Following the Rollercoaster of the SBA’s PPP Loans

New loan programs from the Small Business Administration (SBA) designed to support primarily businesses with fewer than 500 employees through the coronavirus pandemic have not been without their controversies.

In addition to traditional SBA loans, the CARES Act signed into law by President Donald Trump on Friday, March 27, created four new SBA programs – the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan Advance Program, SBA Express Bridge Loans and SBA Debt Relief.

The SBA Express Bridge Loans and SBA Debt Relief programs only apply to businesses with an existing relationship with the SBA. The EIDL is on hold due to lack of appropriations and the PPP ran out of money around 10 a.m. on Thursday, April 16.

The $349 billion reserved for the PPP loans was depleted just short of two weeks from the day applications opened – Friday, April 3. Initial information on the SBA website said the program would be open through Tuesday, June 30.

“We have processed more overall dollars in the last last 14 days than we did in 14 years,” says SBA Great Lakes Regional Administrator Rob Scott.

Scott says that Ohio fared well in the first round of funding. 59,800 Ohio business were approved for $14,108,889,997 ($14.1 billion) in loans.

With a deal on a second round of funding making its way through Congress, questions are being raised about how the initial round of funding was distributed.

Following the news that funds had dried up were headlines that larger restaurant chains like Potbelly Sandwich Shop, Ruth’s Chris Steak House and Shake Shack had received PPP loans.

According to an an article in Yahoo Finance, Potbelly operates 400 plus locations, and made $409 million in revenue last year. Half of Ruth’s Chris’ 150 locations are owned by franchisees, but the restaurant group has over 5,700 employees and reported $468 million in revenue last year. Shake Shack operates 189 locations with some 8,000 employees, posting $595 million in revenue last year.

Leveraging a loophole in the language of the law that allowed any company with less than 500 employees per location to apply for a PPP loan, Potbelly and Shake Shack each received the maximum loan amount of $10 million. Ruth’s Chris received $20 million by applying through two subsidiaries.

On Sunday, April 19, Shake Shack CEO Randy Garutti penned a public letter saying that they would give back their $10 million loan, noting “Shake Shack was fortunate last Friday to be able to access the additional capital we needed to ensure our long term stability through an equity transaction in the public markets.”

According to a CNN article, Shake Shack expects to raise up to $75 million from investors by selling shares.

As a publicly traded company, Shake Shack has such options – options practically any small business across any industry do not have. Many small businesses struggle to even qualify for traditional bank loans.

Bootstrapping and funding from friends and family are typically how small businesses get off the ground. A Gallup poll found 77% of small businesses rely on the personal savings of their founders for initial capital needs.

Asked about additional oversight for the next round of funding to ensure that dollars went to small businesses that lack other funding options, the SBA provided the following statement.

“Congress provided in the CARES Act that food and hospitality companies, including franchises, with multiple locations were eligible to get up to $10 million in Paycheck Protection Program funding per each location they operate to keep employees on payroll and allow their businesses to continue. (To note is that a franchised business typically has a franchisee owning one or more locations of the franchisor, which is the corporate brand.) It is up to Congress to change the parameters of the Paycheck Protection Program; the SBA administers what it passes. Overall, the SBA approved more than 1.6 million loans in two weeks with approximately 9% of funding going to businesses in the Accommodation and Food Services industry.”

On Tuesday, April 21 a packaged passed in the Senate that will provide more funding for PPP loans. A CNN analysis of the bill found $310 billion earmarked for the program, with $60 billion set aside for smaller lending facilities, including “community financial institutions, small insured depository institutions and credit unions with assets less than $10 billion.”

The package will also replenish funding for other loan programs, including $10 billion for grants under the Emergency Economic Injury Disaster Loan program and $50 billion for disaster recovery loans

The House is expected to vote on the bill on Thursday, April 23.

According to an article from Business Insider, Treasury Secretary Steven Mnuchin said they will put out a FAQ in regard to the loans and explain the certification for the program, adding there would be “severe consequences” for large companies that took advantage of the PPP program.

As more funding is imminent, what happens to the small businesses that applied in the first round but did not receive loans?

“There is no queue or waiting line,” Scott says.

Unlike other SBA loan types, a borrower doesn’t go directly to the SBA for a PPP loan, but to their lender or banking institution. When the SBA turns off the system for PPP loans as it did last week, lenders cannot enter any more applications. Business owners would need to check with their lenders on the status of their application and whether it was submitted to the system before funding ran out.

For many banks, administering PPP loans is the first time these institutions have worked with SBA loans. Scott says that SBA lending is typically viewed as a niche type of lending product.

Before the loans became available, the SBA had a network of about 3,200 lenders. Now there are some 5,000. The SBA set up an application process for lending institutions to gain delegated authority on behalf of the SBA to be able to offer the PPP loans to customers.

Lenders that were already certified with the SBA found themselves at an advantage, having familiarity with E-Tran, the SBA’s loan guaranty origination/servicing solution. Scott says the system can be hard to understand and is obviously not ideal to learn in the middle of a crisis situation. In response, the organization rolled out the SBA Connect Gateway, a simplified platform for banks to process PPP loans that connects to the E-Tran system, a rollout that was not without its hiccups, Scott says.

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