The following column is the opinion and analysis of the writer.
There’s significant controversy about the rollout of the vast $2.2 trillion CARES Act, particularly with the $349 billion Paycheck Protection Program. The program got off to a rocky start, ran out money after 13 days and Congress had to add a $310 billion second round.
As the COVID-19 crisis caused the economy to come to a screeching halt in mid-March, Congress needed to act large and fast. “Protecting paychecks” for workers in small businesses was a primary goal while keeping the lights on as everyone rode out the storm.
Small businesses faced a perilous cliff as revenue instantly dried up and these entities typically have limited cash reserves and access to lines of credit. For many, the fastest way to cut costs in a crisis is to furlough workers and hope unemployment keeps them afloat until recovery.
Predictably, unemployment claims in businesses with less than 10 employees skyrocketed and The Economist estimated 60% of those workers have been laid off since January.
To move quickly, Congress used an existing Small Business Administration platform to manage the program. PPP funds were structured as easy-to-qualify, low-interest loans at 1%, which could convert to a grant if most of the money was used for payroll costs. Essentially, it was nearly free money to keep people employed.
Unlike stimulus checks or unemployment benefits, the PPP design provides support at multiple levels: Workers, small businesses and banks.
Workers continue to receive pay and benefits such as health care. Small businesses use the loans to cover payroll for 8 weeks, plus up to 25% of the proceeds for operating expenses like rent and utilities. Banks, often community entities with SBA programs, help keep their customers in business, earn a small processing fee and charge a modest margin, about 50 basis points.
However, launching an immense program during the largest financial crisis in history was a daunting task. The SBA normally processes loans worth $35 billion a year yet needed to scale up for 10 times that volume in a few days.
Enabling rules and processes were quickly drafted while bankers simultaneously tried to interpret those rules and create online platforms to process applications.
Business leaders had to assemble loan documentation and attest to their “economic necessity” as they forecast crushing deficits.
Significant problems erupted as the program took time to ramp up and then roll out. Rules, literally written overnight, have been confusing and difficult to understand. Gaps in the legislation allowed public companies, large restaurant chains and companies with minimal economic stress to swoop in and gobble up significant chunks of the fund, leaving truly stressed smaller companies blocked out.
The program rollout could not keep pace with the escalating economic damage and unemployment. Some in Congress, with hindsight, are asking for investigations and more accountability.
However, despite the challenges and alleged abuses, the program’s initial intent has been mostly fulfilled. Many small businesses received aid as 1.66 million loans, 74% for less than $150,000, were processed in the 13 days of the first round. Smaller, community banks processed approximately 60% of them.
Program complexities are far from solved but continue to be addressed with ever-expanding Q&A guidance.
The SBA made flexible initial interpretations of the hastily drafted CARES Act but must act quickly and reasonably on loan forgiveness guidance.
While the PPP has problems, a significant amount of support is reaching small businesses and keeping workers employed. As a second round of funding continues, we can only hope the imperfect program improves and delivers in time to save more jobs and businesses.
Without it, costs of unemployment and bankruptcy may be even greater.
Don Riegger, MBA, CPA, is board member and treasurer of a Tucson based nonprofit organization. The organization, which has nine full-time-equivalent employees, received its PPP loan immediately after the second round was funded.
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