This afternoon, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act (the Act) into law.
Among other things, the Act appropriates an additional $310 billion to the Paycheck Protection Program (PPP) that was first established by the Coronavirus Aid, Relief and Economic Security (CARES) Act. However, small businesses should be forewarned–most if not all of the additional funding is already spoken for, and the PPP is expected to run out of money again shortly after lending resumes on Monday, April 27th at 10:30 a.m.
This blog post will summarize the Act’s additional funding for small business loans and grants, recent changes to the regulations governing the PPP and the realities of obtaining PPP loans going forward.
Additional Funding for PPP and EIDL Loans
The CARES Act initially appropriated $349 billion to the PPP to fund government-backed loans to qualifying businesses to cover payroll costs, rent, mortgage interest and utilities. The full amount of principal may be forgiven for borrowers who comply with the PPP’s terms and conditions. However, as of April 16, 2020, funding for the PPP was exhausted, leaving a vast number of businesses without much-needed financial relief.
The Act attempts to address this problem by appropriating an additional $310,00,000,000 to the PPP, plus $11,335,000,000 to cover the administrative costs of the Small Business Administration (SBA). Out of this approximately $321 billion, $60 billion is set aside for small, mid-size and community lenders, as follows:
- The SBA shall guarantee no less than $30 billion in loans made by (1) insured depository institutions with consolidated assets of at least $10 billion and less than $50 billion; and (2) credit unions with consolidated assets of at least $10 billion and less than $50 billion; and
- The SBA shall guarantee no less than $30 billion in loans made by (1) community financial institutions; (2) insured depository institutions with consolidated assets of less than $10 billion; and (3) credit unions with consolidated assets of less than $10 billion.
The Act also appropriates $50 billion for the SBA’s Economic Injury Disaster Loans (EIDL) Program, and $10 billion for emergency EIDL grants.
New PPP Regulations
Although the PPP was ostensibly designed to benefit small businesses facing economic hardships as a result of the COVID-19 pandemic, it has been reported that a number of financially sound institutions acquired substantial PPP loans. For example, despite having cash-on-hand of approximately $100 million, Shake Shack, a national fast food chain, acquired a $10 million PPP loan. After mass outcry, Shake Shack announced that it would return the funds it received from the PPP.
Ahead of the Act’s infusion of additional funds into the PPP, the Department of the U.S. Treasury (Treasury) issued updated guidance to address this backlash. On April 23, 2020, Treasury added a section to its Frequently Asked Questions document (FAQs) addressing the eligibility of “large companies with adequate sources of liquidity to support the business’s ongoing operations.” The FAQs note that applicants are required to certify that “[c]urrent economic uncertainty makes [a PPP] loan request necessary to support [its] ongoing operations….” Applicants cannot make this certification in good faith without assessing whether they have access to other funds that can support their ongoing operations without resulting it significant detriment to the business. As an example, the FAQs note that it is “unlikely” that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. SBA may request that such a borrower substantiate the basis for its certification.
The FAQs go one step further, addressing borrowers who acquired PPP loans before the issuance of this updated guidance. According to Treasury, “any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” At a press conference, Treasury Secretary Steven Mnuchin cautioned that there will be “severe consequences” for businesses that do not comply, emphasizing that the PPP was designed to benefit “small businesses that need it, people who have invested their entire life savings.”
The Practical Realities of Tapping Additional PPP Funding
When the PPP ran out of funds on April 16th, thousands of loan applications were stalled in the midst of being processed. Because of this, most financial institutions have a significant backlog of applications, and few new applicants are likely to obtain PPP loans. According to Nick Simpson, a spokesman with the Consumer Bankers Association, “the majority if not all of the [Act’s] funding…is already exhausted.”
What remains to be seen is the amount of money that will be returned to the PPP because of the new obligation for larger companies to repay their loans within the next two weeks, and whether this will significantly expand the ability of smaller companies to acquire loans.
With all of the uncertainty surrounding the availability of the additional PPP funding appropriated by the Act, it is imperative that companies have their loan applications completed now–before lending resumes. Anecdotally, we have observed that our clients have had greater success in obtaining PPP loans from regional and local banks and credit unions. Additionally, applicants may find that Fintech companies, such as PayPal, that became approved PPP lenders shortly before the program ran out of money, may have a smaller backlog of applications. Simply put, it is essential to find a lender and arrange to submit an application at the first opportunity; those who delay at all are sure to be left out in the cold.
If you need assistance with lending or borrowing under the PPP, please contact Jessica M. Baquet at (516) 393-8292 or firstname.lastname@example.org, or Samantha Guido at (516) 393-8250 or email@example.com.