The Imperfection of the PPP
The SBA’s Program Drives Unequal Access and is Insufficient for the Reopening Processes Still to Come
By Joe Santucci, Brook Capital Consulting ©2020
Businesses that received funding from the SBA’s first round of the Paycheck Protection Program (PPP) won the race to the money pot.
And a race it was. Of the approximately 30 million small businesses in the United States, only 1.6 million received a loan approval number as of April 16th, 2020, according to the US Treasury. On that day, all of the $349 billion dollars appropriated to the program were committed to business applicants through a relatively small amount of lenders. So who, exactly, got the money? And what does it mean for the rest?
Sophisticated Businesses Win
Despite the intent of the program to provide “economic relief to small businesses nationwide” with less than 500 employees, the first recipients were larger and more sophisticated publicly traded companies who had established relationships with large lenders and the SBA. Shake Shack ($10 million) and Ruth’s Hospitality Group ($20 million total) were notable examples.
The majority of loans (around 75%) were approved for less than $150,000, and the average PPP loan approved during the program’s first traunch between April 3rd and April 16th was $206,000. So the multi-million dollar loans to large companies likely accelerated the depletion of the available funds before small, corner-store businesses could act. The Wall Street Journal reports this morning that over 80 publicly traded companies borrowed more than $330 million within the first few days of the program.
(Truly) Small Businesses Lose
Although PPP rules allowed for larger businesses in the restaurant and hospitality sectors to be funded, the program clearly seeks to assist mom-and-pop establishments as well. But many single-location businesses didn’t have a finance staff with pre-established accounts and long-standing relationships with lenders. As we all know, micro-business owners are operators, CIO, CFO, and accountants all in one. When the race for money kicked off, there’s simply no way they could compete against publicly traded companies with corporate heft.
According to the Consumer Bankers Association, the remaining demand for payroll loans is close to $1 trillion, much higher than the anticipated $300 billion second traunch of PPP money anticipated from congress this week. To make matters worse for super-small businesses, banks will burn through about $50 billion per day if the first round is any guide.
How To Compete
At Brook Capital Consulting (and just about every other lender we’ve spoken to), the difference between obtaining an SBA approval number or not was—quite literally—the paperwork. Businesses who were, if you’ll excuse the repetitive pun, taking care of business, had payroll and tax documents at the ready and were organized enough to quickly reference needed financial numbers. For them, processing and approval went quickly. On the other hand, businesses who were less than financially organized did not fare so well. Lesson: basic accounting acumen, attention to detail, and organization won the race.
Businesses who had established a relationship with their lenders fared better than those who did not. In fact, we received many calls from clients who had been turned away by their community banks because they did not have an open account. We’re not suggesting opening accounts you don’t need, but if you’d like to apply for the PPP through your local banks, it may help to call them up and check on their lending guidelines before the second PPP round begins.
The PPP is far from perfect and maybe even a bit unfair. Small businesses and independent restaurants represent about 48% of the employment in the United States, but the vast majority of them could not participate in the first round. The program was meant to provide two-months of temporary aid to employees and employers, but then what? For now, it’s all we have, but it’s not the long-term support needed for small business. As former Starbucks CEO Howard Schultz discussed this morning, what we need is a “bridge to the vaccine.”
What we need is a much broader lending facility to help businesses work through the reopening process amidst post-COVID19 constraints. Training, restocking inventory, store modifications for social distancing, technology upgrades for no-contact transactions, and other considerations will drive an undetermined but huge bill for small businesses to stand on their feet again. That bill will be small compared to the misery and price of seeing independent small businesses fail on a mass scale.