New PPP loans promise short-term relief for businesses facing long-term damage

WASHINGTON (SBG) — Small businesses will see another round of relief under the stimulus package passed by Congress Monday, but economists and business advocacy groups say nearly $300 billion in forgivable loans still falls far short of covering the losses many businesses will incur before the economy fully recovers from the coronavirus pandemic.

The stimulus package infuses the Paycheck Protection Program, which has essentially been dormant since August, with $284 billion for small business loans that will be fully forgivable if used for eligible expenses. Lawmakers also attempted to address some of the complications and problems that arose with the first round of funding earlier this year.

According to The Wall Street Journal, first-time PPP borrowers will be subject to the same rules as they were previously, which means businesses with up to 500 employees per location will be eligible. Some existing borrowers will now be allowed to apply for a second loan, but they need to have 300 or fewer employees and must demonstrate a quarterly revenue loss of at least 25% compared to 2019 receipts.

Most applicants will be able to borrow an amount equal to 2.5 times their average monthly payroll, up to $2 million—down from a maximum of $10 million in the first round of loans. Food service businesses will be allowed to borrow up to 3.5 times monthly payroll.

The majority of funds, at least 60%, must be used for payroll costs to qualify for full forgiveness, but the categories of expenses the rest can be spent on have been expanded. In addition to mortgage, rent, utilities, up to 40% can be spent on personal protective equipment for workers, operations expenditures, and repairing property damage caused by protests. The bill also specifies that businesses can claim tax deductions for the expenses covered by the loans, a provision supported by business groups but opposed by the Treasury Department.

The program could be reopened for loan applications within the next few weeks. After criticism that bigger businesses with established relationships with major lenders had an advantage in the original application process, some funds have been specifically allocated to community lenders and small depository lenders.

“The long delay in negotiations over the last six months as the pandemic spiraled out of control has proven devastating to families and small businesses, and we must implement these programs as quickly as possible with equity and justice as the foundation," said Amanda Ballantyne, executive director of the Main Street Alliance.

The Paycheck Protection Program established by the CARES Act in March distributed $525 billion in loans to more than 5 million businesses before it ceased accepting applications in August. More than two-thirds of the loans were for $50,000 or less, and the average loan size overall was $101,000. About $138 billion appropriated by Congress went unspent.

The program was broadly seen as a successful rescue operation for businesses that were forced to shutter for weeks or months due to the pandemic, but it did draw some criticism, as well. House Democrats estimated more than $4 billion was distributed improperly, and the new legislation provides $50 million for audits and fraud prevention.

Kevin Kuhlman, vice president of federal government relations for the National Federation of Independent Business, welcomed the new wave of PPP funding, as well as several changes to the structure of the program included in the bill.

“The bill improves upon current PPP loans by protecting small businesses from surprise tax increases, streamlining the loan forgiveness process, and improving the interaction between PPP and other relief programs,” Kuhlman said in a statement. “This nightmare is far from over for small businesses, but this bill will provide necessary relief for the New Year.”

Earlier this month, about 700 national and state business organizations signed a letter to congressional leaders urging them to act before the end of the year on legislation that would clarify tax-deductibility of PPP loan expenses. Though Treasury Secretary Steven Mnuchin had argued this would allow businesses to “double dip” by claiming deductions on tax-free funds, the groups estimated taxing those expenses would cost businesses $120 billion that many had not anticipated.

“Millions of small businesses are looking to Congress for more capital and support to keep their businesses alive. They cannot absorb a big tax hike during the toughest moment of the pandemic,” Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council, said last week.

According to Michael Merrill, an economist at the Rutgers School of Management and Labor Relations, the reforms to eligibility, expensing, and lending in the new stimulus package should help ensure that loans reach the businesses that need cash the most. That might not be enough to save them, though, unless the public is soon willing and able to resume shopping and dining as they did before the coronavirus struck.

“Small businesses in the retail, hospitality, and personal service sectors need not only survive the crisis--which this bill will help them do,” he said. “They also need their previous customers to return. That is much less certain.”

At best, the new PPP founds will probably only carry businesses through the early spring. The rollout of vaccines could put the country on a path toward containing the pandemic by then, but federal officials expect it will take at least until the summer before most Americans can return to some degree of normal activity.

“We expect it to take till mid-summer for vaccines to be widely available and for small businesses such as restaurants to be able to return to business as usual,” said Radhakrishnan Gopalan, a professor of finance at Washington University in St. Louis. “During this time, they not only have to meet payroll but also other expenses such as rents. So funding to meet two to three months of payroll is not sufficient.”

The latest survey of small businesses conducted by the NFIB Research Center showed growing concerns about the trajectory of the economy, with 25% of businesses saying they could have to close their doors within six months and another 22% projecting they might not survive the next year. The poll found 91% of PPP borrowers had used all their funds, and 44% had already filed applications for loan forgiveness.

According to the NFIB, 45% of small business owners said they would apply for another PPP loan if eligible, and 33% would at least consider applying. Nearly one-quarter of PPP loan recipients either laid off employees after funds ran out or planned to in the next six months, and 53% of borrowers expected to need more financial support within the next year.

About half of small businesses have recovered to near pre-crisis sales levels or are exceeding their pre-pandemic sales, but many others are still floundering. Only 4% of owners reported business conditions are back to normal now, and 47% expect them to return to normal in 2021, while nearly half believe conditions will not fully recover until 2022 or later.

Another poll of business owners released by the U.S. Chamber of Commerce last week found three-quarters of small businesses needed further government assistance to survive and 62% of small business owners feared the worst economic impact of the pandemic is still to come. Half said their businesses could have to close permanently within a year if the economic climate does not improve.

“We are not in the middle of a passing storm, after which all we need to do is clean up,” Merrill said. “We are in the middle of an earthquake, which is shifting the very ground beneath our feet. Many things will be different when the dust settles and there will be no going back to the way things were in every respect.”

According to Gopalan, small businesses face “enormous” challenges surviving the months ahead, and it may be some time before the fallout is entirely clear. Weekly jobless claims remain high and job growth has slowed precipitously in recent months, and failures of more small businesses could exacerbate those trends, hindering the broader economic recovery.

“We will see its impact in the slowness of recovery in the job market,” she said.

The restaurant industry has been hit particularly hard by the pandemic, and many cities and states have imposed new limits on indoor dining in recent weeks following a resurgence of coronavirus infections. Industry groups had hoped the bipartisan $120 billion Restaurants Act would be wrapped into the stimulus package, but dedicated relief for the food service industry was left out.

Still, some aspects of the new PPP funding could offer a boost to flailing restaurants. In addition to being able to borrow funds to cover an additional month's worth of payroll expenses, they will also be able to use the loans to purchase perishable items. Some restaurant groups praised those modifications, as well as another provision of the bill that increases tax deductions for business meals.

“Restaurants have waited months for a comprehensive relief bill that reflects the magnitude of this crisis,” Sean Kennedy, executive vice president of public affairs for the National Restaurant Association, said in a statement Monday. “Today’s bipartisan action is a ‘down payment’ that recognizes the unique damage the pandemic is inflicting on our industry.”

Experts agree restaurants and other businesses will need more federal assistance in 2021. President-elect Joe Biden has committed to pursuing another stimulus package in the new year, but given that it took nearly eight months for Congress to find a consensus on this bill, there is no guarantee more help for businesses will be coming anytime soon.

“Whether we get [more stimulus] or not will depend on the politics in Washington,” Gopalan said.

Even with $4 trillion in federal spending approved this year to counter the economic devastation of the pandemic, the consequences are likely to be felt for a long time to come. Another wave of PPP loans might sustain struggling businesses for a few months, but many will need to rethink how they operate to stay alive in the eventual post-pandemic economy.

“We can't just focus on getting back to where we were. We need to think seriously about how to get to where we need to be,” Merrill said. “And then we need to roll up our sleeves, grab our shovels, and work to get there. That will cost money.”