And the Los Angeles Lakers received a $4.6 million PPP loan—despite being the second most valuable franchise in the NBA.
When news of these large companies receiving funding through the Paycheck Protection Program went public, people were outraged—including many in the federal government. President Trump, Treasury Secretary Steven Mnuchin, and both Democrats and Republicans in Congress have all spoken out against large companies that used the Paycheck Protection Program to secure funding when they had access to other capital.
And not only has the government slammed these businesses, but they’ve also taken steps to prevent large businesses from receiving additional funding moving forward.
The new PPP directives—and how the government is making sure PPP loans get to the small businesses that need them
Clearly, the initial rollout of the Paycheck Protection Program didn’t go as planned—and a decent chunk of the funds went to large businesses. But there are now new PPP directives in place to ensure loans get into the hands of the small business owners that need them, including:
- More money to community lenders. Of the newly replenished PPP funds, $60 billion has been set aside for smaller, community-based banks and credit unions ($30 billion will go to financial institutions with $10 billion or less in assets, while the other $30 billion going to lenders with between $10 and $50 billion in assets). Because these lenders work within smaller geographic regions, it’s more likely that they’ll process loans for small businesses in smaller loan amounts.
- All loans over $2 million to be audited. In an effort to discourage companies from applying for PPP loans when they don’t really need them, Treasury Secretary Mnuchin said on CNBC that all loans over $2 million will be fully audited by the SBA before being approved for loan forgiveness.
- Hedge funds are ineligible for PPP loans. The SBA has taken a firm stance that hedge funds are not eligible for financial assistance through the Paycheck Protection Program.
- Stricter oversight on “good faith” certifications. During the PPP application process, borrowers have always had to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” But moving forward, large companies will need to be prepared to prove it—or suffer the consequences. The Department of the Treasury recently released guidance around the issue in their PPP FAQs, saying “ borrowers still must certify in good faith that their PPP loan request is necessary…it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
The Treasury Department is also encouraging large companies that received funding through the Paycheck Protection Program to return the loans. (Many companies, including Shake Shack and the Los Angeles Lakers, have already returned their PPP loans.) If a large company received funds through the PPP before the new regulations went into place, they have until May 7 to return the loan amount in full without penalty. According to guidance issued by the Treasury, “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”
If you applied for a PPP loan, these new directives are in place to help
If your PPP loan application wasn’t processed the first time around, you were likely frustrated at the lack of oversight—and how that lack of oversight led to large, publicly traded companies securing millions in PPP funding. But these new directives are aimed to address that frustration and make sure that, moving forward, Paycheck Protection Program funds go to where they were intended to go—into the hands of small business owners.