A $310 billion refill of the Paycheck Protection Program signed into law on Friday and taking effect today could help more small businesses including restaurants and bars. The influx of funds comes after an initial $350 billion was depleted in under two weeks. But can new rules keep large, publicly-traded companies from tapping into this second round of PPP funds, as they did last time?
The paycheck protection program, which is administered by private banks and lenders, has been heavily criticized as chains secured tens of millions in PPP funds, while many mom-and-pop businesses received nothing. By now, most of those chains have returned their loans under public and political pressure: First, Shake Shack retuned its $10 million loan, blaming the government for underfunding the program, then others followed suit. Publicly-traded sushi chain Kura gave back its $6 million loan, salad giant Sweetgreen returned $10 million, Ruth’s Chis returned $20 million, Potbelly rescinded $10 million, and the restaurant chain J. Alexander’s gave back $15.1 million. Other large restaurant chains like Eataly, Fogo de Chao, and Fiesta Restaurant Group, which operates Taco Cabana and Pollo Tropical, received loans they haven’t yet returned.
It was a rule in the PPP bill that counted a restaurant’s size based on its number of employees “per physical location,” rather than in total, that opened the doors for major food and hotel chains to participate and cause problems. Many of them were first in line due to their existing relationships with major banks like J.P. Morgan Chase. Class action lawsuits like one in California allege that banks such as Chase favored larger loan applicants in order to secure bigger fees for themselves.
The “per physical location” loophole hasn’t been explicitly closed for the new round of PPP funding, but some other changes could help the replenished loans reach small businesses. $30 billion is explicitly reserved for community-based lenders, while another $30 billion is earmarked for mid-sized banks and credit unions. And newly issued guidance from the Small Business Association says borrowers must certify “in good faith” that they need the loans and can’t get funding from other sources, something most publicly traded companies would be able to do.
But other problems with PPP loans for restaurants remain. To receive full loan forgiveness, a business must rehire employees by the end of June. Depending on when different states’ shelter-in-place orders are lifted, that could be an unrealistic deadline for many restaurants. And, per PPP rules, restaurants can only use 25 percent of the forgivable portion of the loan for non-payroll expenses like rent and utilities. Of the first round of PPP loans, less than 9 percent went to food and hotel businesses, despite the outsize impact the COVID-19 crisis has had on the hospitality industry. Can this next round of funds do better?
So far, not so good: Demand for the new round of funding has already lead the Small Business Association’s computer system for processing loans to crash, according to the New York Times, and the Washington Post expects the new funds to run out in mere days.