• Brian Graham

What's Up With PPP?



On April 19, as Congress was debating how much funding to add to the Paycheck Protection Program (“PPP”), I argued that the funding under consideration (which ultimately ended up at $310 billion) was woefully inadequate and likely to run out more quickly than Round 1. I wasn’t the only one, with most experts predicting the funds would be exhausted within days if not hours.  

In the 13 days since Round 2 launched, however, only $189 billion of the incremental $310 billion has been spoken for. Contrast that with the $349 billion claimed in the first 13 days after Round 1 was released. What happened?  

Simply put, the rules governing the program have shifted materially in the last two weeks leaving many small businesses out in the cold. The need among small businesses for help still dwarfs the amounts allocated to date but the only available solution so far, PPP, has been in practice narrowed, pushing down demand for available funds, for three key reasons:

1. Discouraging Bigger Loans. The Administration has pushed a large proportion of the eligible market out of the program. Borrowers are required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” -- hardly a concrete, quantifiable test. Small businesses are legitimately and understandably concerned over how the government might assess whether a certification was, in retrospect, false. 

On April 28, Treasury Secretary Mnuchin drove that uncertainty to a high level of concern for larger small businesses, stating in a television interview that every PPP loan above $2 million would face an audit and mentioning the potential for criminal penalties if the government later found that the borrower’s certifications were inaccurate. The SBA and Department of Justice followed suit with statements reinforcing this message. Then today, May 13, the SBA updated its FAQs to state that all loans under $2 million will be deemed by the government to have made this certification accurately and not be subject to future audits.

These statements and guidance were clearly a response to negative media attention regarding eligible but seemingly well-off PPP borrowers, like the Los Angeles Lakers or Shake Shack. The government has done a very good job of communicating its desired outcome that larger small businesses not receive, and threat of audit and penalties if they nevertheless accepted, PPP loans has become crystal clear.

Larger small businesses got the not-so-subtle hint. In Round 1, loans over $2 million constituted $95 billion (28% of the fund). In Round 2, the percentage fell to 19% as fewer larger small businesses elected to seek PPP loans. Treasury hasn’t yet released statistics on loan size for repayments under the “safe harbor” which allows repayment through tomorrow, May 14 without being exposed to future government audits. One expects that the further action today will drive the message home ever more clearly. I would be shocked if repayments of PPP loans are not skewed sharply to larger loans, freeing up more capacity that would otherwise have been spoken for. So the Administration achieved its objective but in tandem effectively reduced the target market for PPP assistance by at least a third.

2. Leaving Out Non-essential Small Businesses. The rules governing forgiveness emerging in the last two weeks have perversely made PPP loans attractive only to small businesses that don't really need the help and deeply unattractive to the majority of small businesses that are actually struggling and do need the help. That sounds crazy, but it’s true.

The program rewards (through loan forgiveness) businesses that keep employees on the payroll for the first eight weeks after initial funding; in practice, that will be May and June (while much of the country remains in shutdown). PPP loan forgiveness doesn’t consider whether it actually makes sense for the employee or the small business to remain on the payroll for those specific weeks, nor does it consider whether the small business recovers and preserves those jobs in the long run once the shutdown eases which is (or ought to be) the real policy objective here.  

If you run a so-called essential small business or one that isn’t impacted materially by the social distancing rules, this set-up is a windfall. You already planned and need to keep your employees on payroll; indeed, many grocery and delivery services are desperately hiring to meet increased demand. Without changing plans, these businesses easily qualify for PPP loan forgiveness. Of course, in such cases, PPP hasn’t saved jobs; those jobs were already safe.  

On the other hand, if you run any other small business that is subject to hopefully temporary shutdown-related constraints - like a restaurant or hair salon or florist - these rules are a disaster. While the economy is in full or partial shutdown, you don’t really have much productive for your employees to do. Keeping them on the payroll during this specified eight-week period will result in little incremental economic activity and likely no incremental revenue for your business. PPP forgiveness, if you ultimately qualify and the government doesn’t come after you down the road, doesn’t cover all of the cost of keeping those employees on payroll.  

One could argue that PPP should work as a substitute for unemployment insurance for non-essential businesses by giving employees a paycheck even if there is nothing productive for them to do. Even in that frame, PPP doesn’t measure up and isn't the right path for non-essential small businesses. For many workers, expanded unemployment insurance benefits provide families with materially more income than if they were still on their job.  Whether that is good policy given the perverse incentives is a different matter.

Small business owners are smart and respond to such incentives (purposeful or otherwise). The data support the failure of PPP to help many non-essential businesses. Small businesses operating in the healthcare and accommodation/food services sectors have arguably been hit hardest by the pandemic shutdown. Although these businesses collectively provide 34% of small business jobs and most urgently need help to survive, they received a disproportionately small 21% of PPP funds dispersed in the second round. In a May 12 Wall Street Journal piece, Secretary Mnuchin acknowledged the mismatch between the needs of restaurants and the current set of rules governing PPP. In my view, the mismatch goes well beyond just restaurants to most non-essential small businesses.

3. Confusion. PPP has been understandably, but frustratingly for lenders and small businesses alike, a moving target. The constant shifts and updates have caused uncertainty and confusion, deterring many potential applicants. Since the CARES Act passed, the SBA and Treasury Department have issued nine different versions of interim final rules (giving new meaning to the word “final”) and another 40-plus FAQs and the like. Some evolution is inevitable. The government is designing and launching a brand new program seeking to deliver hundreds of billions to a large swath of the American economy within six weeks. So it is understandable and inevitable that the government is struggling in real time to get the balance right on a brand new program. That’s not a criticism but a reality that impairs demand for assistance through the program.

In summary, one should not take false comfort that the $120 billion remaining in the PPP fund suggests challenges facing small business have been met. Instead, the unused funds reflect increasing restrictions on the usability/value of the assistance through that program. Many small businesses continue to suffer without access to the help they need, which has concerning implications for the nearly half of American jobs that depend on those businesses.

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