A popular government-backed small business loan program to help businesses that have suffered from health problems coronavirus is back, with some fixes to past shortcomings in the forgivable, low-interest loans, but also some of the same loopholes that larger operators can benefit from Main Street mom and pop stores.
Washington’s latest $ 900 billion stimulus effort will complement the Paycheck Protection Program with $ 285 billion for a third round of funding at a time when small businesses continue to struggle. It was passed by Congress Monday night after months of political bickering. The question is whether President Donald Trump will sign it after the president released a video on Tuesday evening criticism of the COVID-19 bill.
The biggest difference in round three? Companies that have previously borrowed from the program and spent the money may take out a second loan. So-called “second draw PPP loans” were not part of the first two rounds. The government also added new restrictions to limit the amount of money that goes to larger companies or those that do not need government support when private funding is available.
All in all, government watchdogs who have followed the PPP say it has improved, but the final round, like the first two, will not be fraud-free.
“I think it’s more likely to go to the companies that need it most because the abuse of the first two rounds has been well publicized,” said Steve Ellis, president of Taxpayers for Common Sense. “But it’s a big pot of money, and there’s no guarantee it won’t be exploited by individuals and companies who shouldn’t get it.”
Here are some of the loopholes that the government closed, narrowed, or left open when re-implementing the program:
- The government has limited second borrower loans to $ 2 million, instead of $ 10 million. But, as in the past, the so-called affiliation rule is waived, meaning that two or more separate divisions of the same company can borrow $ 2 million each, as long as their operations are separate. That will likely enable restaurants, hotels and other chain businesses to borrow more than the individual ceiling.
- The government reduced the number of employees a company could have from 500 to 300. But it also expanded the number of companies that could qualify to get around that rule. Like restaurants and hotels, for example, news organizations with a total of more than 300 employees are eligible to borrow from the program as long as they don’t have more than 300 employees in one location.
- Also new in round three of the PPP: high-end co-ops and Hollywood agents. Residential cooperatives have not been allowed to receive help for small businesses in recent rounds. In addition, the government set aside $ 15 billion for smaller performing arts organizations struggling to survive, but also left the door open to raise at least some of the money through talent agencies representing performing artists.
- Unlike the first round, companies have to show that their business has declined at some point during the coronavirus pandemic, but only over a three-month period. So if a company struggled at the start of the pandemic but is doing well six months later, it is still eligible for round three of the PPP.
- In particular, public companies should not receive new PPP loans. But companies owned by venture capital, private equity firms, or other big-pocket investors are still eligible.
Caroline Ciccone, the Executive Director of Accountable.US, who has been critical of the Paycheck Protection Program, calls the exclusion of public companies, as well as the reduction in the workforce limit to 300, a meaningful improvement. But she says there is still a huge gap between what most people think is a small business and a company of 300 people.
The new round of money sets aside $ 25 million for a federal agency promoting minority businesses and another $ 15 billion that can be tapped by community or minority-owned banks. However, that pales in comparison to the total fund of $ 285 billion. Studies of the previous rounds have shown that companies are minority-owned was not given equal access to PPP loans.
Another potential issue: The updated program is still missing the basic protections that are part of the typical lending process run by the U.S. Small Business Administration. Banks are usually held liable if they provide a loan that appears to be in breach of the rules. Banks had asked the SBA to waive that liability during the first two rounds of the PPP, but the new rules that Washington wrote for round three specifically say that banks cannot be held liable for funding fraud.
Both Ellis and Ciccone said this break could be a problem for banks as we now know there was widespread fraud in the first two rounds of the program.
“The argument is we need to get the money as soon as possible,” said Accountable.US ‘Ciccone. But look what happened in the first waves of this. Tens of billions of dollars in fraud had been committed. At the very least, you should maintain the very limited auditing standards that are normally in place. ‘