Small Businesses Counting on Loan Forgiveness Could Be Stuck With Debt

PPP Loan

Business owners who took out loans under the Paycheck Protection Program thought converting them to grants would be easy. It’s not.

WASHINGTON — The embattled small business lending program at the center of the Trump administration’s economic rescue is running into a new set of challenges, one that threatens to saddle borrowers with huge debt loads, as banks begin the tricky task of proving the loans they extended actually met the government’s strict and shifting terms.

With thousands of businesses preparing to ask for their eight-week loans to be forgiven, banks and borrowers are just now beginning to realize how complicated the program may turn out to be. Along with lawmakers, they are pushing the Treasury Department, which is overseeing the loan fund, to make forgiveness requirements easier to meet.

It is the latest complication for a program that has come under fire for allowing big companies to borrow funds from a finite pool of money aimed at keeping small businesses afloat. More than $500 billion in loans have been approved since the beginning of April, and Treasury Secretary Steven Mnuchin has repeatedly tightened the terms of the Paycheck Protection Program to try and dissuade large companies from taking money. Mr. Mnuchin has said Treasury would review any company that took more than $2 million in loans and would hold firms “criminally liable” if they did not meet the program’s terms.

The Consumer Bankers Association warned on Wednesday that loan forgiveness is the “next shoe to drop” for the program, and the Independent Community Bankers of America raised alarm that struggling borrowers have been misled.

“Virtually every small business borrower believes that this will be forgiven,” said Paul Merski, a lobbyist for the Independent Community Bankers of America. “They took it out assuming that it would be a grant but it’s not — you have to abide by very complex rules and regulations on how this is spent.”

One of the biggest stumbling blocks is a requirement that businesses allocate 75 percent of the loan money to cover payroll costs, with only 25 percent allowed for rent, utilities and other overhead. That has become more difficult as the economic crisis from the virus drags on and as some businesses face a prolonged period of depressed sales, even once they reopen.

Some businesses are facing smaller payroll expenses because workers have opted to accept more generous unemployment insurance benefits, while only a handful of states have so far allowed businesses to reopen.

The I.C.B.A., which represents smaller banks, asked the Treasury and the Small Business Administration on Wednesday to require only half of the loans made through the aid program to be spent on payrolls and allow the loans to be split evenly between paying workers and covering rent, which remains a substantial expense for many businesses.

“Now that over $500 billion of these loans have been approved, we’re really focused on the forgiveness phase, and the forgiveness phase could be 10 times more complex than the initial program,” Mr. Merski said.

Mr. Mnuchin indicated last week that while he believed he had the authority to change the payroll requirement rules he was not inclined to do so given that the intent of the program was to maintain ties between businesses and workers while much of the economy was shut down.

“The objective here is to put people back to work,” Mr. Mnuchin said, adding that he did not want to encourage businesses to choose overhead costs over workers.

But that is not how things have unfolded for small businesses. Many laid off their workers to wait out the economic shutdown, intending to rehire as many as possible after it ended.

Douglas Geller, the co-founder of Wittmore, a clothing boutique for men with three locations in Los Angeles, laid off his six employees after closing on March 17. California is allowing some retailers to open on Friday for curbside pickup only, so Mr. Geller may hire one or two of them back, but only if Wittmore’s business seems viable under the state’s new restrictions.

Mr. Geller managed to get a small business loan just a week ago, but he now thinks the money arrived too early, since the rules of the program are forcing him to spend it in the next eight weeks, even though he cannot fully reopen his stores yet. He is counting on the Treasury Department to make changes to the forgiveness terms.

“We’re not alone,” he said. “I’m friends with other retailers, from the department store level down to mom-and-pop small businesses, everyone has these similar concerns: Forgiveness and the pace of reopening.”

Trade groups have been warning Treasury officials for weeks about the coming conflict over forgiveness.

“Since the program first launched, A.B.A. has been urging the S.B.A. and Treasury to provide clear forgiveness guidance as soon as possible,” said James Ballentine, a lobbyist for the American Bankers Association.

The S.B.A. said on Tuesday that 5,411 lenders had approved $181 billion in loans since the second round of the program was initiated last week. The program, which began on April 3, has experienced high demand but has suffered from technical glitches that stalled loan processing and poor optics as big, publicly traded companies reported receiving millions of dollars while smaller businesses have been shut out. Backlash over those disclosures prompted Treasury to rewrite rules on the fly.

The Treasury Department issued new guidance on April 23 urging big companies with the ability to access other financing to rethink whether they really needed the money. Mr. Mnuchin has given those borrowers until May 14 to return the funds, no questions asked.

“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” Treasury said. Click Here to Continue Reading