Pitfalls of the Paycheck Protection Program

The Paycheck Protection Program is out of money. For the the small businesses that were able to secure a loan, they could face some drawbacks due to some flaws in the program

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The Payment Protection Program of the CARES Act was created to help small business owners keep their employees on payroll and engaged in the workforce. The federal government is backing $349 billion in Small Business Administration-provided loans that are meant to float the payroll of SMBs across the country until social distancing measures are eased, or another stimulus package is passed. 

As of April 16, the program is officially out of money, and the pressure is on Congress to authorize more funding for the program. 

The rollout has been rocky. The SBA lent about $30 billion in loans last year and is now trying to provide $349 billion in only a few weeks. David Reiling, CEO of community lender and CDFI-bank Sunrise Banks noted, “You have to have patience when launching a program of this size, we’ve made a lot of progress this week. It’s important to have some perspective.”

The rollout has been rocky. The SBA lent about $30 billion in loans last year and is now trying to provide $349 billion in only a few weeks.

The program’s implementation has drawn the ire of critics, and for good reason. Crashing web portals and sluggish wait times have made submitting applications feel impossible. Beyond the application process, the PPP has a number of other pitfalls, and while the program will be a lifeboat for some SBOs, it’s not without flaws. 

Common Pitfalls of PPP

Employees may be better off on UE 

As part of the CARES Act package, individuals filing for unemployment may be eligible for a weekly $600 government subsidy for up to 4 months. For workers in some states, like Massachusetts where the maximum weekly benefit is more than $800, that means they could be receiving more money than what they’d typically earn on payroll.

Some businesses aren’t expecting to be able to re-open in 8 weeks’ time. If employees have already been laid off, that means they’ll have to be re-hired to only be let go again in 2 months — while potentially receiving less money than they could through unemployment.

It’s best for businesses that spend significant amounts on payroll

If payroll makes up a big part of your business expenses, PPP has the potential to tide you over for the next 2 months. But for business owners with hefty rents and slim payrolls who have seen their revenue dry up, it’s unlikely to do much. 

Shirly Ng is an SBO in the Bay Area. She’s hesitant to seek out PPP money because rent is her biggest expense. She’s been granted a reprieve on the rent at one of her locations, but is on the hook for $21,000 over the course of the next year for the April and May rent at her second location.

“How do I make up for $21,000 in 12 months? The government has to do something about the rent or the landlord,” Ng said to CNBC.  

It’s not great for businesses that use contractors or freelancers

Independent contractors aren’t legally allowed to be part of your payroll calculations, but rather have to file their own, separate applications, which opened on Friday, April 10. For businesses that rely heavily on contractors — like many fitness studios or hair salons — their approved amount may only cover a fraction of their functional payroll.

You can’t use it to pay back a bridge loan

Many SBOs who needed access to working capital before government funding was rolled out applied for bridge loans. Their hope was that the crisis would be resolved temporarily. Now that we’re looking at extended shelter in place orders and social distancing measures, these same folks are applying for PPP money — only they won’t be able to pay back their bridge loans with it. 

“OK, so if I’m approved for a bridge loan, I’m on the hook for that money while my revenue has hugely diminished,” owner of Waco, Texas pizza shop Ted Browning said. 

SBOs aren’t the only ones who are finding this frustrating. “Can we loan them the money today and they pay us back with PPP money? Nope!” said Kent Curtis, CEO of CDFI-certified Colorado bank.

You may have to lay off employees at the end of 8 weeks

PPP money is supposed to be dispersed 10 days after the loan has been approved. For applicants with early success, this means they may have already received their funds — enough to feasibly take care of payroll for at least 8 weeks. 

In order for the loan to effectively be turned into a grant and forgiven, the PPP stipulates that employers have to return payroll level to that of February 15, 2020 by June 30, 2020. It’s assumed that lawmakers were hoping to have eased restrictions to allow the economy to recover by then. But as the crisis continues to loom with no end in sight, lots of business owners are wondering if they’ll be able to bridge the gap between PPP money and the optimistic June date. 

For community-minded lender David, one of the greatest pitfalls of the PPP is that more eligible borrowers don’t know about the money. 

“Many of the underserved communities we work with are full of business owners who don’t know about this money. They hear ‘loan’ and shut down. It’s part of the reason we’re advocating for dedicated funds for community-lenders with our legislators in the expected next round of funding.” 

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