Few things have stirred more controversy during COVID-19 than the Paycheck Protection Program. And it might get uglier before it gets better. The Wall Street Journal reported Tuesday that at least 30 public companies that received PPP loans plan to keep the money, telling investors to ready for whiplash. The Treasury Department tried to correct this concern previously, an issue that left a lot of small businesses in the dark, after it dominated the first round of funds, which went dry in early April—less than two weeks after being announced. The Senate approved a $484 billion bill the following week, including $310 billion to replenish the PPP.
But beyond just putting more cash in the drawer, the Treasury Department said businesses with access to other sources of capital weren’t eligible for the forgivable loans. More than 230 received north of $1 billion as part of the coronavirus rescue package, according to an analysis of public filings through April 27, The Wall Street Journal said. It led to restaurant companies like Shake Shack, Ruth’s Chris, and Potbelly giving back their loans amid public outcry.
The Treasury Department is giving this round of public companies until Monday to return the funds. The Wall Street Journal said 14 public companies, in the week before the deadline, said would give back the money. In the same period, though, 30 said they plan to do the opposite—a figure that totals some $110 million, which could lead to an audit of their applications.
CNBC, in a recent survey of 2,200 small business owners, found only 13 percent of the 45 percent who applied for PPP loans were approved. Among all respondents, 7 percent said they already received financing and 18 percent noted they were still waiting for a response from a lender.
Regardless of what happens, or what changes might still be in the works for the PPP (especially around forgiveness measures), the issue remains highly contentious and often murky.
Mike Rozman, CEO and co-founder of BoeFly, an online financing platform, chatted with QSR about the PPP and everything restaurants need to consider to get money, get it forgiven, and avoid the many pitfalls ahead.
Let’s start with went wrong the first time around. Many small restaurant owners felt left out by the PPP process and disheartened by how the loans were distributed, with larger chains getting funding (and then giving it back in many cases) as they applied early and didn’t get the relief they needed. What’s different now?
There have been many unexpected challenges in the implementation of the Payroll Protection Program (PPP). When the PPP was enacted, BoeFly encouraged clients to begin pre-applying while waiting for the Small Business Administration (SBA) to issue its guidance to banks for how to handle PPP loans. This was meant to help small business owners begin gathering the documents and information that would be needed for the application process. This preparation was based on the initial PPP loan application from the SBA. However, on the evening of April 2—the night before business owners could officially begin submitting applications— he SBA amended the application. So many small business owners rushed to submit revised applications, and banks and lenders had to adjust their processes, too.
The Small Business Administration’s PPP Loan program attempted to move at breakneck speed—from law to a live program in less than seven full days—leaving banks no time to prepare or scale up for the number of applications that were received once the program opened. During the loan rollout, banks struggled through the systemic challenges and focused on servicing their largest customers first, then looked for ways to bring in new customers before processing additional loans. The result is that large lenders found ways to limit their funding, and most small business owners were left out or turned away completely.
For PPP2, large companies have been forbidden or discouraged from taking money from the program. Additionally, 20 percent of PPP2 funds were earmarked to move through smaller financial institutions as a way to service true small business owners first. These alterations to the program have been successful, with average size of a loan made under this second iteration of the program just $79,000.
What are some key tips you’re sharing with operators to navigate the complicated process of accessing capital? How can they ensure they get funds before the second round of PPP funding runs out?
BoeFly is proud to have processed $750-plus million in loans to help small businesses fight for survival during the pandemic. We’ve helped thousands of franchisees from brands such as Denny’s, Smoothie King, Subway, and Jersey Mike’s Subs receive much needed funds in order to continue employing 55,000 workers. Over 80 percent of our loans went to businesses with less than 100 employees, with an average loan size of $56,085. Despite our progress in processing applications in PPP1, we were frustrated and disappointed that not every application received was approved prior to the PPP1 funds being depleted.
For PPP2, BoeFly has encouraged our small business applicants to also contact any banks they have existing lending relationships with or otherwise feel they might have success with when applying directly for a PPP loan. Your bank may or may not be able to process your application faster, as they likely have their own pool of applicants waiting to receive loan approval during the second round of funding. Thankfully, PPP2 funding has not yet run out, and the great majority of applications are getting approved in a timely manner so chances are high that you will get approved quickly if you apply with a lender soon.
For restaurants in particular, what are some critical elements of the loan requirement process they should know?
The fact remains that the government instituted the shutdown that every American business had to abide by. Therefore, even if restaurant owners have other sources of capital such as a line of credit, it will be extremely difficult for a bank or the government to determine under those circumstances that the average business was not acting in good faith when showing the need for a PPP loan.
That being said, it is recommended that business owners document the state of their business and need on or around the date they applied for the PPP loan. If you are a retailer or restaurant, the simple fact of being shut down should meet those qualifications. For any business, the reality of lost future sales, canceled orders, and uncertainty about the length of the shutdown should suffice to show “good faith.”
The stern warnings coming from the Treasury about liability are aimed at large public or private equity backed companies with other sources of capital, not at small, independently owned companies. The guidance further explains that companies who have received over $2 million in loans will be automatically audited by the SBA and Treasury to determine if this standard was met. If your business obtained under $2,000,000 in PPP loans, it is highly unlikely an audit will take place and you will face any liability. It is the responsibility of the lenders to review documentation after eight weeks to determine forgiveness based on use of funds.
Diving into the forgiveness rules, this might be the No. 1 source of confusion among restaurant operators. Many are taking a wait-and-see approach—get the money and then see if the requirements loosen. The top issue seems to be the 75 percent payroll measure, as well as simply needing to bring back employees by a certain date whether or not operations are back to normal or not. What have you been hearing from small business owners?
Many small business owners are very worried about the forgiveness requirements, especially since the guidance in general continues to change week by week. While this is especially difficult for restaurant owners who are not operating at full capacity, the intent of the PPP program was to keep workers on the payroll and off unemployment. Business associations like the IFA are lobbying to reduce the percentage used on payroll to 50 percent, but you shouldn’t count on that and assume that for complete forgiveness, you will need to use at least 75 percent of the funds on payroll.
As the law currently stands, forgiveness is centered on 75 percent for payroll costs and the remainder on mortgage interest, rent, and utilities payments over the eight weeks after getting the loan. Business owners will also owe money if they do not maintain their staff and payroll as intended by the loan. Your loan forgiveness will be reduced if you decrease your full-time employee headcount or if you decrease salaries and wages by more than 25 percent for any employee that made less than $100,000 annualized in 2019.
As of today, business owners have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. If you offer to rehire and the employee declines, you will want written proof of both in order to show your lender.
What other forgiveness rules should restaurants make sure they know?
You will need to submit an application for forgiveness to your lender, including documentation verifying the number of full-time equivalent employees and pay rates for the 8-week period commencing when the loan is made. The documentation should include payroll tax filings with the IRS, state and local income, payroll and unemployment insurance filings, cancelled checks, payment receipts, or other documents verifying payments. You will need to certify that the documentation is true and correct and that the amount of the requested forgiveness was used for the permitted purposes. The amount forgiven will be reduced to the extent that there was a reduction in the number and/or salaries of employees, unless restored by June 30, 2020.
While the IFA and other industry groups are lobbying to change the allocations for how the funds should be used, it is best to assume those rules will not change. The rules as they are currently written allow for some variance between the approved and non-approved expenses due to miscalculations or an unforeseen issue, such as an employee quitting. That variance will be converted into the two-year note at 1 percent interest with a six-month deferral of the first payment. But, the borrower is certifying on the PPP loan application that they will use at least 75 percent on payroll and the other 25 percent on rent, utilities, and interest payments.
Are there ways to get funds faster than going through a typical bank?
The majority of lenders weren’t able to handle the high volume of PPP loan applications, which caused all of the delays in funding from the first round of the loan rollout. Banks are unsettled and the pressure is intense on all parties, not to mention that banks are in crisis mode with COVID-19, just like other businesses. BoeFly was founded 10 years ago to address this exact problem and works closely with both community banks and large national banks as they come online to process PPP loans. We match franchisees, independent business owners, and non-profits with those lenders willing and able to help. Our technology platform allows lenders to automate much of the loan process, so we are a better path to potentially getting your money faster.
Through applying with a third-party technology platform such as BoeFly, applicants increase their chances of getting matched with an approved lender quickly and potentially receiving their funds much faster than going through just one bank.
Another big question is loan size, how it’s determined, who’s eligible, what can I expect to get in terms of relief? How does this process work?
All businesses – including nonprofits, veterans’ organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply for PPP loans. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries. For this program, the SBA’s affiliation standards are waived for small businesses in the hotel and food services industries, those that are franchises in the SBA’s Franchise Directory, and those that receive financial assistance from small business investment companies licensed by the SBA.
The loan size is based on your average monthly payroll costs, excluding compensation above $100,000 in wages (based on prior 12 months or from the calendar year 2019) X 2.5. That amount is subject to a $10 million cap. In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019.
Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application. Remember, rent does not count as “payroll costs” and should not be included in your loan calculations.
What penalizations should employers be aware of, especially as they look to reopen restaurants and try to raise staffing levels?
New guidance from the SBA states that employers will not be penalized with reduced PPP loan forgiveness if a worker rejects an offer to return to their job—a significant concern for operators given the reality that many employees are making far more money on unemployment. The restaurant owner must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the owner. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Also keep in mind that restaurant owners do not have to hire the same position or keep employees in the same jobs as before. Lenders will be looking at the amount you spent on payroll, not who fills what job. This is a good way to make use of the funds in a positive way and allows restaurateurs to shift roles and responsibilities of existing employees to meet the needs of their changing business models. Just note that the position must be a full-time employee and not a contractor in order to count towards forgiveness.
What documents should a restaurant get ready before applying?
Before applying for a PPP loan, you should gather all the necessary information to ensure a complete application in order to get approved as quickly as possible. Required information includes:
An IRS Form 940 for full year 2019, or
All 4 IRS quarterly Form 941s (Only needed if Form 940 is not available)
Proof of ownership and identification / contact information (for all owners of over 20%)
Proof that the business is Active and in Good Standing (from your Secretary of State)
We recommend that all required documents be saved as PDFs to easily upload into the system and expedite your loan approval.