Businesses Appear Skittish in PPP’s Second Round
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Businesses Appear Skittish in PPP’s Second Round

The first wave of Paycheck Protection Program funding ran out in a few days, but there’s still money left in the second round. Many companies have lingering questions about loan forgiveness.

The U.S. Small Business Administration’s Paycheck Protection Program was developed quickly out of necessity, but the program might not be accomplishing everything it was intended to.

While the program has issued 4,406,267 loans totalling $512,151,608,195 as of May 21, the forgiveness application was just released May 15. At this point, though, the application stimulates more questions than answers.

In round one of the PPP, Minnesota garnered $9,014,060,040 in loans, and so far the state has received over $2,351,171,512 in round two. As of May 23, Minnesota received more than $11 million in PPP loans. But surprisingly, there’s still money left from the second round. Bankers had expected the funds to be gone within days, but weeks later, there are funds still available.

“The second round has not been tapped anywhere nearly as quickly as a lot of people had anticipated it would,” said Brandon Koeser, a senior manager and financial services industry senior analyst with RSM US LLP.

Part of the lack of pursuit could be fear of negative public opinion directed at companies who clearly don’t meet the requirements for the funds, he said. But also, the program isn’t necessarily a good fit for many businesses.

“I think it’s really come to show now that as good as this program is for a lot of small businesses, it still needs to be tailored further,” Koeser said. “For it to really make a big impact, I think the lawmakers and those in charge are going to have to go back and revisit this 75 percent allocation towards payroll related costs and 25 percent for non-payroll, or other qualifying costs.”

Man folks are concerned about being able to maximize forgiveness on the loans and don’t want to be burdened with additional debt.

“I think there’s going to be some changes that are going to hopefully make it better for small businesses, to be able to help them out. Not only near term, but ultimately also long term,” Koeser said.

Federal Impact Locally

The PPP is meant to provide forgivable loans to eligible small businesses, keep employees on payroll, and help those small businesses survive the pandemic. It’s been a big help to some companies, but bankers and businesses think some adjustments would make it more effective.

Earlier this month, Democractic U.S. Rep. Dean Phillips from Minnesota’s 3rd District introduced a bipartisan bill to make fixes to the program.

“While the PPP has helped millions of small businesses keep their lights on, millions more remain on the outside looking in. It won’t matter how much money we appropriate if the system by which it’s distributed is inaccessible to those who need it the most,” Phillips said in a statement.

The bill seeks to extend the forgiveness timeline, reduce the 75 percent payroll requirement, extend the rehiring deadline, ensure payroll tax deferment, and eliminate loan term restrictions.

The program isn’t realistic for the situations faced by many in the hospitality industry, said Ben Wogsland, director of government relations for trade group Hospitality Minnesota.

“The premise of the PPP was that these funds or this relief was going to potentially be forgiven if you meet certain metrics,” he said. “But those hurdles don’t work for this industry, especially when a lot of those businesses are closed right now or are significantly limited in operation.”

Realistically, many businesses are currently closed or have been due to various restrictions, which makes it difficult to meet the condition of spending the funds in a way that meets forgiveness stipulations by the June 30 deadline.

“That’s just not realistic for restaurants and other hospitality businesses that are currently ordered to be closed,” Wogsland said. “There’s a lot of other costs to operating a business that aren’t covered or allowed under the PPP forgiveness provisions.”

Companies are supposed to use 75 percent of the loan on payroll, but for some businesses that’s not representative of their actual expenses. For example, Wogsland said hospitality payroll is typically 20 to 45 percent of costs. And as the new piece of legislation co-authored by Phillips notes, many businesses are having a difficult time rehiring employees who are making more on unemployment enhanced by the CARES Act.

The Federal Reserve System has taken numerous actions to ensure that credit continues to flow throughout the U.S. economy during the pandemic. But in remarks May 13, Federal Reserve Chair Jerome Powell emphasized that “the Fed has lending powers, not spending powers.”

In a speech to the Peterson Institute for International Economics, he noted that Congress already has approved $2.9 trillion in fiscal support to businesses, households, and others to address the negative consequences of the coronavirus.

He pledged that the Fed will continue to move aggressively to stave off economic harm that can be prevented. While acknowledging programs funded by Congress have “provided a measure of relief and stability,” he strongly suggested that there are more steps Congress should consider taking.

“Avoidable household and business insolvencies can weigh on growth for years to come,” Powell warned. “The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support [from Congress] could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”

Earlier this month, the U.S. House, led by Democrats, passed a $3 trillion tax cut and spending package, which does not have support in the Republican-controlled Senate. It’s unclear when the two chambers might reach agreement on another aid bill.

Equitable Distribution

Meanwhile, the second round of PPP was supposed to help minority-owned and smaller businesses. Some question if this has been accomplished.

The stats show that smaller businesses have been helped in this round, with the national average loan size being $73,000, compared to round one’s average loan size of $206,000.

In Minnesota, the average loan size for round one was roughly $194,000, whereas round two’s average loan was about $54,000.

And banks have been seeing smaller businesses seeking the PPP loans, said Katie Wahlquist, chief administrative officer of Star Bank.

“We know just from the know-your-customer philosophy that there are quite a few women-owned businesses. And there also many minority-owned businesses. But, we don’t track those percentages at the bank level. We look at the borrowers as people and we’re analyzing financial data as we’re doing the processing,” Wahlquist said.

Essentially 90 percent of the loans Star Bank processed were under the $100,000 mark, she said. Its average loan size was $64,500 for round one, and $30,000 for round two.

This tracks with what Village Bank has experienced.

“Over 70 percent of those loans are non-clients’ loans, meaning that these are referrals that we’ve gotten from community members,” said Aleesha Webb, president of Village Bank. “As a community bank we’ve really seen this as an opportunity to step up, prove who we are, and really help out those clients that aren’t able to work through the banks they were previously doing business with.”

While Village’s first round of PPP loans hovered around $168,000, the second round averaged about $54,000.

“I’ve seen it going towards a lot of minority-owned businesses. The loans were much smaller. And we did fewer loans in the second round. We were able to get through our entire pipeline, which is fantastic and really gets down to Twin Cities local community businesses and owners that need the funds,” Webb said.

While this second bout of PPP has been better than the first at distributing funds to smaller businesses, black and Latino business owners have still been facing difficulties gaining access to the PPP funds, according to The New York Times.

In the second round of PPP, the government dedicated $30 billion to lenders with less than $1 billion in assets, like community banks, with the idea of helping minority-owned businesses. The data isn’t readily available from the SBA on whether this happened, because it didn’t require demographic data to identify PPP borrowers, a report from the SBA’s inspector general said.

“Because SBA did not provide guidance to lenders about prioritizing borrowers in underserved and rural markets, these borrowers, including rural, minority- and women-owned businesses may not have received the loans as intended,” the report said.

The next federal funding package may address some of these gaps, RSM’s Koeser said.

“That’s a big piece of what’s the next round of aid, the HEROES Act, is looking to try to correct by earmarking some proceeds or funds specifically to minority-owned institutions or small businesses, as well as some organizations that specifically cater to those organizations,” Koeser said. “Unfortunately, it’s not there yet, but there is legislation that is on the table and made its way through the House.”

Not So Easy to Forgive

Also causing concerns, the PPP forgiveness application issued May 15 is not as straightforward as some bankers had hoped. One commercial lender at Bridgewater Bank with 20 years of experience has struggled with the form, said Nick Place, chief lending officer of Bridgewater Bank. That lender has also worked through over 100 PPP loan files.

“For him to have to read through something four or five times and still have a bunch of questions and have difficulty making heads or tails of it––the average business owner is really going to struggle with that form,” Place said.

“It’s all there, it’s just you have to read it very slowly. I mean you have to be very methodical in working through it,” he added.

The actual application form for the PPP loans went through several iterations, and Place is hopeful that the same will happen with the forgiveness application, as it’s difficult to follow as it is right now. In the meantime, Bridgewater is developing processes to streamline the process for clients.

“It’s a trainwreck of a form,” he said.

Bankers have advised clients to spend the loan money on things they’re confident will be forgivable, like payroll, said David Reiling, CEO of Sunrise Banks. But the worry is that with the forgiveness rules as they are now, businesses will end up simply returning the money at the end of the program.

“The intention of this was really to have a big portion of this loan be forgivable, and have that be mainly for payroll purposes,” Reiling said. “The intention––a stimulus to save small business and get it in the hands of employees, keep people employed––is still the right thing to do. But the environment has changed.”

And while he thinks the government did well with the program as quickly as it could, he thinks the forgiveness aspect isn’t hitting the mark.

“We’ve missed the intent, if we make these loans and small businesses end up just repaying them or giving back the money. … That exercise of making the loans was just futile. We have to go back, make some corrections congressionally,” he said. “I just think we defeat the entire purpose of a stimulus by not figuring out what’s right and appropriate in this environment, versus when we started.”

Even if the changes outlined in Phillips’ bill aren’t made to the program, more clarity is expected to come.

“It does lay out what companies need to think about in order to qualify for forgiveness and how much they can obtain. We do anticipate, though, further rules to be released that add further clarity to that,” said RSM’s Koeser.

Village Bank is waiting on additional guidance from the SBA, said Webb. The application is so complicated that there isn’t general advice bankers can give beyond being sure to document everything, communicate closely with bankers, and be meticulous about going through the process.

“You’re not in this alone; work through your banker,” Webb said. “We’re all in this together.”

Trending editor Liz Fedor contributed to this report.