Everything Wrong with The Payroll Protection Plan
Updated: Apr 21, 2020
The Payroll Protection Plan! It sounds so warm and fuzzy, like a big warm blanket of financial security for the restaurant industry, which was essentially decimated in one fell swoop when shelter-in-place orders began shuttering restaurants across the country in mid-March. While it’s too soon to tell, it is estimated that eight million-plus restaurant workers who have lost their jobs because of the crisis, per a survey by the National Restaurant Association.
With restaurants closed, “normalcy” a world away, and business interruption insurance denied across the board, the hospitality industry has been begging for a bail out. (The government bailed out the banks in 2008, who made the problem, but restaurants, who are victims of the problem? Not so much).
The government responded with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and it’s signature Payroll Protection Plan, a nearly $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans backed by the Small Business Administration (SBA).
The PPP may sound wonderful. After all it is initially a loan, but it can be converted into a grant, which is what restaurants desperately need. But here’s where things get wonky. In order to obtain the full benefits of the PPP (i.e. a grant as opposed to a low-interest loan) several difficult criteria must be met: a businesses’ employee headcount has to be approximately the same two months after the loan is originated, as it was before the pandemic hit, and at least 75 percent of the PPP loan must be used to fund payroll and employee benefits costs. The money must be used within eight weeks starting from the loan origination date (if the obligations began before February 15, 2020). If the loan is not transformed into a grant, it has a maturity rate of 2 years and an interest rate of 1%.
Read the bill in its entirety here.
So, yes, the PPP has fallen far short of the sort of comprehensive thoughtful financial support our industry needed. It is huge and drafty, with holes for small businesses and robust coverage only for those who might actually afford their own (see Ruth’s Chris and Union Square Hospitality Group, which did today return its $10 million).
And now, the fund is drained. Terrific.
From the get-go, many in the business were unhappy with the plan’s terms and fine print. The influential NYC Hospitality Alliance advocated for changes to the program including “allowing the loan to be forgivable at a minimum of six months after a business fully reopens, and allowing a larger allocation of the money to be used for rent or other expenses.”
Indeed, these changes would have made this money super useful to small businesses lucky enough to get it. But in its current form, many small businesses are not getting the money, and those that do see it are actually sending their checks back.
Renato Poliafito, owner of Ciao Gloria in Prospect Heights, says even if he had gotten the money, he’s not sure he would have taken it. “The way it’s set up is very limiting and makes it almost impossible to use even if you do get it,” he explained. “Even if we do open just for takeout and delivery, which may not be in anyone’s best health interests, we will not need all of our workforce to run just a small fraction of our business. But if our headcount is not the same, and we don’t use 75% of the money for payroll, then the loan is not forgiven. It makes no sense.”
Here are all the ways the PPP must change to support small businesses:
Rehiring Must be Extended Until December
One of the most attractive provisions of PPP are the forgivable loans. But to qualify for loan forgiveness, businesses have to rehire or retain their staff at pre-pandemic levels by the end of June, which is next to impossible for restaurants who don’t know if they’ll be allowed to open at 100% capacity by June. The NYC Hospitality Alliance is advocating to extend the time allotted to rehire until December.
“The PPP loan to grant program isn’t tailored for restaurants and bars because many will not be prepared, or even permitted, to reopen in June and will not require pre-pandemic staffing levels once they do,” said Andrew Rigie in his recent article in Forbes. “There are too many variables that will impact staffing in the hospitality industry beyond when we may fully reopen. None of us know what consumer behavior will be in the post pandemic era.”
Allow More Flexibility
Most small businesses are on pause; their employees are fired or furloughed and collecting unemployment. Others are partially operating doing takeout and delivery. Some have brutally high rents, others don’t. Given all of these different scenarios, what operators are universally asking for is more flexibility. “Let us decide if we use it for payroll, or rent, or vendors. We are the ones who know our businesses best,” said Poliafito.
Poliafito also points out that the city may experience “The Hammer and the Dance”—shutting down multiple times if the virus rears up again. “If the economy reopens and then closes again, am I supposed to hire and fire and rehire? Will my loan be forgiven if this happens? Who knows?”
Minorities and Women Were Left Out—Community Development Financial Institutes Must be Involved
It’s unclear how decisions were made as to who did and did not receive the money before it ran out, but what’s clear is this: not much went to small businesses, and even less to Minority and Women Business Enterprises (MWBE).
According to the Brooklyn Chamber of Commerce, 84% of Brooklyn businesses surveyed that applied for PPP did not receive funding as of April 17; and 90% of MWBEs surveyed that applied for PPP did not receive funding as of April 17.
“Most of the PPP money went to larger, well-established companies with existing relationships to banks, leaving out small businesses (and especially MWBEs) who truly need the relief,” said Randy Peers, President and CEO of the Brooklyn Chamber of Commerce. “The story of Potbelly receiving $10M is a good example of this.”
Peers would like to see community development financial institutes or (CDFIs) that do a lot of lending to MWBEs need to be included in the PPP program. “We must require all participating banks to accept, review and qualify applications from any small business without requiring existing accounts or loans, and ensure that CDFIs that work with MWBE firms can participate in the program. If these amendments are not made, the PPP will not help countless businesses that need stimulus funding.”
The Fund Must Be Expanded
Many in the business community said $350 billion was not sufficient to fund the PPP mandate, and surely enough, as of Thursday last week, the SBA announced the program was out of money. So even those businesses that applied aren’t going to have access to resources, and certainly businesses that didn’t get the jump early on applications won’t benefit. The fund must therefore be expanded to ensure every small business has the funding they need.
The Loans Should Not Mature for 10 years
Many operators would love to receive a low interest loan right about now, and would consider using PPP money for rent and other expenses and not having it forgiven, but not when the loan has to be repaid in two years’ time.
Dawn Casale, who owns the popular bakery One Girl Cookies, actually did receive PPP and she is not sure whether she will keep it. “When we first learned about the program the repayment terms were 10 years at .05%,” she explained. “Then at the 11th hour they changed the maturity date to 2 years and the interest rate to 1%. The interest rate is fair, but if I choose to use this money for something other than payroll, which I probably would because I am not fully operational right now, and the loan is not forgiven, I can’t realistically pay this back in two years. I just don’t know what kind of business I will be running then.”
Big Businesses Should be Excluded
Clearly the definition of “small business” must be clarified in the next round because, let’s be honest, Shake Shack is not a small business, neither is Ruth’s Chris, or PotBelly Sandwich Co. I don’t care if each store has under 500 employees. And they are not alone. According to CNN, Kura Sushi USA Inc (KRUS)., the largest revolving sushi chain in the US, disclosed a nearly $6 million loan. Operators behind the Ruth's Chris steakhouses and the J. Alexander's restaurant chains received loans of $20 million and $15.1 million, respectively. These are huge, publicly-traded companies that have access to capital that most small operators do not. The money should not be routed their way.
While it is hard to say how decisions were made, most assume that the bigger the business, the greater the likelihood of money to follow. “Larger operators simply have the relationships with the banks and the corporate teams to overpower the system,” said Patrick Ascaso, who owns the French bistro and bakery Le Marais in San Francisco and who did not receive PPP. “The vast majority of small businesses did not have access to this aid. Banks naturally went in favor of the larger companies that they had significant relationships with.”
Ascaso said he could not even get a person on the phone to connect with about the loans. "I could barely get through to a bank when I tried to apply. No one at the bank would talk to us, there was no one to call. We spent half a day trying to get our application processed. The larger firms simply have the relationships with the banks and the corporate teams to overpower the system."
Poliafito agrees. “What I am hearing is that the banks loaned money to larger companies that already had debt with the bank, which makes sense,” he said. “These banks follow the money, not the person.”
Perhaps the most important reason to exclude big business is this: by limiting this funding to truly small businesses, we can preserve the integrity of the restaurant industry in this country. “If we don't get support, based on the analysis and statistics, there is a likelihood that up to 30% of restaurants will not reopen,” said Ascaso. "And all that will be available in American will largely be chain businesses, which will eliminate the creativity, individuality, locality, the talent pool and passion, and everything that small, family-owned businesses bring to our neighborhoods.”