Paycheck Protection loans: ‘Free money’ not flowing as fast as a month ago

Small businesses across the country gobbled up the first round of federal payroll loans in less than two weeks.

The Paycheck Protection Program had its flaws, as would most massive relief plans conceived nearly overnight and rolled out at lightning speed. The idea was to get money to businesses — mostly with fewer than 500 employees — so that they could withstand the coronavirus’ initial devastating punch.

The federal government agreed to forgive the loans if businesses followed several requirements, including using most of the money to pay employees for the next two months.

For businesses, it felt as close to free money as it comes. No wonder the program burned through $349 billion so quickly. (The Tampa Bay Times and its related companies received an $8.5 million loan.)

When Congress agreed at the end of April to add another $310 billion, it seemed certain the money would disappear just as fast. Less than 1.7 million of the nation’s 30 million small businesses received a loan during the first phase. Banks that distributed the funds said thousands of other businesses had applications waiting when the money ran out. Many small business owners complained that they felt elbowed out of the way by bigger competitors who took advantage of previous banking relationships.

But nearly three weeks after the second pot of money became available, there’s plenty left, about $115 billion.

The spigot has slowed in recent days, too. The banks approved an average of about $16 billion in loans a day from the start of the second phase on April 27 through May 8. In the past week, the number has fallen to less than $1 billion a day. At that rate, it would take until at least September to give all the money away, long after the program sunsets on June 30.

So why the falloff?

Some larger, name-brand companies likely thought twice about applying after public shaming endured by the likes of Shake Shack, the Los Angeles Lakers and the parent company of Ruth’s Chris Steak House, all of which returned the money or didn’t accept the loans. The Treasury Department, which oversees the program, also banned publicly-traded companies and others that can acquire financing elsewhere from getting Paycheck Protection loans.

Another factor: Many businesses applied for a loan with more than one bank, hoping to increase their chances. They could accept only one, so duplicates puffed up the first round of numbers.

Tom Zernick, president of First Home Bank’s Small Business Administration lending division, said most of the bigger, more sophisticated businesses that needed million-dollar loans already took advantage of the program.

The numbers back him up: About 4 percent of the loans from the first phase were for more than $1 million, according to the Small Business Administration. In the second phase, it’s less than 1 percent.

That leaves the second phase to smaller businesses with lower payrolls. First Home Bank, for instance, approved about 2,500 loans worth a total of $525 million in the first phase. In the second phase, the bank has already approved more loans — about 2,600 — but for only about $260 million.

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Zernick added that self-employed business owners were shut out for the first week of the first phase. Now, they can apply and are often looking for only $10,000 to $25,000, he said.

“For us, the average loan amount has dropped in half,” he said. “I think something similar is happening at other banks, as well.”

From the start, business owners and their lawyers have balked at the lack of guidelines about how to ensure the Treasury Department forgives the loans. The ongoing uncertainty has kept some businesses from applying. Other companies don’t think they can spend 75 percent of the loan on payroll, one of the requirements.

The last thing many struggling small businesses want is to add debt that they will have to pay back, even at ultra-low interest rates.

“I think businesses are starting to take a second look and saying, ‘Maybe I don't need this right now,’” Zernick said.

He hopes that Congress will shuffle any leftover Paycheck Protection funds into traditional Small Business Administration lending programs, which can help businesses pay for rent and pay off high-interest loans.

He encouraged any small business that needs help paying employees to consider a Paycheck Protection loan, while it lasts.

“Contact your bank to figure out if you’re eligible,” he said. “It’s a good program.”

And lots of money is still available.

Paycheck Protection Program

First phase: 1,661,367 loans for a total of $342.3 billion.

Second phase: 2,686,493 loans for a total of $193 billion. More than $116 billion remained to be lent out, as of Thursday. The program ends June 30.

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