(This is the fourth in a series on the impacts of the coronavirus on employment and the workplace. The first three are here.)
Government and private sector businesses are moving so rapidly during the first week of the $2 trillion CARES Act, that we can already draw some lessons going forward. This is so especially for the $349 billion Paycheck Protection Program (PPP), the main vehicle rushing funds to small businesses to stem additional layoffs and permanent business closures.
Government lending programs usually take months to roll out. In contrast, the application for PPP loans opened last Friday, a week after CARES Act passage. Below are five dynamics of the first week—relating to the Mach 3 speed of the process, the impacts on layoffs, the employment trade-offs with the enhanced Unemployment Insurance, the controversy over the Affiliation Rule, and the challenges for program integrity and preventing program misuse.
To help us understand these dynamics we are joined once again by Ms. Nanette Heide, Co-Chair of the Private Equity Division and also by Ms. Sandra Stoneman, Co-Chair of the Emerging Companies Group at Duane Morris LLP. Both have been in close contact with businesses during the past week, who are considering PPP or have applied.
1. The speed by which the loan process was established suggests how quickly government and the private sector can act when a sense of urgency is present: Over the past week, the Small Business Administration (SBA) continued to develop PPP application guidelines, issuing several advisories, as late as Thursday evening. Still by Friday morning, hundreds of banks and financial institutions were on line accepting loans. Bank of America was the first of the large banks to begin accepting PPP applications on Friday, and reported receiving 10,000 applications within the first hour, and more than 85,000 by the end of the day (totaling $22.2 billion in loan requests). JPMorgan Chase opened its application portal by Friday afternoon, and Wells Fargo announced plans to open within a short time. By this upcoming week, most banks and other financial institutions should be online.
Many banks started with a policy of loans only to existing clients. However, in line with the current sense of urgency, these banks and others in the past three days have come forward to open their processing to non-clients. This should extend the program particularly to the more vulnerable small businesses who may not have strong banking ties—a main goal of PPP.
There are trade-offs in program integrity with the Mach 3 speed implementation, as noted below. But what we do see from the first week is how SBA and financial institutions can accelerate processes.
2. Initial indications are that the funding will have impacts in stemming business closures and layoffs, though we won’t know for some time the extent of these impacts: SBA clarified this week that not more than 25% of the loan amount may be attributable to non-payroll expenses. In the Act, PPP allows for spending over an 8 week period following loan origination to include a range of expenses, including not only payroll but also rent, utilities and mortgage interest. This clarification should help in ensuring that the large majority of funds go to payroll—which should be the focus of the funding.
To be sure, some of these payroll costs would be ones that employers would otherwise have funded on their own. However, here are a few of the businesses I’ve spoken with in the past week who are thinking of applying for PPP or started applications. All have been hard hit by the Shelter in Place orders, seen their revenues sharply decreased or eliminated, and were planning or considering layoffs: a 15-employee flooring company, whose workload plummeted with the Shelter in Place; a 16-employee entertainment event company, whose bookings have virtually all cancelled for upcoming months; a 40-employee trucking company, able to continue operating as an Essential Business, but whose deliveries have been reduced; a 4-employee hair salon, unable to operate at all under Shelter in Place. At least in these cases, money they spend from PPP will positively impact worker retention, and a decision not to layoff or furlough.
Given the deluge of loan applications just in the first day, there was suggestion on Friday that the $349 billion allocated to PPP might run out before June 30, 2020. However, Treasury Secretary Mnuchin told CNBC this week that if that occurs, he would request an additional allocation.
3.The increased subsidies to workers through the Federal Pandemic Unemployment Compensation (FPUC), will blunt worker retention under PPP: The FPUC provides an additional $600 per week to all workers, across sectors and income levels, above the amount that these workers will be receiving from their state Unemployment Insurance payments. This will mean that for many lower wage and even middle wage workers, those roughly earning less than $44,000 annually in many states, they will be receiving more on Unemployment Insurance than they would through their employment.
The result will be more money in the pockets of lower wage and even middle wage workers. However, it will also blunt worker retention under PPP. We’ll know over the next few months the extent of this trade-off.
4.The Controversy Over the Affiliation Rule: Heide and Stoneman note one of the biggest controversies of the past week involved the “Affiliation Rule”, covering small businesses that have investments from large private equity or venture capital funds, strategic investors, and active investors. The SBA issued guidance late on April 3, 2020, as Heide and Stoneman explain in this summary. As they note, the guidance effectively halted the access of these businesses to the program. The guidance requires that a business, if it has either a 50% or more owner of voting securities or an owner that has certain direct controls or negative controls, aggregate its number of employees with the employees of the owner and the other business(es) that such owner also owns (controls). Further if there is a common management between the applicant entity and another entity, those employees must be included too. Given how widespread across sectors and occupations are the small businesses and jobs impacted, this issue will continue to be one of major importance in the weeks ahead.
5. Challenges for Program Integrity and Providing Program Misuse: Given the enormous volume of loans and government direction to process without delay, the usual bank lending processes will not be possible. Banks have been told to accept the certifications provided by loan applicants, including the key certification that “the current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” One bank official only somewhat jokingly described the short-circuited process as follows: identify the business as a legitimate business with an EIN, review financial data, approve loan, wire transfer funding.
Clearly, there is wide room for program misuse, particularly applications by businesses who are not impacted significantly by the shutdowns. Minimizing this misuse in the months ahead will be a challenge for SBA, banks and for business associations advising their members,
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Heide and Stoneman note that the CARES Act is more of a stabilization effort than a stimulus. It enables businesses to hold on through June 30, 2020. But if the economy does not pick up on or before June 30, 2020, business cutbacks and layoffs will likely follow, in the absence of additional initiatives. This past week shows that it’s not too early to start thinking about what might be needed after June 30.
Originally published in Forbes