If you’re a small business owner, you probably have at least heard of, or have already applied for, the Paycheck Protection Program. Besides the stimulus checks going out to individuals, this is the main federal program designed to throw businesses a lifeline during the COVID-19 economic crisis. In short, businesses can apply for a forgivable loan of up to $10 million to cover mainly their payroll for 8 weeks.
In theory, it’s a good idea. Since many businesses can’t operate safely, workers can’t get paid. The PPP is there to help your business keep them paid for two months as we all follow social distancing and flatten the curve.
In practice however, the Paycheck Protection Program has been pretty much a disaster from the get-go. Let’s dive into the nuances of the PPP (here is the official information sheet for reference) as well as the real-world roll out and tease out five reasons why it was such a bust from the start.
1. All employees need to be retained (or rehired) for the loan to be forgiven, but that’s a huge challenge.
There are many factors in getting the PPP loan entirely forgiven, but the main ones are:
- At least 75% of the loan must be for payroll costs
- You can’t decrease your full-time employee headcount
- You can’t decrease salaries/wages by more than 25% for employees making less than $100,000
If you don’t adhere to these stipulations, less of your loan will be forgiven.
But here’s the thing: lockdown for many states started in March. By now, at the beginning of May, thousands of businesses have laid-off or furloughed their staff, and many businesses have yet to receive their Paycheck Protection Program loans at all.
So what do businesses do? Rehire employees? What if you still can’t open for business? Even when quarantine is lifted, businesses will be mandated to reopen at reduced capacity. So how do you hire back your entire staff to meet the terms of loan forgiveness? And with reduced capacity, can you afford to pay them even 75% of their previous paycheck? What if the employees don’t want to come back to work due to safety concerns?
There are hundreds of examples of each of these problems all over America. It’s a tall order to ask struggling businesses to take on a loan that has a high chance of not being completely forgivable when the dust settles.
And if you do have to repay the loan...
2. The loan is due in 2 years from disbursement, but that’s a giant burden.
Hopefully, the government will be lenient with these loans and err on the side of forgiveness rather than scrutinize each one. But that’s a lot of faith to put into not only the federal government, but to the individual banks issuing, and keeping tabs, on these loans. And if any part of the loan isn’t forgiven, your business better be ready to pay up quickly.
The average small business has over a hundred employees. Let’s be incredibly conservative and say small business XYZ needs a $500,000 PPP loan to cover 8 weeks of pay. This company struggled with the previous pitfall mentioned and couldn’t retain 100% of its employees, so say 25% of the loan comes due: $125,000 owed / $375,000 forgiven.
The $125,000 owed is due in 24 months at a 1% annualized interest rate. That means the business will have to pay $5,262 each month over the 2 years.
But wait, no business trying to stay afloat during this pandemic will immediately start paying back the PPP loan. After all, the entire point is to float payroll for two months. And sure enough, the terms of the loan includes a 6 month deferment. So it’s more likely a business will have 1.5 years to pay the $125,000 loan back, which comes to $7,000 a month.
And remember, that’s if 75% of the loan is forgiven outright.
Is the average small business, that doesn’t know when it might open, when it might return to full capacity, or if they need to shut down again in the future, really going to roll the dice on a loan that may or may not be forgiven? Given the popularity of the PPP, many have decided to take the risk, but it can become a huge burden if the government sticks to its repayment time frame.
3. The loan pays for 8 weeks just once, and that’s tough to time.
The Paycheck Protection Program terms are very clear that businesses can only receive a loan once. Despite an additional $310 billion just added to the amount being distributed, the terms of the PPP are to float payroll for 8 weeks, period.
This puts businesses in a guessing game of when will they need the money? If you get 8 weeks and 8 weeks alone, the best idea is to apply the PPP during the 8 weeks leading up to reopening at full capacity. But of course, no one knows when that will be. State governors have continually pushed back the end of lockdown, and health officials warn that we might have more lockdowns in the future.
Does business XYZ, which has furloughed its staff, rehire everyone for 8 weeks via the PPP, only to furlough them again if quarantine is extended another month? Hopefully, the government will provide a third round of PPP funding for business if this indeed happens, but there’s no guarantee that the feds can continue to print money in this way.
4. The money has gone to the wrong businesses, and that’s annoying.
From Shake Shack to the L.A. Lakers, giant entities are receiving money from the Paycheck Protection Program while actual small businesses are still waiting. Thankfully these two and a handful of others have announced that they will be giving back the money allotted to them, but the question remains: why did they get it in the first place?
Remember, $310 billion had to be added because the initial PPP funds ran out very quickly. Who knows what giant companies received these “small business” loans that didn’t need them? But also, who’s to blame for it: the companies acting in their best interest (free money is free money), or the government that has enabled even publicly traded companies to partake?
Forget the previous three points that make the PPP a tough loan to stomach. None of it matters if these loans don’t get to the right businesses at all. This issue is the most publicly facing disaster for the PPP.
Except for the biggest one…
5. No one is even getting the PPP, and that’s ridiculous.
The coronavirus pandemic is unprecedented and the efforts the government is taking to mitigate economic pain is herculean. But the entire point of the Paycheck Protection Program is to provide rapid aid to small businesses and its workers who need help at this very moment.
And yet of this writing, only 5.7% of US businesses received PPP loans when about 70% of small businesses applied. Those are tough numbers to read. Even as flawed as the PPP is, the rollout has been a disaster for the most vulnerable businesses looking to retain their employees.
Of course, doing anything of this magnitude is not easy. But it is disheartening to see that so little help is actually reaching the businesses that need it so much. For now, vulnerable businesses can hope for two things on the horizon: that the lockdown lifts sooner rather than later, and that the government learns from its mistakes on the PPP and redoubles their efforts to get funding to these companies and employees faster.
For more articles on how businesses are responding to the coronavirus pandemic and ways to cope with the economic repercussions of the current crisis, check out our resource center.
Robert Woo is a freelance content creator for various companies from startup to enterprise-level. When not writing SEO-friendly articles, he writes and performs comedy, plays guitar, and champions the Oxford comma.