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The stimulus’s $349 billion program to pay workers at struggling small businesses, explained

It’s probably too small. But it could be a big help to many businesses.

Restaurant owner David Nichol carries a takeout order to the curb in San Francisco on March 27, 2020.
Ezra Shaw/Getty Images

The $2.2 trillion stimulus package passed by Congress and signed by President Donald Trump on March 27 is probably best known for the $1,200 checks it authorizes for most American adults. Its second-most prominent component might be the $600-per-week increase it provides to unemployment insurance.

But bigger than either of those programs in dollar terms is the Paycheck Protection Program (PPP) the stimulus package creates. That program, costing about $349 billion, offers loan guarantees for small businesses, offered through the Small Business Administration (SBA) and its partner banks.

Specifically, it lets businesses take out loans totaling 250 percent of their average monthly payroll in 2019. If they spend at least 75 percent of that money to pay their workers, they’ll be eligible to have the loans fully forgiven at federal expense. The application is a simple two-page form, plus documentation.

That is a big deal, and it’s a program that’s drawn comparisons with Denmark’s approach of simply having the government pay companies’ payrolls for the duration of the crisis. But it’s important to be clear about the bill’s design and its limitations.

First and foremost, not every American works for a small business. As of 2016 — the most recent year for which data is available — only about 47.3 percent of employees worked for businesses covered by the SBA. Generally, the SBA covers business locations with 500 or fewer employees. People working for, say, a McDonald’s franchise, or a hotel company that has locations with 500 or fewer employees, could be covered. But many others will not be. Moreover, each business’s loan is capped at $10 million, which might not be enough to cover the payroll expenses of some larger small businesses.

Second, the design is rather awkward. The Danish government is making direct grants to businesses to pay their workers. Out of a desire to get money distributed quickly through the SBA, the US program is designed as loans that could be forgiven later. But there are strings attached to the loan forgiveness aspect, leading to the possibility that some businesses will take out large loans that aren’t forgiven later, leaving them in debt.

“I have a PhD in economics, and I think this is a headache,” Adam Ozimek, chief economist at freelancing platform Upwork and the owner of a bowling alley/restaurant in Lancaster, Pennsylvania, tells me.

Most significantly for businesses looking forward, the loans are supposed to last only eight weeks. A senior aide to Sen. Marco Rubio (R-FL), who helped write this section of the stimulus bill, explains that the budgeted amount for the program is meant to cover eight weeks of payroll and operating expenses for all businesses under the SBA’s ambit. But the bill also allows others, like sole proprietors and contractors, to apply for the loans, and when the budgeted amount runs out, the program’s done.

Some states like Virginia have already announced stay-at-home orders that extend beyond that eight-week window. To cover operating expenses beyond that would require additional legislation from Congress authorizing more money for the program.

In the meantime, Rubio’s office and others are urging small-business owners to contact their banks as soon as possible to apply for the program. “The way most banks are treating this is that they’re building a wait list of interested businesses,” the Rubio aide explains. If you think this program could help you and your workers, the time to act is now.

How the Paycheck Protection Program works

While the PPP has many relevant differences with the famed Danish approach to coronavirus unemployment, the rationale is the same. The government has forced many businesses to shut down with little or no warning, and the government should cover the costs of that decision.

The SBA has put out an admirably brief, and clear, explanation of how to apply for the program. It is run primarily through lenders who are part of SBA’s 7(a) loan program, its primary means of providing financial assistance to small businesses (you can see a list of the biggest 7(a) lenders here). For people who don’t get them forgiven, the loans have an extremely low interest rate of 0.5 percent; interest payments are deferred for the first six months after the loan is taken out. If not forgiven, the loan must by paid in full within two years.

The window to apply is short: Applications open on Friday, April 3, and close on June 30. For independent contractors and the self-employed, they open slightly later, on April 10.

The loans are available to a surprisingly long list of businesses. Firms with 500 employees or less, which are SBA’s usual clientele, are eligible, as are sole proprietorships, contractors, and the self-employed. Nonprofits are eligible if sufficiently small, and there are special circumstances in which locations with more than 500 employees can be eligible for SBA loans.

The loans also draw a distinction between firms with 500 or fewer employees and locations. For certain industries, specifically restaurants and hotels, the stimulus bill specifically allows locations with under 500 employees to apply for loans even if they belong to a large national chain. Hilton, for instance, is hardly a small business: It has about 173,000 employees worldwide. But an individual Hilton hotel could have fewer than 500 employees, making it eligible for paycheck protection.

Ozimek tells me he’s been trying to navigate the application process for his small business: Decades, a bar/restaurant/bowling alley/arcade in Lancaster, Pennsylvania. The eligibility requirements are laxer than normal for an SBA loan, but still considerable. Employers must submit their last 12 months of payroll reports from the IRS, including detailed information on gross wages, state/local taxes, vacation pay, and more. The idea is to ensure employers aren’t exaggerating their normal payroll costs to get a larger loan.

When it comes to forgiving the loans, several restrictions apply. Businesses cannot be forgiven for loans covering payroll above $100,000 per person; it’s not clear if this is inclusive or exclusive of benefits like health care. Businesses must have spent 75 percent or more of the loan on payroll costs to qualify for forgiveness, and the forgiveness amount will be reduced if payroll costs are lessened through layoffs or wage cuts. The loans are generally capped at $10 million each, which might limit their usefulness for particularly large locations or firms.

Difficulties with the program

The biggest question mark about the legislation is money.

The loans are designed to cover eight weeks of expenses. Let’s say a business wants to use the loan to cover expenses starting this week. Eight weeks gets you to the week ending Friday, May 22.

It’s far from clear that the coronavirus crisis will be over then. In Virginia, most notably, the government is asking businesses to shut down for at least two and half weeks after that point. That means there will be more payrolls the program has to cover, and for longer.

Columbia economist Glenn Hubbard and American Enterprise Institute economist Michael Strain, who estimated that the demand for this kind of loan could easily exceed $1 trillion, have proposed a $1.2 trillion relief program. This means the $349 billion currently appropriated could dry up rapidly, especially if there’s a mad rush. Hubbard, who was George W. Bush’s chief economist, is hardly some big-spending liberal; economists across the spectrum are warning that we need more small-business support, now.

Ozimek, the economist and small-business owner, says this kind of uncertainty is making it hard for him and similarly situated business owners to plan. When the coronavirus hit, he laid off servers and cooks at his restaurant and encouraged them to go on unemployment, which is newly generous after Congress added $600 a week across the board to checks.

Then it became clear that paycheck protection loans would be available. Ozimek now faces a choice. He could hire back all of his staff for eight weeks using the PPP money. But then he’d have to either lay them off again or continue to pay them after the loan money runs out, if stay-at-home orders are still in place. That might wind up costing the business more, and may also be worse for workers depending on the unemployment they’re getting.

What he can’t do is just take out a PPP loan to cover his mortgage and basic operating expenses while the restaurant’s shut down — he wouldn’t be using 75 percent of the loan to cover payroll, which means the amount couldn’t be forgiven.

“First the state shuts down your business and you want to get your workers on UI as much as possible,” Ozimek recaps. “Then the Senate starts discussing a bill that seems like it will pay based on whether you’ve retained your staff. It sets off an early panic where it seems like it’s too late. Then you hear it includes a rehiring provision: As long as we rehire by June 30, we’re fine. We can borrow money, use it to cover operating expenses, and then we rehire by the 30th and everything’s fine.

“Then in the last 24 hours, Treasury puts out their guidance and says actually, you have to use 75 percent of this for payrolls. So now our plan to rehire by June 30 and use a lot of this on operator expenses, mortgage rent, and utilities — you can’t do that anymore.”

Ozimek and the Economic Innovation Group’s John Lettieri have proposed a small-business loan program with less stringent spending requirements and long-term repayment of up to 20 years to give companies a longer period to recover.

But that solves a different problem than paycheck protection does. PPP is meant to both help small businesses remain solvent and to pay everyone on their payroll. To the latter end, the restrictions on using the money for things besides payroll limit the program’s effectiveness at maintaining small businesses’ solvency, which might be less relevant for firms whose workers would benefit from emergency $600-a-week unemployment.

The bottom line is that the paycheck program does some good, but it’s too small and, arguably, too inflexible. It was already clear that Congress would need to act again. For its “phase four” stimulus, it should be clear about the goal: whether to help people who are out of work primarily through their old employers or through unemployment insurance, in addition to whether to bail out small businesses so that they persist into the future, above and beyond bailing them out so they can pay workers. Trying to do both appears to be creating knotty interactions between programs — and leaving small-business owners in a place of uncertainty.

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