Jesse Carlson is SVP and General Counsel at Kapitus, a small business financing company, and previously served as counsel in the Professional Liability & Financing Crimes Section of the FDIC’s Legal Division. More.
As of June 30, 2020, the SBA will stop processing Paycheck Protection Program (PPP) loans under the CARES Act. Many banks and other lenders have already stopped accepting new applications given their internal processing timetables. At this juncture, it makes sense to give an update on the PPP and the likely future path of further federal response to the difficulties that small businesses are facing as a result of COVID-19.
The Paycheck Protection Program (or PPP): A Retrospective
At the (potential, see below) end of the Paycheck Protection Program, it is worth noting the successes and failures of the Congress and SBA in supporting small businesses through the COVID-19 pandemic. The problems with the Paycheck Protection Program have been well documented: the first “round” of PPP appropriations from Congress and the lure of “free” money led to a feeding frenzy and the first $350 billion was accounted for in weeks. The desire to get funds to businesses quickly resulted in many companies no one would consider “small businesses” with deep connections to banks disproportionately benefiting from the program. (I’m looking at you Los Angeles Lakers, although there are continued reports of publicly traded companies that continue to take the loans.)
As an additional $300 billion was appropriated, demand for the program cooled. It is worth noting that as of June 20, 2020, approximately $128 billion in funds appropriated for Paycheck Protection Program loans had not been claimed. This sudden lack of demand was not entirely surprising, given that many small businesses were put off by the so-called 75/25 rule, which tied forgiveness to using 75% of the PPP loan for payroll within 8 weeks of the loan funding, and the complex forgiveness requirements. The initial forgiveness application was at least as complicated as a tax return, if not more.
To put it in perspective, a restaurant that was closed would have little appetite for taking a loan to pay staff that were not needed, given that staffing needs had declined as most restaurants shifted to take out and delivery only; and it was unclear what part, if any, of the loan would be forgiven. Belatedly, Congress did act, and on June 5, 2020 the Paycheck Protection Program Flexibility Act was passed, which relaxed the 75/25 rule to 60/40, extended the forgiveness period to 24 weeks for eligible costs incurred as opposed to paid during that period. The SBA also created an “EZ” forgiveness application. However, many restaurants found that they had hamstrung themselves by acting early and not being able to take advantage of the more flexible arrangements, and Congress made these clarifications without extending the period in which small businesses could apply.
Based on feedback from our customers, despite the problems detailed above, the Paycheck Protection Program provided a much-needed cash infusion to many restaurants. The constant changes to the program, while causing consternation among borrowers and lenders, were for the most part well-intentioned.
What Can Restaurants Do Now that the Paycheck Protection Program is Over?
For those customers that did not take the plunge and seek a Paycheck Protection Program loan:
it may be possible to get in under the wire if you have a simple application and all the documentation is in order. Online lenders have shown fast turnaround times for our customers, and a link to apply can be found here.
The SBA has started taking Economic Injury Disaster Loan applications after a long pause, and our customers have noted that the processing times have been reduced from the early days of the program, a link to the application is here. The application form is easy and only requires a couple of line entries from your tax return. Under the EIDL program, a small business can get a grant of $1,000 per employee up to $10,000, an unsecured loan up to $25,000, and a secured loan with no personal guarantee up to $200,000. The loans have up to a 30-year term at a 3.75% interest rate and are made directly from the SBA. While not forgivable, the loans can be used for essentially any business purpose and have relatively generous terms.
Further Restaurant Protection Programs are Almost Certainly Coming
Given the resurgence of Covid-19 in many states across the south, and the inability to contain the virus, Congress is likely to take additional action to sustain the economy. While the Paycheck Protection Program expires June 30, it is likely to be revived with the next relief bill, although in a more targeted form. Any further relief will be more targeted to industries that are disproportionately affected, such as restaurants, and businesses with less than 100 employees that can demonstrate a decline in revenue who may be able to seek a second PPP loan.
All in all, expect further opportunities– waiting rather than rushing in may be to your benefit. The first chapter is written, but the story is not told and the unfolding pandemic will likely yield additional government relief.
Updated April 1, 2020:
The Coronavirus Aid, Relief, and Economic Security Act, or the ‘‘CARES” Act, was signed into law last week. Among the many provisions to help the American economy, the CARES Act includes a dramatic expansion of the eligibility for an existing Small Business Administration (“SBA”) loan, dubbed the “Paycheck Protection Program,” that is intended to speed liquidity to small businesses across the country.
The public health response to Coronavirus has had an outsized impact on restaurants, especially fine dining, where social distancing has required restaurants to cease in-store service. Given the size and scope of the restaurant industry (representing 15.6 million jobs and almost $900 billion in sales), and the unfortunate fact that in order to “flatten the curve” restaurants took an out-sized hit, the Paycheck Protection Program included key provisions tailored to restaurants, including:
- Relief from how employees from restaurants under common ownership are counted. A small business is generally defined as less than 500 employees. This test will be applied on a per-location basis for restaurants.
- Recognition of tipped workers in the calculations of loan amount and forgiveness, such that tipped workers on the payroll will be considered to make the federal minimum wage for purposes of the Paycheck Protection Program.
- Rent as an approved use of funds, not just payroll. The fact is that rent is often the highest fixed cost for a restaurant, and loans under the Paycheck Protection Program can be used on rent for the two months after the loan is disbursed.
Distinguishing Between SBA Loan Programs
Many small businesses consider an SBA loan as the gold standard for small business finance and associate the SBA with low rate, long term loans that are favorable to small businesses, including restaurants. But the SBA administers a number of different loan and grant programs, and there are significant distinctions between them.
One of the largest is the “Section 7a” loan program. 7a loans are notoriously difficult to qualify for and usually require long lead times, collateral, a minimum personal credit score of 680, and significant documentation. These loans are made by banks (not the SBA) but are 75-85% guaranteed by the SBA.
In order to speed relief to small businesses that have been impacted by Coronavirus, the Paycheck Protection Program dramatically expands the Section 7a loan to cover many, many more small businesses, with the expectation that $350 billion in 7a loans will be made between now and the end of June, when this type of loan sunsets.
This is not a typical 7a loan, and it is not the “Economic Injury Disaster Loans” made directly by the SBA that are reportedly crashing the SBA website (although a business can apply for this type of loan as well as a Paycheck Protection Act Loan so long as they are used for different purposes). The CARES Act creates a completely different program that is intended to help small businesses retain or rehire their workforce so that things can get back to normal as quickly as possible once the threat of the virus passes.
Check out Quick Base’s COVID-19 Small Business Relief Programs for assistance with applying for your CARES Act SBA loans.
Summary of Key Details for Paycheck Protection Program Loans
To speed relief to small businesses, the Paycheck Protection Program waives key SBA 7a requirements:
- Don’t have to show you can’t get credit elsewhere (something that is required for a disaster relief loan)
- No personal guaranty
- No collateral
Who qualifies for the Paycheck Protection Program?
Small businesses including restaurants:
- With 500 employees or less
- That were in operation on February 15, 2020
- Who paid employees; and
- Who can certify in good faith that their operations have been impacted by the uncertainty of current economic conditions and will use the loan for eligible purposes
On a more particular note to restaurateurs, the Paycheck Protection Program specifically waives SBA affiliation requirements for restaurants. Typically, all the employees of affiliated companies are aggregated to determine whether you qualify as a “small business.” But for restaurants, each location is judged on its own. So if a restaurant group employs 50 workers at 11 locations, it is still eligible.
For more financial resources, news, and updates on how the coronavirus is affecting restaurants, visit our COVID-19 resources page.
What can a small business restaurant use their Paycheck Protection Program loan for?
- “Payroll costs,” which means salaries, commissions, compensation (up to $100,000 per employee), sick leave, severance and other payments to workers, group health care benefits, including insurance premiums, retirement benefits, and state and local payroll taxes.
- Mortgage interest payments
What is the maximum Paycheck Protection Program loan amount?
The maximum is 2.5 times a restaurant’s average monthly “payroll costs” (see the list above for the exact components), based on the average from the last year (or if the business has been open less than a year, the last three months), up to $10 million.
What are the Payment Protection Program loan terms?
- Any payments are deferred for 6 months
- 1% interest during the deferral period
- Any balance after the forgiveness period has a maximum two-year term
What is this about loan forgiveness for the Payment Protection Program?
- For eight weeks after the loan is disbursed, and documented payments in the following categories will reduce the principal balance of the loan, up to 100%:
- “Payroll costs” (see above)
- Mortgage interest
- Rent payments
- HOWEVER, to take advantage of Payment Protection Program loan forgiveness, the restaurant must either retain its employees or re-hire them by June 30, 2020. If the restaurant does not retain or rehire at least 75% of its employees, there is a corresponding deduction to the forgiveness amount.
- Of note to restaurants, the minimum wage for tipped workers will be grossed up to the federal minimum wage for purposes of calculating the principal forgiveness amount.
A couple of notes of caution, unscrupulous lenders or loan brokers will attempt to charge an applicant some sort of fee, such as a “consulting” or “broker” fee for “assisting” in obtaining a Paycheck Protection Program Loan. And brokers and lenders may encourage you to make a “regular” 7a application in addition to, or instead of a Paycheck Protection Program Loan because they can charge a higher fee if the application is approved.
- DO NOT make a “regular” 7a application, the loan will take weeks to process and it could make a small business ineligible for a Paycheck Protection Program loan.
- NO FEES should come out of the loan disbursement, or be charged by the lender or any broker. The CARES Act specifically provides that the borrower is not to be charged any fees. The SBA (NOT the borrower) pays lenders a 5% origination fee, and the lender can pay a third-party an amount authorized by the SBA for their services. A reputable lender should not be asking for any fee and should not be taking any amount out of the loan.
Do not get duped into paying for a Paycheck Protection Program 7a Loan. This is a program intended to aid small businesses during this crisis. Report any unscrupulous behavior you encounter to the SBA or to the FTC.
The Paycheck Protection Program is designed to help small businesses like restaurants to get the cash they need right now. As rent is one of the biggest expenses in running a restaurant, restaurateurs could effectively geta cash influx for rent payments from the SBA under this loan program if they rehire 75% of their staff within two months. Be wary of unscrupulous lenders and brokers who will either charge a fee or guide you to a “regular” 7a application. Only work with a reputable partner to apply for the Paycheck Protection Program.
Update (4/7/2020): An earlier version of this post has since been updated as the program was still evolving as the SBA and Treasury shaped the program within the parameters set by Congress. Items updated include employee size per small business, interest rate, loan term, and forgiveness requirements. As of 4/7/2020, the employee size can be up to 500 (previously less than 500), the interest rate is 1% (previously 4%), the term is 2 years (previously 10 years), and the forgiveness program is now more restrictive, being weighted toward payroll costs, not allowed for any existing debt obligations, and covers eligible costs for only the 8 week period after the loan is issued. An additional insight from these updates, specifically for restaurant owners with reduced payroll costs, is that taking the loan closer to an expected re-opening date will allow more expenses to be eligible for forgiveness as operations pick back up. For more information on the program, you can refer to the PPP Fact Sheet outlined by the SBA and Treasury.