Is the COVID Small Business Loan Program a Boondoggle?

Yes ... and no.

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The second round of funding for the major coronavirus rescue program aimed at small businesses started heading out the door on Monday, after the initial $349 billion allocated to it was exhausted in just 10 days, leaving many businesses all over the country frozen out. That initial dash for cash led to story after story about the program being a, well, boondoggle.

Some of those criticisms are totally legit. Others, though, are a bit overblown, or end up misplacing the true blame for what went wrong. I’m going to try to untangle it all with seven points below.

  1. First, what are we talking about? The Paycheck Protection Program, as the major small business rescue program is officially known, is meant to provide low-interest loans of up to $10 million to struggling small businesses under the auspices of the Small Business Administration. If 75 percent of the money a company receives goes toward paying employees, the loan turns into a grant and doesn’t have to be repaid.

    This is a crucial point that is often glossed over in critical coverage: The loan has to be repaid if it doesn’t wind up mostly going toward worker pay. There’s also a loose requirement that companies demonstrate some sort of economic need for the program.

    A large part of the misunderstanding about this program, I think, is definitional. Most of us envision the local dry cleaners or mom and pop hardware store when we think of a “small business.” But the government’s definition is very different.

    For most industries, having under 500 employees qualifies a business as “small”; in others, it’s up to 1,500 employees. And some industries have no employee standard at all, merely an annual level of receipts that for many sectors is in the millions of dollars.

    So many companies that don’t look “small” to you and me are small in the government’s eyes. (You can see the full Small Business Administration definition list here.)

  2. Bigger, politically connected firms got their money first — thanks to big banks. It’s undeniable, though, that bigger firms, some of them politically connected, accessed the money first and left lots of smaller businesses with nothing.

    To me, though, the issue was less about which companies applied for money, but how that money was dispersed. SBA had banks process the loan applications, and many big banks such as Chase and Citibank gave preference to their bigger, more established clients, giving them larger loans that drained the PPP at a faster rate than would have occurred otherwise.

    For many more traditional small businesses — such as dry cleaners and day care centers — those relationships with big banks didn’t exist, leaving them to scramble around to find a lender willing to process their application. By the time many of them found a lender, if they found one at all, the program was already out of funds.

    This was a real flaw: Big banks are impersonal, inefficient, and just generally bad at helping local businesses. They are particularly bad at getting funds in the hands of those businesses that are always on the short end of the lending stick, such as firms owned by women and minorities.

    And of course, a legacy of the last economic crisis is that there are more large banks and fewer small ones, compounding this very real problem.

    A different avenue for the money — for instance, giving more explicit amounts to community banks and credit unions, or even local governments — could have made a huge difference. SBA did belatedly cap the amount any single bank could give out, but at 10 percent, that total still seems high.


  3. Chains were explicitly allowed to access the program. Much of the outrage online about the PPP has been directed at big, national, chains, usually in the food business, that were able to receive money. But to be clear, Congress very explicitly decided to allow chain outlets to access the program, so long as they have fewer than 500 employees per location.

    That decision makes some sense: Lots of chain restaurants are franchises, meaning the owners are nominally independent, owning their shop and just leasing their name and products from their parent company. (Whether they are truly independent from corporate HQ is very debatable, but let’s put that aside for now.)

    Congress didn’t want to lock out someone who owns a couple of Burger Kings from accessing the money to pay employees during the inevitable coronavirus-related business downturn, or someone who owns an individual Motel 6 location and saw business decimated by everyone canceling travel plans. And that’s a defensible position — there’s no reason to let all those businesses flop because they happen to have a name that’s nationally recognized.

  4. But some chains engaged in chicanery. That said, some chains definitely violated if not the letter of the program, then the spirit. The parent company for the Ruth’s Chris Steak House chain, for instance, used two subsidiaries to receive $20 million in loans, getting around the $10 million cap. And it seemed prepared to use that money to pay corporate HQ employees, not servers at individual restaurants, when the latter is clearly what Congress had in mind by allowing chains access in the first place.

    But I don’t quite get the outrage at chains like Sweetgreen or Shake Shack getting loans to pay their restaurant employees. These are businesses that have had to shut down due to government directive, and likely won’t rebound anytime soon. Yes, they aren’t all necessarily independently-owned neighborhood restaurants, and they can maybe access capital elsewhere, but they are exactly what Congress had in mind when giving chains access.

    I’d be madder at, say, construction firms, many of which are not stopping work during the pandemic, accessing the largest portion of the first round of funding.

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  5. What is “need” anyway? This gets at the real question at the heart of the controversy over the PPP: Which companies really need it, and what do we mean by need?

    Since the flurry of initial criticism, the Treasury Department has clarified that companies that receive public funding probably don’t qualify under the PPP’s requirement for economic hardship. So something like a Shake Shack that can access funds elsewhere is deemed ineligible, sort of retroactively, and can give back the money it received penalty-free.

    I suppose I understand that criticism, but I also think that the extraordinary circumstances of the pandemic, alongside the requirement that most money go to workers if a company wants to have its loan forgiven, makes the “need” question less important. As long as the money goes to workers in an industry that was hard hit by the coronavirus — like the restaurant industry undeniably was — having the government step in is the right thing to do.

    Also, adding more onerous requirements to demonstrate true pandemic-related need would have meant more paperwork and nonsense that also would have made it harder for smaller firms to access money versus bigger companies with more employees and dedicated finance teams. With something meant to get money out fast, adding more hurdles would cause many of the same issues folks are complaining about.

    Congress went with expedience over micromanaging every loan to make sure it was absolutely necessary. Again, I think that’s the defensible position.

  6. Congress significantly underfunded the program. The biggest problem is simply that Congress didn’t put anywhere near enough money into the program, setting off a race for funds in the first place. The second round of funding Congress authorized still won’t be enough, so this cycle is going to keep going ‘round.

    If, instead, the program had been open-ended, meaning every company that qualified would receive a loan, no matter what, a lot of the initial messy rush would have been avoided. Clawback provisions could have been inserted to claim money from companies that acted in bad faith after the fact. Or it could have simply been taxed back, with bigger companies that made higher profits during the pandemic facing higher rates.


  7. The Fed’s big business bailouts are going to be worse. All of the focus on the small business program leaves aside the fact that the coronavirus rescue for big corporations — which is going through the Federal Reserve — is going to be magnitudes of order more offensive.

    While PPP has a cap on loan amounts and directed the money toward workers, the Fed’s program have, as I reported here at the time, very few restrictions, most of which the Treasury Secretary can just waive anyway. Companies are explicitly authorized by the legislative language to lay off up to 10 percent of their workers. Only mid-sized firms, not larger ones, have an explicit prohibition on outsourcing.

    Trillions of dollars are going to pour into corporate coffers with little to no oversight, is what I’m saying.

    The only saving grace is that the Fed has agreed to publish details on which companies receive loans, and on what terms. But that won’t help us prevent bad things from happening, merely fight over it all after the fact. If you’re going to be outraged about anything in these rescue packages, get outraged about that.

Look, I would have preferred Congress take a different tack entirely, and do something akin to what the U.K. and Denmark did: Agree to pay a certain percentage of company payrolls, up to a certain income amount, so long as they don’t lay anyone off, for the duration of the crisis. It’s simple, guarantees that the money reaches workers, and circumvents much of the jankiness of the PPP.

Democratic Rep. Pramila Jayapal (Wash.) and Republican Sen. Josh Hawley (Mo.) both have proposals to do just that — but they introduced them after the first rounds of coronavirus funding had already been approved.

In a different world, though, a lot of the scandalous PPP stuff — both real and imagined — could have been avoided. But since we’re stuck with PPP, maybe direct a little more outrage at the banks, and a little less at the burger chains.


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— Pat Garofalo