By John Lettieri
America’s small businesses are facing unprecedented challenges due to mandatory shutdowns and shelter-in-place orders around the country. Congress has responded with the new Paycheck Protection Program (PPP), which was passed as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27. The program provides federally insured short-term loans that are forgivable to the extent a business retains or re-hires its workers during the crisis. While the law includes modest flexibility to use the loans to cover other major expenses, such as rent and utilities, the program is fundamentally designed to cover short-term payroll expenses.
After originally funding the program at $349 billion in emergency lending capacity under the Small Business Administration’s 7(a) loan program, Congress is already preparing to add more funding to accommodate overwhelming demand for PPP loans. While the program represents a critical lifeline for businesses that have been deeply affected by the ongoing crisis, its shortcomings are not limited to its level of funding. Congress should move quickly to enact improvements to PPP so that it better reflects the nature of the current crisis and the needs of businesses doing their best to avoid permanent closure.
Summary of Structural Issues: PPP is designed to help businesses cover payroll expenses during a short-term period of lost revenue, followed by a quick snap-back to normal business conditions. However, many businesses are facing a much more daunting outlook: the likelihood of prolonged revenue loss, severe operational disruption, and uncertainty regarding when life will return to normal.
By strictly linking relief to payroll expenses, PPP is, by design, of limited use to businesses struggling to meet a wider range of fixed costs. Even assuming a business can meet its other expenses, by limiting the total loan amount to roughly 10 weeks of average monthly payroll, it provides a short runway before a cliff of impending layoffs and permanent closure. Most troublingly, by structuring the benefits and terms of the program as it did, Congress inadvertently created a program that will steer the greatest benefits to the least affected businesses, while delivering the shallowest benefits to the most deeply disrupted businesses.
Below are four key ways that Congress can strengthen PPP.
Problem 1: $349 billion is not enough.
There was never much doubt that the program’s initial funding levels were not enough to meet the scale of demand from borrowers, or that Congress would eventually approve more; the only question was how quickly that would happen. Less than a week after the program launched, and with tens of billions in loan applications being processed each day, Congress is already working to approve an additional $251 billion in funding. However, the total funding needed could easily reach four or five times the original appropriations level — even in a relatively brief economic shutdown. Greater funding is needed not just to accomodate a high volume of applicants, but also to make room for another key improvement: higher individual loan limits.
Solution: Well over $1 trillion may be needed to sustain small businesses during the crisis. Because of the limited initial funding level and the first-come, first-served nature of the program, small businesses are desperately rushing to grab PPP loans like shoppers scrambling to buy toilet paper because they are afraid stores will run out. Beyond quickly passing an expansion of the program, Congress and the Administration should calm business owners’ nerves by providing explicit assurances that the program will not “run out” of money as long as relief is needed. Furthermore, with PPP now up and running to address immediate liquidity needs, Congress should explore additional emergency lending options, such as the one proposed here.
Problem 2: Borrowing limits are too low.
Businesses are facing a prolonged period of depressed or nonexistent revenue, diminishing cash reserves, and paralyzing uncertainty. PPP limits loans to 2.5 times the average monthly payroll of an applicant business. If applied to costs starting with the beginning of the covered period (Feb. 15), this would only cover payroll expenses through the end of May. Meanwhile, state and local officials around the country are preparing for shutdowns and shelter-in-place orders to extend into June or beyond. And even once the most severe measures are lifted, business revenues will not immediately snap back to pre-crisis levels. Meanwhile, businesses have other fixed expenses, such as rent and utilities, that must be paid. PPP’s low loan maximums — combined with its dominant focus on maintaining full payroll — will make it difficult for many salvageable businesses to do more than delay an inevitable failure due to insolvency.
Solution: The loan limit should be increased to at least 5 times average monthly payroll costs, or double the current ceiling. This will give affected businesses a longer runway and greater certainty as they navigate difficult months ahead.
Problem 3: Program rules skew benefits to healthier businesses, while many vulnerable businesses will be left with less loan forgiveness and a worse balance sheet.
Because PPP conditions loan forgiveness on employee retention, it naturally skews the likely benefits towards healthier firms that are at lower risk of layoffs. While the CARES Act provided some flexibility for employers to optimize how they used the loans to cover a range of expenses, SBA’s rules strictly limit non-payroll expenses to no more than 25 percent of the total forgivable amount of the loan, thereby negating the flexibility Congress built into the program. This will further tilt the benefits in favor of healthy businesses. For example: If a healthy business — one that has had to make no layoffs to date — gets approved for a PPP loan and maintains its current payroll through June 30, it will likely see its entire loan forgiven. In contrast, a business that was forced to lay off staff in March, secures a PPP loan in April, and works to steadily re-hire back to pre-crisis levels by the June 30 deadline could see much less of its loan forgiven. Worse, it will then have only two years to repay the balance of the loan due to the very short amortization schedule SBA has authorized.
Solution: Congress should ensure businesses have reasonable flexibility in how they cover their major expenses using PPP loans. The best way to do this is to simply do away with SBA’s 25 percent cap on non-payroll expenses altogether, which is in conflict with the plain reading of the statute.
Small businesses come in many forms and have a diverse set of needs. While encouraging employers to retain their workers is laudable, federal relief programs shouldn’t attempt to micromanage businesses that have already experienced massive disruptions and forced shutdowns through no fault of their own. Recently-expanded unemployment insurance and other individual relief efforts will help ensure workers are supported throughout the crisis. But if we want them to have jobs to return to after the crisis is over, small business relief must come with enough flexibility to allow businesses to manage their expenses and navigate an indefinite period of operational disruption.
Problem 4: Healthy businesses will poach resources meant for struggling ones.
The current structure of the program does nothing to discourage businesses that are completely unharmed by the crisis from applying for a PPP loan and receiving full loan forgiveness. In fact, the program amounts to free money for healthy businesses that can meet the full-time employee retention requirement that ensures loan forgiveness. Borrowers are simply required to make a series of good faith certifications during the loan application process, including that current economic conditions necessitate the loan to support ongoing business operations, and that the funds will be used to maintain payroll and address other covered expenses. Congress correctly wanted to avoid delaying relief to desperate businesses by requiring applicants to demonstrate tangible economic harm up front. This was wise. However, by not even requiring an ex post certification of need in order to receive loan forgiveness, the program allows healthy businesses to crowd the pipeline of applications and poach resources meant for those who are facing serious disruption.
Solution: Congress needs to take modest, but meaningful, steps to make a healthy business think twice before applying for PPP — without discouraging needy businesses from taking advantage of the program. One option is to require for-profit businesses to certify and briefly describe under threat of penalty that they experienced lost revenue or other significant operational disruptions as a result of the crisis. Such a certification should not be administratively burdensome, nor should it be required up front in the loan application itself, but months later instead, when a business submits the paperwork necessary to apply for loan forgiveness.
In considering guardrails for the program, lawmakers must be careful to avoid adding delays or administrative burdens on vulnerable businesses — not to mention participating banks and the SBA itself. It is better to err on the side of providing too much relief than too little.
Designing, passing, and implementing a program as massive as the PPP is a difficult undertaking even under the best of circumstances. Congress and the SBA should be commended for their efforts to get PPP up and running in a matter of weeks. While the program is a critical first step in providing emergency assistance to America’s small business community, Congress must act quickly to strengthen the program and ensure it provides the resources and flexibility needed for small businesses to navigate an unprecedented economic crisis.
For more information and a list of resources on the Paycheck Protection Program, read EIG’s blog on “Understanding the Paycheck Protection Program” or watch EIG’s webinar with guest speaker Caleb Orr, Policy Advisor to Chairman of the Senate Committee on Small Business and Entrepreneurship Senator Marco Rubio.
John Lettieri is the President and CEO of the Economic Innovation Group.