PPP’s Banker Versus Borrower Dilemma

Since the launch of the Paycheck Protection Program (PPP) in early April, the single-minded focus of the U.S. Treasury, the banks approved to process PPP loans and the small- to medium-sized businesses (SMBs) clamoring for those funds was to get as many applications completed, approved and funds distributed as possible — and as quickly as possible. A process that has been challenging, given the overwhelming volume of applications presented by SMBs in need and frustrating given how quickly the $340 billion in funds allocated to that program had been claimed — it took only 13 days.

When this week dawned, so did PPP 2.0 — an additional $310 billion for SMBs, to be distributed by a larger pool of approved lenders, to an expanded pool of SMBs, readying the process for forgiving the loans made by the bankers who processed them and navigating whether those who got funds should have – and should keep them. And that was the topic of conversation in Episode 5 of the ongoing series of conversations between Planters First Bancorp CEO Dan Speight, Ingo Money CEO Drew Edwards and Karen Webster that has taken the PYMNTS community inside of PPP’s black box. This week, they were joined by Opportunity Fund CEO Luz Urrutia, whose nonprofit lending platform started to distribute PPP loans to small and micro-businesses this week.

The Opportunity Fund, which had been excluded from distributing the first round for funds, was able to get authorized and set up to do so within a week, Urrutia noted, and after a rocky first day or so, have managed to consistently keep the loans flowing.  In under a week, they’ve managed to get 400 loans worth a total of about $4.4 million for the micro-businesses they serve into the queue and approved.

Meanwhile, Planters First, Speight noted, had managed to fund roughly 85 percent of the applications it got in the first round and were able to clear its remaining 15 percent backlog by lunchtime on Tuesday, all of which have also been approved.

“We’re now at the part where the mode is closing down the rest of it and working on the forgiveness piece,” Speight said.

And while the progress is great — not to mention incredibly important for the micro-businesses the Opportunity Fund works with and the Main Street mom and pop shops First Planters works with — but the end of distribution complexity, unfortunately, has not meant the end of confusion or concern when it comes to PPP funds. Instead, Edwards noted, it has largely relocated them to the SMBs who took the funds. Particularly the larger SMBs that took the funds in good faith — believing they legitimately qualified for them — who are now considering giving them back for fear of facing audits and potential legal liability

“Because of the political and legal risk from the backlash at some of the companies who took the funds — many are going to give that money back and potentially lay people off,” Edwards noted, “a real shame since that will likely mean the layoffs the program was designed to avoid, all because of a lack of clarity around what ‘qualifying’ for the funds actually means.”

The Shifting Definition Of Eligible

That there are firms that even Treasury Secretary Steven Mnuchin said fell within the legal definition of a qualified PPP application but probably should not have pursued that program — the LA Lakers basketball team comes to mind — is something the panel universally agreed to. But, Edwards noted, the national outrage at those abuses has now caused the Treasury to declare that they will audit any business that received a loan for more than $2 million to determine if they needed the funds to stay afloat. Some believe that changes the spirit and intention of the program, which was intended to keep workers on the payroll and avoid layoffs until the economy restarted — not necessarily, to those businesses that were one foot away from shutting down the doors.

“It’s as if [the government] suddenly turned around and said, no, no, no, wait a minute. If you’re not on bankruptcy’s doorstep, then you better not take this money or we’re coming after you,” Edwards said.

Moreover, Speight noted, what it means for a business to be struggling during times like these is a fluid concept and incredibly hard to assess from the position of not knowing exactly how much longer the economy is going to be in the deep freeze.

“There are businesses that their revenue has really not been tremendously altered during this time, but they got the loan because they know what’s going to happen over the next two and a half months,” Speight noted, or even a full year.  No one knows exactly how the recovery from the coronavirus pandemic is going to proceed, if there will be another round of SMB stimulus funds after this one, or if their business that managed to hold strong through April will plunge off in May when their hard-hit customers stop paying their bills.

Something, Urrutia noted, that could easily happen just given how interconnected the entirety of the economy is. Seeing around the corners in times this uncertain, the panel agreed, is not possible for entrepreneurs who don’t also happen to be psychic.

“We’ve been so focused on the banks getting the money out. What I believe happened in the last seven days is the government’s created a disincentive on the borrower side now. So it’s not a banker problem anymore, it’s a borrower problem where there are business owners out there right now saying ‘Wait a minute, what do you mean criminal prosecution?’ I mean, that’s a strong phrase if you’re a small business owner who just wants to survive.”

Moving Forward

The PPP program, Urrutia noted, was a good start, but for the businesses, they serve that was all it was.  There is still a lot to be done. Particularly for the very small businesses her firm works with, they don’t need payroll funds; they need working capital to finance reopening. And, she noted, the economy needs that for them as well.

“Hopefully the third or fourth congressional stimulus package will extend credit to viable businesses that are seeking to either open or that remain open throughout this in some form or shape. The purpose needs to be to revive the economy. PPP is doing  a lot to keep people employed, but nothing to revive the economy.”

And part of the process, Edwards noted, will be on the SMBs themselves — in how they innovate, restructure and reshape their organizations to meet a wholly new commerce playing field. They’re not there yet today — a recent attempt at eating out locally when restaurants provisional reopened proved to him a lot of work still has to be done there.

But Speight noted, for all the bugs, bumps and accidental disincentives created, the PPP program mostly deserves our praise — because he’s seen firsthand that it has been a tremendous start when it comes to the comeback of business on Main Streets.

“I hear stories every day about when we close where the customers are crying and thanking us for giving them the money to save the business that their family has had for generations. They feel like they are going to do it. I don’t want to take anything away from the PPP because of nothing else. The feeling and the relief that it’s given to so many people during this time is invaluable.”