The frustration surrounding the Paycheck Protection Program (PPP) is palpable. It was funded with $659 billion ($349 billion initially plus a second $310 billion infusion) with the aim of helping small businesses maintain payroll (or, well, paychecks) for their employees during the COVID-19 crisis.
Between funds running out and publicly traded companies taking millions of dollars from the program, it’s not a big stretch to say the backbone of the American economy has gotten the short end of the stick so far. Late last week, we received some hope in the form of an audit announcement. Naturally, when folks hear “audit” coming from a government employee, a nervous feeling starts to creep in. Rest assured, these aren’t your typical audits—and they aren’t aimed at the small business owners who have been playing by the rules.
Who Will Get Audited for PPP Loans?
Over 200 publicly traded companies have received millions in PPP loans. According to a New York Times report, the list of companies that received money includes firms that recently bragged about access to other sources of capital (a fact that should have disqualified them from the program), companies that have had legal issues due to their accounting practices, and businesses that have paid their executives millions of dollars in recent years.
In short, companies that didn’t meet basic loan guidelines received funds.
When submitting a loan application, applicants must initial next to a list of “certifications.” By signing them and submitting the application, these businesses are legally certifying that they fit these criteria. At the top of the list is this: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
To learn about the two primary SBA loan types—the PPP and EIDL—check out this article comparing the two and explaining how to apply.
Part of the reason these companies are coming under fire is that many have other ways to access capital that don’t make the loan “necessary to support ongoing operations.”
In response, Treasury Secretary Steve Mnuchin stated that any company that accepted more than $2 million dollars from the Paycheck Protection Program will be audited to ensure they actually qualified for the program.
If any company inappropriately applied for and accepted funds, they could face criminal charges. Secretary Mnuchin went further and chastised big businesses, reminding them these funds were meant to keep workers on the payrolls of small businesses, not to line the pockets of public companies and big chains who have access to other sources of capital.
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Can They Return the Funds?
Many of these large and public companies are now returning the money. Whether it’s due to negative publicity or the threat of criminal liability, more than $2 billion from the first round of funding for the program has since been declined or returned by large corporations.
Under Secretary Mnuchin’s guidelines, if any companies received funds but did not actually qualify for the PPP loan they have until May 7, 2020 to return those funds to the Small Business Administration (SBA). Any returned loans by that date will be deemed to have been sought “in good faith.”
Earlier in the month (before the second round of PPP funding was passed), Jennifer Kelly, a spokesperson for the Small Business Administration said this to Forbes about Shake Shack’s returned $10 million loan: “The money will go back in the fund. However, new loans can’t be made against those funds until Congress authorizes new funds.”
What’s unclear is whether returned loans are actively being reallocated to new applicants now and what will happen when this second round of funding is depleted. We’re trying to get to the bottom of it before the second round of funding runs out, but we’re hopeful that all the returned loan amounts will make it into the hands of small businesses with a real need for the capital.
What The Math Means for SMBs
The Treasury Secretary pointed out in his statements that the program is getting funding to small businesses with an average loan size of $206,000. This means the declined and returned $2 billion could cover another 9,700+ loans to small businesses who desperately need it.
I Received a PPP Loan. Should I Return It?
In addition to the large and publicly traded companies that were out of line for accepting the loan, we’ve also seen several small-ish businesses struggle with the decision to keep the loan or return it. Unfortunately, because the guidance is somewhat vague, there is no one-size-fits-all answer to this, but there are a few points to consider.
If your business received a loan for over $2 million, you know that an audit is coming. Be prepared to back up not only how you spent the money but to prove that the funds were the only way you saw to keep your staff on the payroll.
That’s ultimately what it comes down to. The spirit of the bill was to keep as many people employed as possible by keeping as many small businesses open as they could. If your loan was well below the $2 million mark, it’s less likely you’ll face an audit. But if you have other sources of capital that could be used to pay employees, you should consider whether you’re staying true to the certifications you made on the loan application.
Small businesses are scrappy, and we’ve seen several pivot their business models to find new revenue streams in the midst of this crisis. If you’re one of those businesses who have found a way to survive in the time it took the bank to process your loan application, you might consider returning it, too.
We’re Here for You
Our customers are small businesses. This is personal for them and it’s personal for us. It’s okay to feel a little vindicated when we hear that these companies will be held accountable for taking cookies from the cookie jar that didn’t belong to them, even if they decide to hold on to their PPP loans.
Starting a business is hard. Running a business through a global pandemic is even harder. We exist to help business owners beat the odds, and we take our responsibility very seriously. We’ve created a loan calculator to help you apply for these loans correctly. We also have a COVID-19 resources page where you can find information about everything from the differences between loan options to how you should pay yourself, and many other challenges businesses are facing.
To small business owners everywhere who are feeling frustrated, worried, or alone: we’re rooting for you.