The $49,000 small business loan was Linda Jones’ for the taking. But ultimately, the owner of Area Rent-Alls in Westminster abandoned the loan, which could have been forgiven if it was primarily used to pay employees.
It certainly would have offset lost revenue as office and construction equipment rentals slowed during the coronavirus stay-at-home measures. But Jones didn’t think she’d be able to get some of her staff to return to work. One of her six employees called in sick last month and never came back. She’s also found it difficult to hire workers for the spring ramp up to 10 people.
“I’m short people. I can’t get people to even come in, so if I got this loan, I wouldn’t have anyone to pay,” said Jones, who took over the 58-year-old business in 1985. “I’m lucky enough that my landlord said I only had to pay 50% of my rent. But in three months, I have to pay 300% of my rent. The PPP won’t help me with that. I qualified for it but I can’t use it for what I need to.”
Jones’ concerns are similar to other small businesses and the uncertainty appears to be slowing the federal Paycheck Protection Program, which has dwindled to a trickle of activity. After the first round of $349 billion was quickly sapped of funds in 14 days, the second batch of $310 billion is now going on Day 18 and still has more than $100 billion left. The slowdown is partly due to much smaller loans to many more small businesses.
But sluggishness is also blamed on numerous new rules issued by the program overseers at the U.S. Small Business Administration. Updates were intended to curtail potential fraud, prioritize smaller businesses and respond to public shaming of large companies that received multimillion-dollar loans during the first round.
Some updates, such as one aimed at publicly traded companies, require businesses to certify the loan is absolutely necessary despite a company’s access to funding elsewhere. Then Treasury Secretary Steven Mnuchin said that loans over $2 million would be audited. But the worst part for most small businesses and lenders is what hasn’t been updated: clear guidelines on how the loan will be forgiven.
“In my mind, one of the mysteries is what is the certification process going to be for whether you qualify for forgiveness or not. What’s the bank role in that? We don’t really know that yet,” said Glen Jammaron, president of Alpine Banks of Colorado, which processed about 3,300 loan customers to the tune of about $300 million — a sum that has gone down as some customers returned their loans. “We know what the intent of it was. You got the money, you kept your employees working, you stayed open. It’s forgivable.”
That’s still more or less the same, Christopher Chavez, with the SBA office in Denver, said in an email. “The businesses have eight weeks from disbursement to pay payroll to get forgiveness – those rules remain in place.”
(Update: The SBA released its loan-forgiveness form on May 15, 2020.)
But with rules being updated frequently, there’s a growing range of interpretations to that basic guideline — and it’s scaring the small businesses that need the money the most, said Koger Propst, president and CEO of ANB Bank in Denver. One business owner borrowed $25,000 and then returned it because he was unsure if savings he had at the bank counted as other sources of funding.
“When you start looking at all of the stress that will come economically and see little businesses getting $25,000 being worried that they’re going to get prosecuted by the Treasury and they turn it down, that might be the difference of whether they will make it over the next couple of years,” Propst said.
Propst feels the small business shouldn’t have canceled the loan. But the lack of clear forgiveness guidelines has his customers waiting. Since the loans began, ANB Bank made 2,400 loans valued at $275 million. About $10 million was returned. But most of the remaining $265 million is still sitting in customer accounts.
“You know, the whole point of this was to get money out quickly to help people. But it’s clear to me, our small businesses that we’ve helped — and it’s 2,400 of them — are primarily frozen,” Propst said. “They’re afraid that if (they) spend it and (they) spend it wrong, because the forgiveness rules have not been published, it won’t be forgiven. … And so they’re waiting.”
Push to expand loan benefits
The program has already helped millions of small businesses nationwide. As of May 12, the SBA had approved $191.3 billion and 2.65 million loans in the second round of PPP. That includes at least $3.27 billion worth of loans to 52,785 small businesses in Colorado for a state average loan size of $62,000. In the first round, PPP loans valued at $7.4 billion went to 41,635 small businesses in Colorado.
They’ve helped Montanya Distillers employees in Crested Butte carry on with rum making as well as new coronavirus-inspired activities such as making antiviral sanitizer. The company even moved ahead with expanded liquor distribution into Europe this week.
“For us, since we kept our staff on payroll, the transition has been quite easy,” said Karen Hoskin, Montanya’s founder and CEO.
Other companies mentioned in past paycheck loan stories in The Colorado Sun confirmed they, too, have received the loan, as did The Colorado Sun.
But at least one business owner said he’s still deciding whether to accept the loan for his restaurants, the Silverheels Bar & Grill and Kemosabe Sushi & Sake in Frisco. The lack of SBA clarity on forgiveness is aggravating, owner Bob Starekow said. Plus, he was thrown off by unexpected guidance from the IRS preventing companies with tax-free PPP loans from taking tax deductions on payroll expenses. The IRS didn’t want people getting “a double tax benefit.”
Starekow said he’s received SBA’s assurance that he’ll get the loan but is now waiting for his bank, USBank, to share the documents so he can review and maybe sign them.
“If I get it, I want to take it, hold it in reserve, try to comply and try to get employees back. And if I don’t, I’ll send the loan back,” Starekow said. “I don’t know. I’m 40 years in this business and I don’t want to go out this way. I’d rather go out because people don’t like my food.”
Business groups have rallied policymakers to expand the usefulness of PPP loans, asking that more than 25% of the loan be allowed for rent and other expenses. There’s talk about extending the covered period beyond eight weeks, to help out businesses that haven’t been allowed to reopen fully.
“You’ve got to be cautious if your employees aren’t ready to come back or prepared to come back. You have eight weeks and if it takes you three weeks to ramp up, you may have a problem,” said Tony Gagliardi, state director for the small business organization NFIB. “But you don’t have to bring back the same employees.”
The SBA also plans to update a rule to exclude furloughed employees who refuse to return to work. If the employer made a “good faith, written offer of rehire,” but was turned down by the employee, the worker will be excluded in the loan forgiveness calculation. The rejection must be documented, according to question 40 on the SBA’s paycheck FAQ page.
Lawmakers are maneuvering to change some of the rules. Colorado’s U.S. Sen. Michael Bennet, a Democrat, teamed up with Republican Sen. Todd Young of Indiana last week to introduce the RESTART loan program. The measure would extend the Paycheck program to give small businesses more time to ramp up their workforce to qualify for complete loan forgiveness.
On Tuesday, House Democrats introduced a new $3 trillion federal coronavirus relief package, called the HEROES Act. In it, the paycheck program (starting on page 833) would extend the covered period to 24 weeks from eight, remove the limit of 25% of the loan being allowed for nonpayroll purposes, and accept applications six months longer and wrap up at the end of December.
The proposal is expected to get a House vote on Friday but faces tough partisan negotiations in the Senate. But this needs to happen fast so businesses can make decisions now. The week-long negotiations of the first CARES Act was costly as businesses began laying people off prior to the bill’s passage on March 27, said Sarah Mercer, an attorney and lobbyist at Brownstein Hyatt Farber Schreck.
“Everyone thought this was going to be an eight-week problem. Congress thought it was going to be an eight-week problem. Businesses thought it was going to be an eight-week problem. It’s looking like it’s going to be a longer problem,” Mercer said. “If we don’t help to keep these businesses afloat, the next step that we’re going to see is just this flood of bankruptcies.”
How to get the loan forgiven
Complete loan forgiveness is most straightforward for businesses that never furloughed staff. It’s also clear that businesses that use 75% of their loan to pay workers within the first eight weeks of getting the loan will be forgiven — even the large, publicly traded firms, said Andrew Comer, a partner at Fortis Law Partners in Denver.
Companies like Shake Shack, Ruth Chris’ Steak House and others returned their $10 million paycheck loan because they were shamed into doing so — but not because they would break a law, he said.
“Are there going to be legal interpretations and parameters that say no public company should ever take this? That hasn’t come out. That’s been the interpretation based on what the administration has implied and said that no public company should take this, but that’s not a rule,” Comer said. “Arguably the Treasury Department and the SBA could enforce some criminal penalties because they could argue that it’s fraud. You represented you need it. You didn’t need it. It’s fraud. But this whole thing has been so fast and so vague, that it’s gonna be difficult to enforce criminal penalties against somebody.”
And most small businesses likely don’t have access to those other funding sources and really need the loan, Comer said.
“My advice to almost everyone is to apply,” Comer said. “In this environment, 90% of or more businesses have a need. But, my advice is then to spend the money in keeping with the spirit of the law, which is to retain employment. … If you keep records that show you had an economic need, if you keep records that show that you kept employees that you otherwise would have gotten rid of, that’s a really, really good and healthy thing to do to show that you are in keeping with the overall goal of the law.”
Over at FirstBank Colorado, the bank’s website lists what expenses are allowed for forgiveness. But without further SBA guidance, the bank is sending concerned customers to their tax advisors, said Ron Tilton, FirstBank’s president.
“We do know there’s a higher likelihood that a customer’s loan will be fully forgiven if they use the funds as intended when the PPP was made available: a minimum of 75% must go to eligible payroll expenses, while a maximum of 25% may be used for other eligible expenses,” Tilton said in an email. “Based on what we know today, the business must also maintain a consistent level of full-time employees and provide compensation within a tight range of pre-COVID levels.”
Of course, companies don’t have to apply for the maximum loan amount, which is 2.5-times the average payroll for the past 12 months. Owners who feel they are unable to get all their workers back should apply for a lesser amount.
Loans that aren’t forgiven revert to a 1% interest rate that must be paid back in two years, which includes a six-month grace period.
Businesses should also talk to their banks because lenders, who are paid up to a 5% loan commission by the SBA, will be the interpreters of SBA guidance and make the forgiveness decision.
Vectra Bank Colorado, which processed 3,282 paycheck loans valued at $482 million, shared tips this week with customers who had received a loan about more details on the forgiveness process:
- Use no more than 25% of the loan on non-payroll costs, otherwise that will result in partial forgiveness
- If you had laid off workers or reduced pay by more than 25%, rehire and reinstate pay.
- If you feel you really don’t need the loan, you have until May 14 to return it without penalty.
- Document how the loan is used and store the loan in a dedicated bank account to make tracking expenses easier. This includes payroll tax filings or reports from your payroll company, plus receipts of rent, utilities and mortgage interest payments.
- It may help to align payday with the eight-week cycle, since funds paid after the eight weeks won’t count toward forgiveness.
- Follow SBA and Treasury updates
Vectra is still accepting applications including from new customers. While its average PPP loan size was $148,537, approximately 61% of approved loans were amounts of $50,000 or less. The bank, which serves customers in Colorado and New Mexico, has already begun preparing for loan forgiveness. Bruce Alexander, Vectra’s president and CEO, recommends that customers don’t wait on forgiveness since there could be a logjam.
“I do think the integrity of the program, and how it’s worked at least through a company like ours, it did exactly what it was supposed to do,” Alexander said. “I’ve received hundreds of thank you notes from customers and prospects saying, ‘You helped save my company,’ and that’s pretty rewarding.”
This story was updated on May 15, 2020 at 8:52 p.m. after the SBA released its loan-forgiveness form .