Will PPP’s Lack Of Clarity Fail To Protect SMBs And Paychecks?

During last week’s On The Agenda discussion of the many twists and turns that now characterize the PPP program, Karen Webster, Planters First Bancorp CEO Dan Speight, Ingo Money CEO Drew Edwards and special guest Opportunity Fund CEO Luz Urrutia predicted that if the past were any sort of prelude, the newest infusion of funds from the U.S. Treasury into the program would likely be fully depleted by the time the panel reassembled for the sixth conversation the next week.

But as it turned out, that didn’t happen — as of this week’s conversation, now joined by attorney Judie Rinearson, a partner; payment group leader; and co-chair of global fintech and blockchain groups at K&L Gates law firm — money remains up for grabs, as extremely vague and concerning guidance from the federal government on whom those loans were intended for exactly may be keeping many small- to medium-sized businesses (SMBs) from participating.

“There’s been such a change from the administration and the SBA about what they are intending for these loans. If you take a look at the original announcements, they are so clear. Even if you have access to other funding, not a problem. The goal is to get America running and it was clearly encouraging businesses to go out and seek these funds,” Rinearson said.

So business did that, at clearly a much greater level than the architects of the program were intending.  And some firms collected the loans, Rinearson noted, that did seem questionable and drew much backlash in the first few days as the most egregious examples became public. But what the government revised its guidance to in late April, it had a chilling effect that’s made many companies afraid to apply for the loans, and scores of others afraid to keep the funds they’ve already gotten, even if they were taken out in good faith.

“I think everyone’s heart was in the right place when they came out with this loan program. They wanted this to work; they wanted to get more people employed and they wanted to save small businesses. But it’s really difficult and I think as time has gone by, it’s become clear that this is a lot more difficult to deal with than they had originally thought,” Rinearson said.

And while it’s not too late for the government to clarify and fix the guidance as given so far, the panel agreed, the government is going to have to do it soon before a wave of SMBs, which really should have kept these funds for their employees’ sake, start sending back the money for fear of the outsized consequences of keeping it.

The Trouble With The New Rules

The Administration’s new guidance on the PPP loans issued on April 29 was a nearly 180-degree turn from that which was provided as application guidelines when the program opened its doors on April 3.

In the beginning, it was defined as a Paycheck Protection Program, giving businesses under 500 employees the opportunity to get 2.5 months of payroll (plus some expenses) if they could prove it necessary to continue to operate their business as the businesses were told to close their doors as a result of the pandemic. Part of the “necessary” requirement included the lack of access to other capital.

Businesses flooded banks with applications and the initial $340 billion of funds was gone in a matter of 13 days.

Since then, an additional $310 billion was made available to SMBs, beginning on April 27.

Around the same time, April 29, Treasury issued new guidelines – and a warning.

SMBs who had received PPP funds above $2M will be audited, and just about any other loan, could too, depending. The guidelines further stated that if that audit finds that the firm didn’t need that loan to operate its business, and potentially had access to other capital, there could be some very nasty consequences including criminal investigations, prosecutions and “maybe even spending a little time in the pokey,” Karen Webster noted, depending on what was discovered.

The Treasury encouraged any PPP funds recipient to take another look at their business, and consider returning the money on May 7 — extended this week to May 14 — no harm, no foul.

That’s when the waters started to get murky and SMBs started to get scared.

Clarification, Please

Edwards, Speight and Rinearson agreed that the problems with the guidance are, in fact, even alarmingly less clear than looks at first glance.

What exactly constitutes “needing the money” at the time one took the loan — it is extremely vaguely defined.

Could access to capital mean having deep-pocketed board members who the Treasury Department now considers legitimate providers of capital, making the PPP funds recipient in violation of the standards? Not clear.

Is having an available credit line from a lender that they may, or may not, have been allowed to draw all the way down on a disqualifier? Maybe.

What if a firm’s revenue wasn’t sliced in half, but they took PPP funds in anticipation of their revenue hitting the skids in the next 60 days when clients stopped paying on their invoices? Totally unclear.

These are all the gray areas, among many others, that businesses right now have no clear answers for. And, as we’ve already seen during this process, as Planters Bank CEO Dan Speight noted, a lack of clarity in the details can be a dangerous disruptor in this whole process.

“We’re really concerned as a bank that unfortunately we’ll be in the middle of it,” Speight said. “We will quickly start getting into a ‘forgiveness hell,’ if we’ve got new rules that come out that business has got to start proving things about worthiness for funds. And we’ll find ourselves stuck in the position of  having to adjudicate the forgiveness page rather than having it just happen, and that will be tough.”

But not nearly as tough as it will be on the SMBs who took a larger than $2 million loan because that’s what 2.5 times payroll for their business amounted to, and who truly thought it was the right thing to do to keep employees on the payroll. They now have no idea if they should continue holding the funds.

Ingo Money, Edwards noted, falls into that category — as it didn’t take a loan from the front doorstep of bankruptcy — but because it was the best way to keep hundreds of employees fully employed. And while it isn’t afraid of being audited or asked to pay back the funds as a loan with interest, given its position as a heavily regulated FinTech working with banks, being the subject of a criminal investigation is not an option.

“Our ability to sign the next contract with the next top five banks, just torpedoes, as long as an investigation is going on. It’s the kiss of death if the federal government’s investigating you for potential wrongdoing,” Edwards said, noting that Ingo was far from unique in this regard among FinTech and other heavily regulated digital service providers. They will “have to give the money back and do whatever we have to do as it relates to our employees.”

In short, the panel noted, this is a mess in the making, as a program that started to be based on protecting paychecks has morphed midstream in a rescue package for mom and pop shops with less than 50 employees.

That’s a problem on its own, made worse by what seems to be an inexplicable rush to penalize or punish businesses that responded to the initial pitch to do what the program outlined — protect the paychecks of their workforce in a time of unprecedented uncertainty.

That’s the bad news. The good news, the panel noted, is that three small changes could help clarify where the parameters are unclear, and protect the interests of SMBS and the issuers that processed the loans.

The Three Steps To Saving PPP

The first easy change, Speight noted, is simply to replace the nebulous categories around the ability to repay, which is extremely hard to determine, and place some bright lines in place that are easier to determine. If a firm can demonstrate that it used the funds to keep people on its payroll in the two months outlined in the loan, that’s sufficient to eliminate the need for an audit, regardless of the size of the loan. The purpose of the program, as indicated by its name, was to do precisely that, and if businesses did that, they should be able to keep the money.

The second obvious change, Edwards and Rinearson noted, is simply to take the threat of criminal investigation or prosecution off the table. There are actual fraudsters who have attempted to take advantage of the program by pretending to have employees and the most serious consequences should be reserved for real malicious bad actors. People trying to save their businesses and acting in good faith haven’t committed a crime, they noted, and don’t deserve to be treated like criminals because they attempted to use a program advertised as helping them avoid furloughing their workforce.

Finally, Edwards noted, if the end-goal is to make sure that only small businesses teetering on the edge of survival participate in the PPP as grant recipients and that larger firms with stronger income streams and durability shouldn’t be given what could be a windfall, so be it. For those firms, eliminate the forgiveness for all of it. Most, he noted, like Ingo will be absolutely delighted to pay interest on those monies, in exchange for having certainty about their cash flow.

“If you told these companies that they had to pay back the [PPP] loan, because they, in theory, had access to capital with deep-pocketed board members, I am sure that everyone would say OK, fine, we’ll pay it back. The government gave us immediate access to money during a time where we probably would have to spend months trying to find that money, which would have defeated the purpose. Being asked to just pay it, that would be a great outcome.” Edwards emphasized.

In fact, it would be a better outcome for everyone, as more businesses who needed the money now would likely apply for it. The government would likely recoup some of the massive buckets of funds it has just given out and many employees who might not otherwise stay fully employed during this time will likely do so — something everyone wants when the pandemic ends and recovery begins.