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How Are Small Businesses Spending PPP Money?

The Paycheck Protection Program has been one of the most important and controversial parts of Congress' relief program. Is it working?

My neighborhood bars have begun to feel optimistic.

This being the town with a college, it seems, every few blocks, Boston has no shortage of places to buy a beer. Within a few minutes’ walk of my front door there are at least a half dozen options. They range from Harry’s, the dive bar with a sports vibe, to Hopewell’s, the basement bar with an upscale vibe, to The Avenue, the student bar with a beer list bigger than my first apartment. They have all been closed since mid-March when the entire state went on lockdown.

Over the past week they began to do renovations. Almost every bar in my neighborhood is under some sort of reconstruction, from a few bits of new furniture to complete overhauls.

It’s difficult to say exactly what has been driving the changes. Restauranteurs and bar owners I speak to in my area cite a wide range of different factors. The state seems serious about reopening this time, some have said, with the governor’s phased-in plan having more weight behind it than previous announcements. Now is just the right time, others say; they might as well take advantage of the empty space to do the work they can’t manage around customers. (Although none mentioned this, the timing almost certainly had to do the governor’s recent decision to allow contractors to resume construction business.)

But virtually all of them have also cited government relief money, state grants and the Paycheck Protection Program, or PPP. Almost two months after Congress authorized this program, it is a good sign that the money is starting to get where policymakers want it to go.

The PPP is the flagship program of the $2.1 trillion CARES Act. It is a small-business relief program which issues money to any business of less than 500 employees, including contractors, freelancers and the self-employed. Applicants can receive a block of money intended to help them keep staff employed and cover overhead costs for a period of up to eight weeks. The government issues this money as a loan but will forgive the loan entirely for any small business which spends the money according to the rules of the program.

As has been well reported, the PPP ran into early troubles. In addition to ongoing issues over the program’s funding (at time of writing it has run out of money once and exhausted more than two-thirds of its second authorization), the program’s reliance on private lenders created significant confusion. Ambiguous language left many banks unwilling to participate in this program, while others prioritized existing customers over the small businesses that the PPP was advertised as serving.

In the weeks since, the Treasury has clarified many of the issues which made banks reluctant to lend Paycheck Protection money. Much of the program’s money has been dispersed as loans to businesses. Despite the headline-grabbing claims made by large restaurants and other Fortune 500 companies, according to lenders, the Paycheck Protection Program is generally reaching exactly the kind of small businesses that Congress planned on.

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(Although, readers should note that the CARES Act intentionally made large restaurant and hotel chains eligible for PPP money. When companies like Shake Shack  (SHAK) - Get Shake Shack, Inc. Class A Report filed for this money, they were using the system as designed.)

“We’ve had a thousand different industry codes,” said Rob Frohwein, CEO of the lending platform Kabbage. “It has been businesses from every walk of life that comes to us. We had a broad distribution prior, in terms of businesses that reach out to us, but this has been extreme.”

Frohwein’s financial technology company (FinTech is the industry term) is one of the companies that has been recently deputized by the SBA to authorize loans under the Paycheck Protection Program. This was one measure to help get the money moving faster, as the agency first tried to work primarily through banks with which it already had a lending relationship. Kabbage focuses on small businesses and individuals, and Frohwein described a surge of these customers with a particular emphasis on the smallest segment of the market.

“We’ve had a huge number, I think like 40% of our approved allocations are for folks who are sole proprietors and independent contractors,” he said. “A lot of independent contractors are still in the process of applying right now. Either they didn’t feel comfortable about applying or were not aware, or just got run over in the stampede of doing this. So we’re seeing a tremendous number of applications still rolling in right now.”

Yet while there is a strong signal that small businesses have begun to receive relief money, many struggle to understand their requirements and benefits under the system. The owners of two Boston-area restaurants interviewed for this article, for example, spoke of struggling to make payroll based on the difference between tipped wages and the minimum wage when their servers can’t collect any tips. This has, they said, approximately tripled their pre-quarantine payroll costs, a hardship given that the PPP is primarily calculate based on those pre-quarantine pay stubs.

Neither seemed to know that they were entitled to calculate their PPP loan based on their servers’ income inclusive of tips. As a result, both appear to have collected significantly less from this program than they were allowed by law, or were confused when speaking about their rights and obligations.

This confusion has been a throughline of the Paycheck Protection Program experience for many small business owners. One survey conducted by the National Federation of Independent Businesses found that more than 70% of small business owners consider the terms and conditions of the program at least somewhat difficult to understand. Across multiple different issues, roughly half of those surveyed found the forgiveness terms of this lending program confusing, particularly as it relates to bringing their workforce back to its pre-crisis level. 

While most business owners surveyed expect their PPP loans to be forgiven, and almost all of them expect the SBA to forgive at least 75% of the money, many don’t understand what the government expects in exchange for that forgiveness. This is particularly important in light of the PPP's 75/25 rule. Businesses which accept money under the PPP must spend at least 75% of the funds on payroll. They may spend the remaining 25% of the money on overhead such as rent and mortgage payments, and must do so within eight weeks of receiving it.

This is a standard that many businesses say they cannot achieve. In particular for businesses in high-rent city areas, overhead can often consume far more than 25% of the budget. This has set the stage for a potential debt crisis among the businesses which survive the coronavirus quarantines, as many of them expect loan forgiveness from a program whose terms they can’t understand and may not be able to meet.