Paycheck Protection Program: Is it Helping Small Businesses?

The title of this post is a touch misleading. Of course the Paycheck Protection Program is helping small businesses. But is it helping the right ones, and is it helping enough of them? My colleague Matt Moriarty’s post last week on the Paycheck Protection Program elicited a lot of feedback. From this feedback and what we’ve heard anecdotally, it’s been tough for many small businesses to get these loans.

But there may be ways for Congress, the SBA, and lenders to make this program–or any similar program that Congress is considering–to help out small businesses more equitably. Below are some questions that policy makers should consider when modifying the Paycheck Protection Program or crafting a similar program in the future.

Are there multiple versions of the loan application? As Matt pointed out in his post, some early versions of the loan application disqualified companies with foreign owners from participating in the Paycheck Protection Program, even though this was not a requirement in the CARES Act. It seems that some lenders are still using forms that disqualify foreign-owned companies. But this goes to the larger point of how to make the lending process more uniform. It shouldn’t matter if a business goes to any one lender. But, from what we’re hearing, it does matter because some lenders appear to be using different versions of the loan application form.

Are lenders making it hard for businesses to get loans? Because the Paycheck Protection Program is structured as an SBA loan program, it’s ultimately up to each individual lender to decide whether to make a loan to a certain business. However, this could create some inequities based on the lending standards employed by each lender.

Are they going to rely on a past relationship with the business in order to make a loan? Some lenders appear to be requiring that the business already have a past loan with the bank before they will make a loan under the Paycheck Protection Program. Because there is a limited pot of money, and many entities are in need, this can end up pushing out those companies that don’t have an existing relationship with an SBA lender–even though it may be those businesses lacking an existing lending relationship most in need of help. It may be necessary to structure a new program more directly as a grant program. That way, businesses that need the money the most may be able to get it, even if they don’t have an existing relationship with a lender.

Is the program helping small businesses or just larger small businesses? The Paycheck Protection Program is generally open to businesses with no more than 500 employees. For some businesses, that includes the employee-counts of affiliates, but not for all businesses, such as businesses like hotels and restaurants with a NAICS code starting with the numbers 72. (For more on the applicable affiliation rules, see our recent post.) Those same businesses (with a 72 NAICS code) are also eligible if they employ less than 500 employees at each physical location.

The net effect of these rules is that the program is open to some pretty large businesses. For instance, some have speculated that a large hotel chain could qualify for the loan. While I’m not denying those businesses need help, opening up competition for loans from businesses ranging from a small one-person operation to a multi-national hotel chain creates an awfully large pool of applications. Inevitably, some businesses will be left out in the cold, and it’s likely to be those on the smallish end of the continuum. So, what could be done to help those businesses?

For starters, as mentioned above, the loan application process could be opened up so there are no restrictions such as being an existing customer. This could likely be done through SBA or Treasury regulation. Second, the loan program (or the next one) could be stratified so that certain pools of money are open only to businesses under certain size standards. For instance, you could have one category for businesses under a smaller receipts-based SBA size standard, such as $8 million. Then you could pick a larger number for the next category, such as business over $8 million but less than $30 million, and so on. While it wouldn’t be perfect, it could help ensure that the loan dollars are spread out among different size businesses.

With the next loan program in the pipeline, it’s important to look at these questions quickly, like now.