An Update on the Government's Efforts to Aid Small Businesses
While it may seem hard to believe that March was just five months ago – not five years ago – that’s when Washington created two loan programs that were supposed to help struggling businesses keep doors open and employees on the payroll. The Main Street Lending Program (MSLP), administered by the Federal Reserve, would be accessible to small and medium-sized businesses (those that have up to 10,000 employees), but loans from it would have to be paid back. The Paycheck Protection Program (PPP), run out of the U.S. Small Business Administration (SBA), would be accessible only by businesses with fewer than 500 employees, but the loan would be forgivable if firms used most of the proceeds for payroll and other covered expenses.
Have these programs fulfilled their objectives, and what is the future of each? We’ll explore those questions this week.
The PPP certainly has helped many small businesses—and Americans who watched the Republican National Convention on Monday night heard from one, the owner of a Montana coffee shop, who praised the program. Between March and August 8 (the latest date for which information is available), more than 5,400 lenders, including banks and fintech companies, provided more than 5.2 million PPP loans to U.S. small businesses totaling $525 billion. Congress provided, through two rounds of funding earlier this year, about $650 billion for the PPP, which means about $125 billion remains unused. (More on that money later.)
The program is not without its critics, however, and Congress still needs to tackle at least one major concern about the program: whether the small businesses that used the loans to cover expenses can also deduct those expenses (as they normally would) from their taxable income when it comes time to file their annual returns.
In the libertarian magazine Reason, writer Billy Binion lists the problems that have plagued the PPP: it is “fragmented and bureaucratic”; the system crashed almost as soon as it was launched; the requirement to spend 75 percent of the proceeds of the loan on payroll was too strict (Congress later lowered that threshold to 60 percent); and some large franchises received huge PPP loans while “many small business owners were denied loans altogether, especially if they didn't have a lending history with the lender they selected to help them procure a loan, or if they had a lending history with a different bank.”
At least initially, borrowers could not apply for PPP loans through fintech companies, even if they had a history of using them. Eventually, however, the Treasury Department and the SBA allowed fintech lenders into the program, but only 15 would become approved PPP lenders.
And there have been the outright mishaps. According to a local television station in Minnesota, one man received a direct $150,000 deposit from SBA into his bank account without ever applying for a PPP. (Tom Fahling, who is semi-retired, works part-time as a desk clerk.) The bank that has processed the loan was “a number or two off” when keying in information from the loan and, as a result, the money went into Fahling’s account instead of the account of the intended recipient. Fahling, not the bank, was the one who noticed the error. After being notified about the mistake by Fahling, the bank transferred the funds to the rightful borrower.
The U.S. Department of Justice also has begun to look into fraud involving the PPP. According to CBS News, for example, one Miami man was charged with bank fraud and making false statements to a financial institution after he was awarded $3.9 million in PPP loans, “some of which he used to buy a Lamborghini.”
Then, this week, the nonprofit watchdog group the Project on Government Oversight (POGO) reported that United Coal Company, which is owned by Ukrainian billionaire Rinat Akhmetov and operates four coal mines across Appalachia that owe about $13.4 million in civil penalties for violating federal health and safety standards, “received a total of $21 million” in PPP loans. POGO said United Coal is one of “at least 27 companies with estimated revenues exceeding $1 billion last year that received” PPP loans.
These issues are not the only ones plaguing the PPP, which expired on August 8 and is no longer accepting applications. As The Wall Street Journal explained at the end of last month, “Congress left a loose end … that could end up costing small businesses $120 billion in taxes.” Specifically, the legislation that created the PPP, the CARES Act, “explicitly says that forgiven loans don’t count as taxable income, but it is silent on whether ordinary tax deductions for the same expenses are allowed.”
For a small business, this problem amounts to real money—tens of thousands in deductions for a business that took a $100,000 PPP loan, for example. One small business owner called the issue “a little kick in the gut after you had a swift pat on the back.”
The U.S. Department of the Treasury opposes allowing businesses to deduct covered expenses, but Republicans on Capitol Hill disagree. Tackling the issue has been part of the negotiations on the fourth COVID stimulus package that have been ongoing since May, but are stalled amidst partisan gridlock.
Another issue lawmakers are considering in those negotiations: whether to allow some small businesses to take a second PPP loan since, as noted above, approximately $125 billion in PPP loans have been left unused. According to a survey of members of the Small Business Majority, 80 percent of small business owners would like to take a second PPP loan if allowed. Indeed, without a second loan or other stimulus relief, 44 percent of the business owners polled “said they would be unable to survive another six months.”
Additionally, according to Newsday, some small businesses are holding off on applying for loan forgiveness (again, firms do not have to pay back the loans if they use at least 60 percent of the proceeds to meet payroll and keep employees attached to the workforce) as they wait to see if Congress will “remove the forgiveness application requirement for small businesses and nonprofits with loans under $150,000.” (Most borrowers received loans totaling $150,000 or less.) In other words: these businesses are waiting to see if they can avoid the paperwork associated with getting their loans forgiven. According to Newsday, one survey found only seven percent of PPP recipients have applied for forgiveness. (To be sure, the SBA only began taking applications for forgiveness on August 10.)
The Federal Reserve’s MSLP, meanwhile, has not yet run into so many questions or problems—but that could be because it took the Fed until early this summer to get the program off the ground. The Fed provided the broad outline for the program in April 9. It accepted public comment on its initial terms until April 16.
The Fed then took two full months to fully outline the MSLP. When the program finally launched in mid-June, the Fed announced several changes designed to make the program more accessible, including lowering the minimum loan size for certain loans to $250,000 from $500,000; increasing the term of each loan option to five years, from four years; and raising the Reserve Bank's participation to 95 percent for all loans.
Were those changes successful in making the program more “accessible”?
By the end of July, according to The New York Times, the Fed had given out only 13 MSLP loans, the largest of which, at $50 million, went to a casino in Pennsylvania. By the middle of August, according to The American Banker, only 32 MSLP loans had been approved and purchased by the Fed. (Banks originate MSLP loans, and the Fed can purchase up to 95 percent of the loan amount.) Another 55 loans were under review.
A Congressional Oversight Committee report issued last week put the status of the MSLP in stark terms, saying it has seen only “modest initial activity thus far.” The report also noted, “The Federal Reserve’s participation amount in these loans is $472 million,” or only “about 0.07 percent of the program’s $600 billion lending capacity.” Only 522 lenders have registered with the program and even fewer, just 160, “had publicized that they are accepting loan applications from new customers.”
The New York Times noted, “Lawmakers have questioned why it took so long to get the program running — Main Street did not purchase its first loan until July 15 — and why so little of its $600 billion capacity is being used.” At least one federal lawmaker has called the program an outright “failure.”
As Yahoo Finance explains, federal lawmakers from both parties are pushing the Fed to relax requirements in order to entice more businesses to apply for help from the MSLP, particularly as negotiations regarding a new round of PPP loans are stalled.
Will that — or any of the issues plaguing the PPP — get ironed out? Not in the immediate future. The two parties have been focused over the last two weeks on their respective conventions, and Congress isn’t scheduled to return to Washington until mid-September. But government funding expires at the end of next month and Congress will have to act to stave off a shutdown. A government funding bill could provide a legislative vehicle on which changes to the PPP or MSLP could find a ride.