As the second round of the Paycheck Protection Program gets underway, we can expect a lot of the news coverage of the massive business grant and loan initiative to be as clueless and superficial as the post-mortems that followed the first.
The PPP was the part of the $2.2 trillion relief package, known as the CARES Act, that President Donald Trump signed just four weeks ago. This history is too ancient for some journalists to remember that the $350 billion PPP was initially (and correctly) described as a program aimed as small and midsize businesses. The program allows loans of up to $10 million for enterprises that employ up to 500 people – more in the case of some restaurant and hotel chains.
It took a week for the Small Business Administration to launch the program, and then less than two weeks for the entire sum to be exhausted. Nearly 5,000 lending institutions worked heroically to process applications that resulted in more than 1.6 million loan approvals, at an average of about $206,000 each. Those lending institutions also processed an untold but vast number – at least in the hundreds of thousands – of applications from businesses that either did not qualify or did qualify but failed to get their requests to the SBA before the money ran out.
The frustration on the part of qualified applicants who rushed to gather documentation only to have the funds run dry created a lot of resentment toward some of the businesses that did secure funding. That resentment is amplified by fear. Doubtless, many of those left-behind businesses need to secure PPP money to have even a decent chance at economic survival.
A relative handful of the PPP loans went to bigger enterprises that qualified for seven-figure sums. To be eligible for the full $10 million, a business would have had to have a payroll of at least $48 million in a 12-month pre-pandemic testing period. Loan eligibility was based on two months’ average payroll plus 25%.
The press is not very good at handling technical nuance these days (and, in fairness, it probably never was). But it excels at amplifying emotions like fear and resentment. Any conflict with the facts can be glossed over. That is how we get chestnuts like this one from CNBC: “The PPP was designed to help the nation’s smallest, mom-and-pop shops keep employees on payroll and prevent mass layoffs across the country amid the coronavirus pandemic.” Clearly, from the criteria they built into it, the designers of the PPP did not think they could prevent “mass layoffs across the country” by targeting only “the nation’s smallest, mom-and-pop shops.”
Note to CNBC and the many other outlets who reported similarly: A business that goes by a name like Freddie’s Food Truck is not likely to have 500 employees or a payroll of $48 million, and thus qualify for a $10 million loan. But why should self-evident facts prevent you from doing a rote story about the “big guy” taking something away from worthier ordinary folks?
The media-fueled ruckus was loud enough that, as the House of Representatives was voting on the PPP refresh yesterday, Treasury officials changed the rules. The Wall Street Journal reported that about 150 publicly traded companies that received nearly $600 million in loans (that’s about 0.2% of the total initial allocation) would have to return the money; a few, including Shake Shack Inc., had already said they would.
Treasury Secretary Steven Mnuchin justified the after-the-fact change on the grounds that the PPP was not intended “for big, public companies that have access to capital.” Mnuchin knows perfectly well that if Congress had meant to exclude publicly traded companies from the program, it would have put such an exclusion into the law. He also knows that the fact a company’s stock is publicly traded says next to nothing about how much capital, if any, it can access when business conditions are as chaotic as they are during a global pandemic lockdown. No public company is issuing new stock right now. But the optics were bad, and some hills are just not worth dying upon.
Few, if any, PPP recipients (including those that are publicly traded) are big enough to take advantage of the other business support measures that federal officials rushed to put in place when the nation’s economy went into hibernation. The Federal Reserve provided support to money market funds. These funds buy the short-term commercial paper that large corporations issue to meet near-term funding needs. Another section of the $2.2 trillion relief package provided seed money for the Fed to purchase up to $750 billion in corporate bonds, two-thirds of that in new issues, to let large companies that held investment-grade ratings before the pandemic continue to tap credit markets. Yet another piece set aside funds for particularly hard-hit industries in the travel sector.
The businesses eligible for PPP funding are too small to have investment-grade bond ratings or to raise funds in the commercial paper market. Absent the SBA loan guarantee that is at the core of the PPP, most would not even have been able to get bank loans in time to avoid having to cut staff as revenue fell off a cliff in March. Shake Shack, an outlier among outliers, said it would return the PPP money after it secured other financing. The Treasury Department’s about-face yesterday will leave others to fall through a hole in the federal financial safety net.
The PPP money was supposed to be quickly available on generous terms. The loans carry a 1% interest rate and are payable over two years (six months deferred at the outset). They will be forgiven to the extent the business uses the money within eight weeks of disbursement to cover payroll, rent, mortgages and utilities. The forgiveness only applies to up to $100,000 per year in salary per employee, so the beneficiaries are hardly society’s fat cats. And forgiveness only applies to the proportion of the loan commensurate with pre-pandemic workers who stay on the payroll, or who are quickly rehired or replaced.
Still, it is a generous program that promises to help a large swath of businesses. That is why it was so oversubscribed that Congress has rushed to refresh it with another $310 billion. In this second round, lawmakers set aside a slice of the funding for rural and small community lenders that did not have the staff or the volume to grab a share of the first round, and whose genuine mom-and-pop customers often lacked connections with bigger banks that would have helped them. The PPP was not designed to help only the weakest and most desperate businesses, however. An establishment that was financially shaky before the pandemic will not do much to promote a vigorous economic rebound if we keep it on life support only by means of a federal grant or cheap loan. For stronger businesses that might not have laid off employees anyway, PPP money will act as both a safety net if things get worse and a stimulus if they get better.
It is fair to question the way the PPP and other economic recovery programs are designed. I myself have noted, in this space, that it would have been more efficient for the government to disburse the funds directly, rather than relying on private lenders working with the SBA. Some will say that Congress should have targeted the money more narrowly to smaller, needier enterprises than the many bigger and better-established companies funded in the first round. This argument isn’t meritless. But that does not mean companies that used the program as it was actually designed did anything wrong. Nor does it justify describing a program like the PPP as having been meant only for “mom-and-pop” businesses when that was never the case.
I view the PPP a lot like a selective college admissions application. You have to qualify to get in, but not every qualified applicant will be admitted. In a crisis situation where you can’t help everyone with everything, you help as many as you can, as much as you can. And if you are trying to keep workers and employers together, you go where most of the workers are employed. You won’t find enough of them working at Freddie’s Food Truck to do the whole economy much good.
Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book,
Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book
The High Achiever’s Guide To Wealth.
Posted by Larry M. Elkin, CPA, CFP®
photo by Mike Mozart
As the second round of the Paycheck Protection Program gets underway, we can expect a lot of the news coverage of the massive business grant and loan initiative to be as clueless and superficial as the post-mortems that followed the first.
The PPP was the part of the $2.2 trillion relief package, known as the CARES Act, that President Donald Trump signed just four weeks ago. This history is too ancient for some journalists to remember that the $350 billion PPP was initially (and correctly) described as a program aimed as small and midsize businesses. The program allows loans of up to $10 million for enterprises that employ up to 500 people – more in the case of some restaurant and hotel chains.
It took a week for the Small Business Administration to launch the program, and then less than two weeks for the entire sum to be exhausted. Nearly 5,000 lending institutions worked heroically to process applications that resulted in more than 1.6 million loan approvals, at an average of about $206,000 each. Those lending institutions also processed an untold but vast number – at least in the hundreds of thousands – of applications from businesses that either did not qualify or did qualify but failed to get their requests to the SBA before the money ran out.
The frustration on the part of qualified applicants who rushed to gather documentation only to have the funds run dry created a lot of resentment toward some of the businesses that did secure funding. That resentment is amplified by fear. Doubtless, many of those left-behind businesses need to secure PPP money to have even a decent chance at economic survival.
A relative handful of the PPP loans went to bigger enterprises that qualified for seven-figure sums. To be eligible for the full $10 million, a business would have had to have a payroll of at least $48 million in a 12-month pre-pandemic testing period. Loan eligibility was based on two months’ average payroll plus 25%.
The press is not very good at handling technical nuance these days (and, in fairness, it probably never was). But it excels at amplifying emotions like fear and resentment. Any conflict with the facts can be glossed over. That is how we get chestnuts like this one from CNBC: “The PPP was designed to help the nation’s smallest, mom-and-pop shops keep employees on payroll and prevent mass layoffs across the country amid the coronavirus pandemic.” Clearly, from the criteria they built into it, the designers of the PPP did not think they could prevent “mass layoffs across the country” by targeting only “the nation’s smallest, mom-and-pop shops.”
Note to CNBC and the many other outlets who reported similarly: A business that goes by a name like Freddie’s Food Truck is not likely to have 500 employees or a payroll of $48 million, and thus qualify for a $10 million loan. But why should self-evident facts prevent you from doing a rote story about the “big guy” taking something away from worthier ordinary folks?
The media-fueled ruckus was loud enough that, as the House of Representatives was voting on the PPP refresh yesterday, Treasury officials changed the rules. The Wall Street Journal reported that about 150 publicly traded companies that received nearly $600 million in loans (that’s about 0.2% of the total initial allocation) would have to return the money; a few, including Shake Shack Inc., had already said they would.
Treasury Secretary Steven Mnuchin justified the after-the-fact change on the grounds that the PPP was not intended “for big, public companies that have access to capital.” Mnuchin knows perfectly well that if Congress had meant to exclude publicly traded companies from the program, it would have put such an exclusion into the law. He also knows that the fact a company’s stock is publicly traded says next to nothing about how much capital, if any, it can access when business conditions are as chaotic as they are during a global pandemic lockdown. No public company is issuing new stock right now. But the optics were bad, and some hills are just not worth dying upon.
Few, if any, PPP recipients (including those that are publicly traded) are big enough to take advantage of the other business support measures that federal officials rushed to put in place when the nation’s economy went into hibernation. The Federal Reserve provided support to money market funds. These funds buy the short-term commercial paper that large corporations issue to meet near-term funding needs. Another section of the $2.2 trillion relief package provided seed money for the Fed to purchase up to $750 billion in corporate bonds, two-thirds of that in new issues, to let large companies that held investment-grade ratings before the pandemic continue to tap credit markets. Yet another piece set aside funds for particularly hard-hit industries in the travel sector.
The businesses eligible for PPP funding are too small to have investment-grade bond ratings or to raise funds in the commercial paper market. Absent the SBA loan guarantee that is at the core of the PPP, most would not even have been able to get bank loans in time to avoid having to cut staff as revenue fell off a cliff in March. Shake Shack, an outlier among outliers, said it would return the PPP money after it secured other financing. The Treasury Department’s about-face yesterday will leave others to fall through a hole in the federal financial safety net.
The PPP money was supposed to be quickly available on generous terms. The loans carry a 1% interest rate and are payable over two years (six months deferred at the outset). They will be forgiven to the extent the business uses the money within eight weeks of disbursement to cover payroll, rent, mortgages and utilities. The forgiveness only applies to up to $100,000 per year in salary per employee, so the beneficiaries are hardly society’s fat cats. And forgiveness only applies to the proportion of the loan commensurate with pre-pandemic workers who stay on the payroll, or who are quickly rehired or replaced.
Still, it is a generous program that promises to help a large swath of businesses. That is why it was so oversubscribed that Congress has rushed to refresh it with another $310 billion. In this second round, lawmakers set aside a slice of the funding for rural and small community lenders that did not have the staff or the volume to grab a share of the first round, and whose genuine mom-and-pop customers often lacked connections with bigger banks that would have helped them. The PPP was not designed to help only the weakest and most desperate businesses, however. An establishment that was financially shaky before the pandemic will not do much to promote a vigorous economic rebound if we keep it on life support only by means of a federal grant or cheap loan. For stronger businesses that might not have laid off employees anyway, PPP money will act as both a safety net if things get worse and a stimulus if they get better.
It is fair to question the way the PPP and other economic recovery programs are designed. I myself have noted, in this space, that it would have been more efficient for the government to disburse the funds directly, rather than relying on private lenders working with the SBA. Some will say that Congress should have targeted the money more narrowly to smaller, needier enterprises than the many bigger and better-established companies funded in the first round. This argument isn’t meritless. But that does not mean companies that used the program as it was actually designed did anything wrong. Nor does it justify describing a program like the PPP as having been meant only for “mom-and-pop” businesses when that was never the case.
I view the PPP a lot like a selective college admissions application. You have to qualify to get in, but not every qualified applicant will be admitted. In a crisis situation where you can’t help everyone with everything, you help as many as you can, as much as you can. And if you are trying to keep workers and employers together, you go where most of the workers are employed. You won’t find enough of them working at Freddie’s Food Truck to do the whole economy much good.
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