Recipients of PPP loans face big decision on Monday

Businesses that received emergency loans from the Small Business Administration’s Paycheck Protection Program (PPP) face a Monday deadline of whether to keep the money, and all the restrictions that come with it.

The main concern among companies is that the Treasury Department’s shifting terms for forgiving the loans might leave them high and dry. Others are worried they will face blowback, from workers or the general public, for having taken the loans in the first place.

The midnight deadline marks the point of no turning back for participants in a program that’s been plagued by confusion and allegations of favoritism on both sides of the aisle.

“This critical program has had a bumpy rollout. The decision to make some large businesses pay back the loans was based on buyer’s remorse from Congress,” said Paul Winfree, who directs economic policy at the conservative Heritage Foundation.

Much of the public backlash came when large companies took advantage of carve-outs for the hotel and restaurant industries. Shake Shack was one of the most well-known cases. The fast food chain announced it had received millions of dollars, at a time when thousands of small businesses couldn’t access the loans, but said it would return the funds amid criticism from Democrats and Republicans.

Treasury Secretary Steven Mnuchin later announced that loans above $2 million would be audited and potentially face criminal liability if the borrowers did not meet new, stricter guidelines. He gave companies until Monday to return the loans without question before launching investigations.

“Obviously a lot of firms received loans that probably didn’t need them, and some of them have expressly said that,” said Alexandra Thornton, director of tax policy for the left-leaning Center for American Progress.

A New York Times analysis found that public companies received nearly $1.5 billion in loans, and that almost a third had been returned ahead of Monday’s deadline.

“None of this was thought out very well when the legislative language came together,” said Winfree, who called the program a “mess.”

Congress included $349 billion for the PPP in the $2.2 trillion CARES Act that was signed into law on March 27, with the aim of rescuing small businesses devastated by the COVID-19 pandemic and associated lockdowns.

The idea was to offer forgivable loans to businesses with fewer than 500 employees since they don’t have the same kind of access to capital that big corporations do. If a small business spent most of the money on payroll, and the rest on basic costs such as rent or utilities, the government would forgive the loan, essentially turning it into a grant.

Lawmakers thought that approach would ensure businesses used the money for the intended reasons, and hoped that relying on the Small Business Administration and its existing network of financial lenders to disburse the loans would allow the program to ramp up quickly.

But the carve-outs and challenges to obtaining the loans prompted charges of favoritism as large banks processed applications from existing customers first.

In the first days of the program, major lenders were able to get up and running, and some, such as Bank of America, explicitly said they would only service existing clients.

Small businesses that had to wait for their community lenders to get on board had a harder time accessing the funds, if at all.

“I think the people who really lined up were the people who had sophisticated tax advisers and had preexisting relationships with the larger banks,” Thornton said.

The funds were depleted in less than two weeks. When the program was replenished with an additional $310 billion, Congress slapped on new restrictions requiring a large portion of the funds to be distributed through smaller lenders, and Mnuchin instituted special hours in which only smaller lenders could process the loans.

The average loan size dropped nearly 50 percent.

Still, Thornton said, smaller businesses may have been repelled by the thought of taking on a new financial risk until the government decided, based on uncertain rules, to forgive the loan.

“The idea of giving loans, and not grants, to small businesses probably wasn’t such a good idea,” she said. “The fact that they don’t know if the loans will be forgivable until after the fact is a make or break thing.”

Others, such as Dallas Mavericks owner and former Shark Tank host Mark Cuban, argued the program and its funding simply wouldn’t be enough to keep the economy afloat during the pandemic.

“It’s time to face the fact that PPP didn’t work. Great plan, difficult execution. No one’s fault. The only thing that will save businesses is consumer demand. No amount of loans to businesses will save them or jobs if their customers aren’t buying,” Cuban tweeted Monday.

Federal Reserve Chairman Jerome Powell highlighted the risk of a prolonged recession in a 60 Minutes interview that aired Sunday.

“There’s a real risk that if people are out of work for long periods of time, that their skills atrophy a little bit and they lose contact with the workforce,” he said, saying prolonged unemployment weighs down the economy.

But he also seemed to throw his weight behind programs like the PPP.

“The good news is that we have policies that can go some way toward minimizing those effects. And that’s by keeping people and businesses out of insolvency just for maybe three or six more months while the health authorities do what they can do. We can buy time with that,” he said.

Key members of Congress have pushed back against criticism of the PPP, saying it has fulfilled the main goal of getting money to small businesses quickly.

“Any business that has abused the program to gain eligibility should be held accountable,” said Sen. Marco Rubio (R-Fla.), who helped craft the legislation around PPP as chairman of the Senate’s Small Business and Entrepreneurship Committee.

“But we also can’t allow rightful scrutiny to become runaway hysteria,” he added.

While public companies did end up getting some PPP loans, they accounted for just 0.35 percent of its overall funds, Rubio said.

Even at the time the legislation was being passed, Rubio argued that it was better to move quickly and clean up the mess later than spend weeks crafting focused legislation, building new bureaucracies and adding red tape.

“The core purpose of this program was keeping millions of Americans from being laid off. And if judged by those standards, then the fact that by the time the second round of PPP is complete, close to 50 million Americans will have a job because of it makes the program an enormous success,” Rubio said.

Still, groups that felt shut out by the program say the government should ensure that funds returned from big companies end up in the hands of smaller ones.

“We want those dollars to be reinstituted in [community-based financial institutions] that are friendly to the minority community,” said Ron Busby, president of the U.S. Black Chambers.

Mike Lillis contributed.