As pandemic lingers, PPP loans slow to a trickle

Participation in the SBA’s Paycheck Protection Program (PPP) has slowed dramatically, with many businesses saying its restrictions don’t help them prepare for the future. | CREATIVE COMMONS

It was the program heralded by the federal government to save America’s small businesses, but as the pandemic and its associated economic lockdowns linger, the flow of the U.S. Small Business Administration’s Paycheck Protection Program loans has slowed to a trickle.

Through the 13-day run of the $349 billion first round of the program in April, Delaware businesses obtained 5,171 loans worth nearly $1.1 billion.

The first week of the $310 billion second round saw 4,872 state businesses get loans worth about $366.3 million.

In its second week, however, only 795 Delaware businesses obtained loans worth about $29.6 million. That represented about an 83% drop in recipients between the first two weeks of the program.

By the third week, the SBA wasn’t breaking out weekly state figures as the fund only saw $6.2 billion in loans nationwide – or less than half of what it loaned in the second week. Delaware saw roughly 361 new loans approved in the third week, but its total allocation dropped roughly $30 million to about $1.45 billion, indicating some recipients had decided to return the funds.

The reasons for the slowing of the program are threefold.

First, the program has likely met market demands, as one economic study pegged the costs of reaching every eligible American small business at about $750 billion. As of May 19, nearly $513 billion of the total $659 billion allocation has been disseminated.

A late April survey of 285 Delaware businesses found that 61% of respondents had applied for a PPP loan, of which 48% had received funds and 44% were still awaiting application review. An analysis by Bloomberg News found that nearly 57% of eligible Delaware small businesses had received PPP loans, covering nearly 75% of the eligible workforce.

Another factor is the increased scrutiny of recipients, following media reports of publicly traded companies and those with relatively easy access to other capital obtaining PPP loans. Some of those companies, like Ruth’s Chris Steak House and Shake Shack, have returned the loans, but others have not.

After the outcry over those loans, the U.S. Department of the Treasury reported that all loans of $2 million or more would be audited, but those under that threshold will be deemed to have been made “in good faith” – meaning they won’t be audited.

Perhaps the most notable reason for the slowdown in lending, however, has been the growing wariness of businesses to take the money now and start the program’s eight-week window, especially as a substantial number of customers in Delaware may not return for weeks or even months. Others have chafed at the requirement to spend 75% of the funds on payroll, even though costs of pivoting a business’s operations to address the challenges of the pandemic may be more important.

Bob Older, president of the Delaware Small Business Chamber, said the program was problematic from the start, because the funds weren’t so much financial aid as added debt.

“Not only does it put businesses in more debt, but it puts them in more debt in a very short period of time,” he said, referring to its two-year term on non-forgivable expenses. “I think that’s a big problem for a lot of businesses.”

Older, who also owns and operates the travel agency Creative Travel, said he doesn’t need money for payroll, but rather for rent and expenses, noting that he expects to lose upward of a year’s income in trip cancellations and refunds. With such a large anticipated deficit, Older said the PPP’s limit of two-and-a-half-times monthly payroll would be a drop in the bucket to help him. He said lenders were encouraging him to look not at the PPP, but a 10-year business loan at 5.25% interest.

“The problem with the PPP is that it was designed for payroll, not for helping the small businesses where they need it the most,” he said.

Gianmarco Martuscelli, owner of Martuscelli Restaurant Group which operates Klondike Kate’s and La Casa Pasta in Newark, and the Chesapeake Inn in Chesapeake City, Md., agreed with Older. He obtained a PPP loan in the first round of funding but believes he will end up returning some of the funds because his restaurants, operating as takeout-only until June 1, don’t need to reach prior staffing levels. While his restaurant group routinely employs upward of 500 people, Martuscelli said that he currently has only about 50 working.

“We’re in no man’s land right now and we’re down to three more paychecks covered,” he said, noting sit-down service will be allowed for only two of the eight weeks covered under the PPP.

Falling short of the 75% threshold turns the shortfall into a two-year loan, a term window that no restaurant would take on right now, Martuscelli added.

“If you’re asking us as a business to only open up at 30% capacity or only dining outdoors, there’s no way we can bring back the same amount of people to run that operation at a lesser capacity,” he explained. “That means there’s no way for us to get the forgiveness because you’re putting us at a disadvantage.”

Martuscelli’s criticisms, echoed by many other small businesses, were backed up by a May 8 report by the Office of the Inspector General for the SBA. It called into question some of the guidelines of the program, which were decided by administration officials and are not written into the congressional bill authorizing the PPP. Those rules included the 75% threshold and the two-year loan term – Congress allowed up to 10-year terms.

“It may be important to consider that many small businesses have more operational expenses than employee expenses,” the SBA Inspector General wrote. “Our review of data from the first round found that tens of thousands of borrowers would not meet the 75% payroll cost threshold and would therefore have to repay the amount of non-payroll costs in excess of 25% in less than two years.”

Asked during a May 19 Congressional hearing about whether he was open to changing the rules of the PPP, however, Treasury Secretary Steve Mnuchin downplayed adjusting either the 75% rule or the eight-week window. The U.S. House of Representatives voted to extend the eight-week period to 24 weeks as part of a $3 trillion coronavirus relief bill lawmakers passed May 15, but Senate leaders say they have no intent of taking up the bill.

By Jacob Owens

jowens@delawarebusinesstimes.com