Small businesses await money, clarity in $350 billion Paycheck Protection Program

April 9, 2020
In The News

Hailee Bland-Walsh promised her employees three paychecks — one every two weeks — when she closed City Gym KC in Waldo on St. Patrick’s Day in response to the coronavirus pandemic.

She’s three weeks into that commitment, but with customers canceling memberships to her gym as they’ve lost jobs, Bland-Walsh is looking for other sources of capital to keep her business afloat.

Like thousands of small business owners, Bland-Walsh has applied for funds from the Paycheck Protection Program, a $350 billion segment of the $2 trillion Coronavirus Aid, Relief and Employment Security Act passed by Congress in March. The initiative is supposed to infuse money to small businesses with the hope they can keep employees on their payroll as the pandemic savages the global economy.

But Bland-Walsh, like other small business owners, has found the process of applying for PPP loans confounding as she awaits word of whether she gets the money.

“I’m just sort of waiting, but I don’t know how long to wait,” Bland-Walsh said. “I’m a little bit panicked because I don’t know when that money will run out.”

It’s been a rocky start for the PPP as business owners and banks seek clarity from the Small Business Administration, the federal agency through which the program is run. The SBA, in turn, has been regularly revising its guidance to lenders and businesses to catch up with the questions they have.

“We need directives,” said Joe Close, president of Country Club Bank in Kansas City. “For 90 percent of our clients, it’s pretty easy, cut and dry, no shades of gray. For the other 10 percent, there are shades of gray and we need clarifications.”

Wells Fargo stopped taking applications on Sunday evening, barely two days after it started, saying it couldn’t loan any more money. Bank of America originally only took applications from businesses it had loaned money to previously, but switched course amid outcry.

President Donald Trump this week bristled when a McClatchy reporter asked about the confusing nature of the PPP rollout.

“I wish you would ask the question differently: Why don’t you say it’s gotten off to a tremendous start?” Trump said at his Monday press briefing in Washington, D.C. “But there were some little glitches which, by the way, were worked out. It would be so much nicer if you would do that but you’re just incapable of asking a question in a positive way.”

Larry Kudlow, Trump’s National Economic Council director, acknowledged the following day that the program “got off to a bad start” while touting the merits of the overall package, saying “this will help an awful lot of Americans get through this period.”

Rep. Sharice Davids, D-Kansas, said she’s hearing from frustrated business owners who are depending on PPP. She blames the Trump administration for a lack of clarity.

“The lack of clear guidelines left a lot of decisions to the banks...and Congress needs to provide more resources and we should do that immediately,” Davids said.

Sen. Roy Blunt, R-Missouri, said the PPP appeared to be popular but acknowledged that there may not be enough money in the initial program.

“Speed was essential,” Blunt said, “but one of the byproducts of speed would be that we didn’t get things quite right.

Business owners like Bland-Walsh are worried about the program running out of money, but the Senate has suggested it may direct another $250 billion toward the PPP amid surging demand for funds to bridge small businesses over to the other side of the coronavirus pandemic.

Still, questions remain about PPP — Which businesses qualify? Can businesses spend the money on independent contractors? Can the loans be forgiven? And how? And when does the money arrive?

“Like any other government program, nothing is easy on these programs,” said Gerald Weidner, a partner in Kansas City for the Stinson LLP law firm. “The statute was enacted very quickly, signed into law very quickly.”

WHO QUALIFIES?

Bland-Walsh first went to her tax accountant with questions about PPP and was referred to Commerce Bank, where City Gym KC does its business banking.

She received a one-page explainer on applying, but received two more calls from the bank asking for more information in her application.

“The entire process took five full days to complete,” Bland-Walsh said. “I know on the banks’ side, they’re very overwhelmed and operating with very little information.”

What is clear is City Gym KC meets the first requirement for PPP eligibility: with 15 full-time employees, the gym is well under the SBA’s definition of a small business, which is 500 employees or fewer (businesses in certain industries, like some energy, mining and manufacturing enterprises, can be larger).

Full- and part-time employees, as well as temporary employees, are counted equally for the purposes of determining whether a business is under the 500-employee threshold. The SBA takes the average number of people employed per pay period with a company for 2019 or the last 12 months.

The SBA’s affiliation rules can complicate employee counts if a business is controlled by or deemed to be affiliated with another company. If that’s the case, the SBA adds up the employees for the multiple companies in determining whether it qualifies as a small business.

“The simplest is ownership percentage,” Weidner said. “If we have three companies and one is a holding company that owns 51 percent of the other companies, all three are considered affiliates.”

HOW MUCH CAN BORROWERS GET?

PPP loans are capped at either $10 million, or two-and-a-half times the average monthly payroll for 2019 or the last 12 months, whichever is less.

Borrowers don’t have to prove that they have lost money due to the pandemic or can’t obtain financing elsewhere.

“Just that you’ve been affected by the economic uncertainty of the pandemic,” Weidner said.

Businesses don’t have to put up collateral and its principals aren’t required to guarantee the loan.

The loans can be spent on payroll, mortgage interest if they own their business property, rent payments if they are on a lease, and utilities.

Close, the Country Club Bank president, said his bank started working about a month ago with small businesses like restaurants to modify mortgages, such as putting off principal payments for three to six months. Under PPP, such a business could then use the SBA loans to pay the interest.

Borrowers can have the loans forgiven if they spend at least 75% of the loan on payroll, provided that headcount and salaries or wages don’t decrease. The other 25% can go to rent or interest and utilities. If borrowers don’t meet those forgiveness requirements, the PPP loans carry 1% interest and mature after two years. Payments are deferred for the first six months.

Payroll costs do not appear to include payments to independent contractors or freelancers under PPP. Those workers are encouraged to file for their own PPP benefits.

“Independent contractors can apply separately for their own PPP loans,” Weidner said. “The amount of their loan will be based on their average monthly payroll or their self-employment income for the 12 month period.”

WHERE TO GET LOANS, AND WHEN?

The SBA has an approved list of FDIC-insured banks that can accept and fund PPP applications.

But borrowers would do best to apply through a bank they have existing accounts with first.

Banks are required to verify who they’re lending money to; banks already have much of the information they need from existing account holders or borrowers.

“It makes sense that banks would work with their borrowing customers first,” Close said. “They have typically been in contact with their lenders.”

It’s unclear so far when loan proceeds will arrive for many borrowers.

“Funds have not happened yet,” said Robin Wells, senior vice president for Country Club Bank. “We are still waiting on guidance for the documentation.”

OTHER OPTIONS?

The SBA has an Economic Injury Disaster Loan where borrowers can get up to $2 million in working capital. The loans are amortized over 30 years with a 3.75% interest rate for small businesses (2.75 percent for nonprofits).

There’s also an Economic Injury Disaster Loan advance program that provides up to $10,000.

UNCERTAINTY AHEAD

Bland-Walsh grew up in Kansas City, went to college and came back 10 years ago. In 2011, she opened City Gym KC in Waldo.

“We opened up after the financial crisis,” she said. “Steady success and growth.”

She relies on membership fees, but she’s seeing customers cancel, given their own financial uncertainties.

And while Bland-Walsh awaits word on her PPP loan application, as well as a disaster relief grant, she knows she’s not alone among small business owners who have bills to pay and are stuck wondering what the future will look like.

“I’m one of many,” Bland-Walsh said. “All of the small business owners I know are having the same hand-wringing time...How long can I go before I can’t re-open? What if this extends into August?”