The CARES Act Revisited

The CARES Act Revisited: Updates to the Paycheck Protection Provision

A lot has happened in the past week.  And now that we’ve had an opportunity to read through more details of the Paycheck Protection Provision, it’s become clear that the program’s rollout will be messy.  In fact, it already is.

Last week I wrote a post outlining a few of the provisions in the CARES Act meant to provide economic relief to small businesses.  What we’ve come to realize in the last few days is that the Treasury Department has a great deal of latitude in how these programs will actually be offered.

For example, the permits the Treasury Department to issue up to $349 billion of loans to small businesses through the Paycheck Protection Program.  Businesses with fewer than 500 employees can apply through an SBA approved lender for loans up to either 2.5x their average monthly payroll over the previous year, or $10 million (whichever is less).  The bill stipulates that the pay back period for the loans may be stretched out to up to 10 years, with an interest rate no higher than 4%.

Then, early last week, the Treasury Department stepped in and communicated that all loans will have a two year amortization period and 0.5% interest rate.  And on Thursday, Secretary Mnuchin announced another interest rate revision to 1%.


How Effective Will the Banking System Be?

So…..there’s been a lot to keep up with.  The paycheck protection program still appears to offer the most benefit for most small businesses, but the changes have confused bankers and business owners alike.

Since the SBA has insufficient resources to operate the program itself, it is relying on the banking system for help.  Typically in government backed lending facilities, the SBA provides guidance to banks, which then create systems and processes internally for extending the SBA backed credit.

The paycheck protection program is no different.  The SBA and Treasury Department are currently scrambling to interpret the bill and provide guidance that banks can use to begin offering loans through the program.

There is urgency here.  Obviously, small businesses around the country are hurting and struggling to keep people employed.  The faster these loans can be rolled out, the faster the funds can be used to keep people employed.

But here’s the rub.  SBA approved banks have complete discretion over whether, when, and how they process applications.  While the SBA, the treasury, and the legislators who passed the bill want to help small businesses ASAP, banks aren’t compelled to process your application if they don’t want to.

This is exactly what we’re seeing.  While the program officially went live on April 3rd, few banks were prepared to participate on that day.  Those that were have leaned toward offering applications to profitable clients only.  Bank of America, for example, is only processing applications for existing business clients as of the middle of February.  And by “business client”, the bank means a business entity with existing credit lines or loan balances.  Businesses with savings and checking accounts only will not qualify.


The Profitability Problem

I can’t fault the bankers for favoring their existing clients first.  The SBA loans themselves are simply not profitable.  This is the exact reason that Secretary Mnuchin raised the interest rates from 0.5% to 1% last week in the first place.  If they’d remained at 0.5% banks simply would not participate.  The loans would be money losers.  There wouldn’t be enough participation.

Nevertheless, this problem will leave many businesses scrambling to find a banker willing to take their application.  Think about well-run businesses built off organic growth and without any bank financing.  Should they be left out in their time of need because they don’t have an existing relationship with an SBA lender?  Plus, the funding for this program is limited as things stand.  Why should businesses with outstanding credit have first crack at free government money?  This is completely inequitable and goes against the spirit of the bill.  (Granted, Mnuchin has communicated that he’ll go directly back to Congress if the PPP is indeed oversubscribed.  For now the funds are technically limited).

Given the urgency of getting a bill passed and cash in the hands of small businesses, legislators were truly between a rock and a hard place.  They had to get something passed.  For all the banks out there reluctant to spend time on unprofitable PPP applications, perhaps its an opportunity for online lenders to build their reputation and goodwill.


Strategizing Your Application

Let me add a few strategy thoughts here with regard to your paycheck protection plan applications.  (So I don’t spend the entire post rambling & opining).

First, if you’re considering a PPP loan, consider an EIDL loan as well.  The economic injury disaster loan program is available as well as the PPP, and comes with a $10,000 cash up front grant.  You can borrow up to $2 million based on your credit score, can participate in both programs simultaneously.

The EIDL is run directly by the SBA – you don’t have to go through a bank.  There are some nuances about combining an EIDL with a PPP loan, including the fact that your $10,000 EIDL grant is deducted from any PPP forgiveness.  You can read about the specifics here.  In any case, the EIDL will get some cash in your hands sooner, and can’t hurt.  Given the distribution & access problems with the PPP, you may as well seek EIDL funding as a backup.

Second, consider the timing of your PPP application and the 8 week forgiveness window.  If you’re unlikely to spend the funds on payroll in the next few weeks anyway, you might want to delay.  (Remember that payroll and rent expenses in the first eight weeks after obtaining a PPP loan are forgiven).

For example, we have clients at Three Oaks Capital who are postponing their PPP application because their employees are currently taking advantage of the expanded unemployment insurance options.  Since their businesses will not be free to open for at least a few weeks anyway, they plan to wait to file their application until everyone comes back to work.  Since the expanded unemployment program is sufficient for their team, they want to be sure they’re in a position to have the loan forgiven.  There is risk to waiting, of course, given the limited funding.  But it can make sense in many situations.


That’s it for today.  This situation is changing rapidly and I’m sure there will be items to update over the next week.  Stay tuned for more content on the subject!

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