By now, most of us are familiar with the Paycheck Protection Program (PPP), the forgivable loan initiative under the CARES Act. The PPP allows small businesses to borrow up to $10 million to help fund their payroll and certain other overheads and then potentially get forgiveness for most of the amounts at the end of the loan. Despite its many well-publicized challenges (tech problems, big bank delays, big company favoritism), the program has been mostly successful in getting more than $500 billion in loans to small businesses as of the end of last week. These loans have played a crucial part in helping small businesses keep afloat and maintain their payrolls as they navigate through shutdowns, shelter-in-place orders and economic suppression by their local governments battling the COVID-19 pandemic.
But there’s a big, big problem looming with the program, and in just a few weeks all that has been accomplished could blow up in a very bad way. That’s when many companies will be seeking forgiveness.
According to the Small Business Administration, more than 1.6 million loans were issued during Phase 1 of the program before the initial funding ran out. After a few tweaks and additional funding, another 2.6 million loans were granted to small businesses through thousands of financial lenders. The program is built around a vital component that allows business owners to, after an eight-week period, apply to their financial lender for "forgiveness" of certain payroll and overhead expenses which would then – it's hoped – significantly reduce their loan balances.
The rules for calculating loan ability are based on a company’s prior payroll numbers so that the forgiveness businesses receive will equal the payroll they expect to incur during that eight-week period upon approval and funding. That way, when all the smoke clears, the hope is that all will be forgiven. In effect, the government will have provided them with free money to keep their businesses afloat.
In about a month, there will be a big problem: A great number of small businesses will find that they didn’t incur enough payroll to get their loans fully forgiven. Why?
Many business owners I've spoken to who have been approved for these loans are still shut down on government order. Their employees have been sent to unemployment. Bringing them back doesn't make sense because there's nothing for them to do. Others don't need the help immediately. They are seasonal businesses. Or they have some cash to live off of in the short term but see future sales dropping off.
But the Paycheck Protection Program doesn't consider this. So when the money hits these companies' bank accounts, the eight-week clock starts ticking. If they don't use the money, they're going to be forced to convert it into a two-year (albeit at a very low one-percent interest rate) loan. But many can’t incur additional debt, regardless of the interest rate. They just need financial aid.
So now business owners are faced with a quandary. If they're not going to use the money, should they just give it back (they have until May 14th do so)? If they haven't yet received the funds, should they cancel their applications? If they haven't yet applied, should they?
The problem has caused, according to some reports, a slowdown in the program. And yet, our problems persist. Our businesses are at a standstill. We do need the money, so much so, that some studies say as many as half could go out of business in the next six months if things don't change.
This is nothing more than a timing problem, and there’s a very simple fix. A fix that doesn't require any more money, bailouts or relief from the government. It just requires a quick and easy rule change, and possibly a change that the Treasury could make on its own without congressional approval or political backlash. The change is this: Let the business owner and his or her financial lender mutually agree on when the eight-week forgivable period begins.
In the end, a Paycheck Protection loan is merely a promissory note between the business owner and a lender. Sure, the note is backed by the government and the lender must follow certain guidelines. But why not give the lender more leeway to determine when the eight-week clock begins? Allow the lender, based on the knowledge of their customer, up to 60 days to start the clock ticking. That gives the customer some breathing room until their local government allows them to fully get back to business, when the “season” starts or when the financial effects of falling orders is felt. This would also better enable the business owner to re-hire as many staff as possible when the economy kicks back in.
I realize that the objective of the Paycheck Protection Program was to keep as many people off of the unemployment rolls as possible and for businesses to get help maintaining their payrolls. In many cases this has happened. But in too many other cases, the intention does not meet the facts of running a business in the real, pandemic-related world of continued government shutdowns.
So, like all good plans, tweaks are needed to attain their objectives. In this case, just a small tweak to the eight-week forgiveness period would put the program back on course to reach those goals.
Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.