Will New Funding for Small Businesses Last Long Enough for Those With Greatest Need? | Coronavirus Series
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Late Tuesday night, the Senate reached a deal on a new round of funding for the Payroll Protection Program (PPP), a signature piece of The $2.2 trillion CARES Act stimulus package signed into law on March 27, 2020 by President Trump. The PPP makes forgivable loans available to businesses with fewer than 500 employees that use the funds specifically to keep paying their employees over an eight-week period.
The legislation is expected to be approved by the House today.
Details are still being divulged but the new legislation reportedly includes a total of $480 billion of new funding, $310 billion for the PPP ($250 billion refilling the program, and $60 billion set aside specifically for smaller institutions like credit unions and community banks). An additional $60 billion will replenish a separate emergency loan and grant program for small- and medium-sized businesses (SMBs) (the Economic Injury Disaster Loan). The remaining funds will support hospitals and expanded testing programs.
This latest funding was made necessary after the original PPP ran out of money—and into controversy—after just 13 days.
The original PPP had problems from the start
The fresh funding will replenish the $310 billion in the original PPP. What happened with the first $310 billion? The Small Business Association highlighted these statistics as proof of the program’s impact:
- From its start on April 3, 2020, PPP provided payroll assistance to more than 1.6 million small businesses in all 50 states and territories.
- Nearly 5,000 lenders participated in this critical program, including significant lending by community banks and credit unions.
- The vast majority of these loans—74 percent of them—were for under $150,000, demonstrating the accessibility of this program to even the smallest of small businesses.
Despite these highlights from the SBA, there were significant problems with the initial program.
“We didn’t even get through the first five minutes of applications,” a JPMorgan Chase senior banking executive said. The bank received over 60,000 applicants for the PPP. A Bank of America executive said the bank received 10,000 applications an hour.
The overwhelming influx of applications was only part of the story. For many, even applying for the loans was an excruciating experience. Allen Walton, founder of Spyguy.com said of his first time applying for PPP, “I applied through BBT back when they first opened the application process. They did it a full week before Chase and Paypal, and I still didn’t get funding. Zero communication, too.” Ryan Light, the Founder of Pistol Lake experienced something similar saying he’s not sure he’s “ever done so much work/research on something and had nothing to show for it.”
Process challenges were only part of the story with the PPP the first time around.
Too big to fail?
There’s continuing controversy over some of the original PPP funding going to large, publicly-traded companies and others for whom it was not intended. One of these publicly-traded companies, Shake Shack, agreed earlier this week to return $10m that they had received from the program following a public outcry.
Shake Shack is not alone. Other large chains like Ruth’s Chris and Fogo de Chao also received funding from the program and although technically not improper under the vague language of the legislation, these companies are much larger and have much more access to capital than the businesses the funding sought to protect.
The problem is bigger than a handful of companies taking advantage of funding not purposed for them. Tom Colicchio, celebrity chef and co-founder of New York’s Gramercy Tavern commented, “This really exposed the weakness in the program. We need to quantify what a small business is. I don’t think that’s a publicly-traded company.”
Although this controversy ignited during the congressional negotiations over round two of funding, there’s been no indication that this gap in qualification criteria has been corrected. Any company that doesn’t neatly fit the common understanding of “small business” faces significant public backlash. Mark Cuban would tell publicly-traded companies considering applying to think twice—”you’re going to kill your brand.”
Start-ups backed by venture capital firms or with access to other rich investors are confronting similar questions about whether or not to apply. Notably, investor Bill Gurley, a partner at Benchmark, tweeted about the issue:
Let’s be candid. If you believe in business & capitalism, then there are zero circumstances where the government should bail out equity holders. $GM and $GS were mistakes. If the gov’t is the lender of last resort, they should own all of the equity. I invest in equity as my job.
— Bill Gurley (@bgurley) April 13, 2020
Ready, Set, Go
Small business owners remain hopeful that this time around there’ll be enough funding and that the money will move quickly enough to meet their critical need.
This time, Allen Walton is not chancing a repeat of his first PPP experience with a bank; instead, he’s chosen to work with a non-traditional lender. “I’ve filled out paperwork with PayPal since they worked incredibly fast to get people funded once the program finally opened up. I know some people who got funding within 24 hours.”
Some banks are already warning that this new round of funding may still not be enough to meet demand. “This is going to go within, at most, 72 hours,” said Consumer Bankers Association President Richard Hunt, who represents large banks. “But the odds are more like 48 hours.”
This is especially true given that there’s already an existing backlog of applicants, so the time it took originally to disburse funds when applicants needed to sort out the online application process will be much shorter. “I know one bank that got roughly 5,000 applications and was able to get 2,000 approved, so it already has 3,000 PPP applications in hand and ready to go when and if there’s additional funding,” said Paul Merski, group executive vice president of congressional relations and strategy at the Independent Community Bankers of America.
Despite all of these challenges, Ryan Light remains hopeful. “We have reapplied now in hopes that there will be a new round of funding and that we will somehow be one of the lucky ones to get it.”
Time is of the essence, so move quickly. Like the first round of funding, the latest money is expected to deplete quickly. Don’t wait to approach your lender now. When you do apply, be sure you have all of the necessary information for your application ready. A rejected or incomplete application likely sends you to the back of the queue and could mean you miss out on funding.
Consider smaller and/or non-traditional lenders. There have been other reports like Allen Walton’s that suggest looking beyond banks to other approved small business lenders that may move applications along more quickly—like PayPal, Kabbage, or OnDeck. There is also $60 billion specifically set aside for smaller lenders (e.g., community banks and credit unions). These local institutions may not see the same influx of applicants as the larger banks, so they may move faster.
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