4 Reasons Small Businesses Are Struggling With the Paycheck Protection Program

Unclear terms, unrealistic loan forgiveness, a site unprepared for launch, and a bottomless demand for cash

Countless small businesses have been hit hard by social distancing measures meant to slow the spread of COVID-19. Lawmakers say that helping those businesses is a paramount priority. But many companies hoping to cash in on the Paycheck Protection Program (PPP)—a federal measure offering $349 billion in loans for small businesses—have been disappointed in recent days. The program has struggled to take flight amid a series of glitches, some of which will be temporary, as government workers overcome the difficulties involved in quickly creating such a massive project. Some will not be.

1. A site unprepared for launch

The Small Business Administration (SBA) loan application platform launched Friday. By Monday, it had crashed. Its availability has ebbed and flowed since the site went online—which isn't terribly surprising, considering that Congress approved the stimulus bill just a week prior. But banks have said they don't fully understand the PPP's terms, which were handed to them on Thursday evening, about 12 hours before they were to start fielding applications.

Those applications may take over an hour to process, and the SBA's platform sometimes asks for information not required by PPP, thus incorrectly disqualifying eligible applicants. What's more, as of Monday, banks had not yet been provided with the documentation needed to close out loans. Some banks—including the colossal Citigroup—still weren't accepting applications as of Wednesday afternoon.

"If the government wants to give us a 100 percent guarantee that, regardless of what documentation they get, they are going to pay us within a certain time frame—that would change it significantly,"Mike Martin, the chief executive officer of Western Bank, told the Silver City Daily Press. "Every bank that I know of will say, 'This is how many of these loans that we can do based on the risk parameters.'" 

2. Banks afraid of new risks

Those risk parameters appear to be either too high or too ambiguous for some lending institutions. After the floodgates opened, several banks began turning down potential loanees if they didn't have a previous lending history with the bank—even if the business owner had decent credit. The move eliminated several businesses who otherwise qualified for the PPP. Bank of America was perhaps the most high-profile example of this: After a swift backlash, the banking behemoth eventually lowered the barrier, but it is still rejecting applicants who have a lending history with another bank.

That pickiness drew criticism from the SBA, which reminded banks that taxpayers bailed them out to the tune of several billion dollars just over a decade ago. Some institutions "that had no problem taking billions of dollars of free money as bailout in 2008 are now the biggest banks that are resistant to helping small businesses," Joseph Amato, the SBA Nevada district director, argued in the Monday PPP teleconference.

3. Untenable loan forgiveness terms

Businesses that receive loans can have them forgiven. The government has forced them into an economic collapse, the thinking goes, and thus they are entitled to compensation as they attempt to survive this period of social isolation.

But there's a catch, and it's a big one. Business owners must spend 75 percent of their loan on payroll expenses should they want their debt washed away. That's a change from what Congress approved: Lawmakers voted for a 50 percent payroll requirement, but Treasury Secretary Steve Mnuchin quietly changed the terms after the fact.

The stipulation was, in theory, a way to incentivize bosses to keep their employees employed. But how business owners are supposed to do that when they have no business remains unclear. While labor is certainly a sizable portion of any entrepreneur's expenses, there are several other costly measures that any enterprise must address, such as rent. 

In other words, successful applicants will be faced with a difficult choice. Do you lay off your workers—who can apply for unemployment—and pay to keep the lights on, knowing that you'll be digging a financial hole for yourself that you might not be able to climb out of? Or do you pay your employees when there is no work to be done, so you can come out of this debt-free? One wonders the point of emerging debt-free if you no longer have a building from which to operate. 

4. A bottomless demand for cash

Before the PPP applications even hit the web, Mnuchin implied that banks might deplete the $349 billion in loans without helping every eligible business owner. That seems ever more likely as applications mount at breakneck speed. 

As of 2018, there were about 30 million small businesses in the United States. Applicants can request up to 250 percent of their current payroll, which almost certainly ensures that the funding will run dry. On Monday, Bank of America's 177,000 applications appealed for $32.6 billion in funding—10 percent of the total federal program. Wells Fargo hit capacity the same day.

Mnuchin reiterated his push yesterday to add $250 billion to the program, but Democrats blocked that request today. Sens. Ben Cardin (D–Md.) and Chris Van Hollen (D–Md.) said that they wanted to come to a bipartisan consensus before moving forward, pushing for increased funding for hospitals.

The temporary standoff will almost certainly result in a rather expensive compromise. On Wednesday, for instance, Democratic leaders seemed to agree that they could find $250 billion in additional loans to small businesses, but only if the GOP agreed to tack on $100 billion for hospitals and $150 billion for state and local governments.