Desperate small businesses await fresh aid with or without flaws

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Eight months after they got a $56,000 forgivable loan from the federal government, Lauren and Ben Reese lie awake nights talking about whether they’d do it again.

Don’t get them wrong. Like most small-business owners who took part in the $523 billion Paycheck Protection Program, the Reeses are grateful. In March, business dropped 30% overnight at their two cafes in Beaverton, Oregon. The taxpayer-funded relief helped them keep the doors open and retain most of their dozen employees.

Read more: Addressing COVID-19 challenges in a small business

But there were glitches galore. The program’s rules changed midstream and were sometimes difficult to follow. Borrowers had little control over how they could spend the money. Publicly traded companies tapped the program for millions, drawing criticism. Gaps in the government’s data make it difficult to gauge the program’s effectiveness and its level of fraud.

Lawmakers have sought to address some of the program’s more obvious failings. Plans call for revising the program to focus more on minority-owned and smaller enterprises that have lost money, make it easier to have loans forgiven and change tax rules to favor business owners.

“We’re really anxious to see if the next round will have ‘lessons learned,’” said Lauren Reese, who runs Lionheart Coffee with her husband. “That said, we’d take any help we can get, even if that help is confusing, complicated and uncertain.”

But with desperation mounting over a resurging coronavirus and wide vaccine distribution still months away, one basic weakness can’t be fixed: Congress designed the initial program to help businesses for two months. Those two months ended six months ago.

A new round of aid may not arrive in time, said Patrice Frey, chief executive officer of Main Street America, a small-business advocacy group. One in four small companies said they’ll go belly up if economic conditions don’t improve over the next six months, according to a National Federation of Independent Businesses member survey conducted earlier this month. “We’re staring down a dark tunnel,” Frey said.

Many of the program’s initial flaws can be traced to the speed of its creation and the urgency of its rollout. Since April, the U.S. Small Business Administration has made more loans than it had in its 67-year history, throwing pandemic lifelines to 5.2 million companies, or about 80% of the nonfarm employers that qualified, according to the best available data. The average loan was about $101,000.

Little about the program has been straightforward. Its definition of small business was expansive enough to include companies with far more than 500 employees. Its loan amounts were based on the number or workers — and because almost half of Black-owned businesses have no employees, according to a survey by Guidant Financial, advocates and lawmakers say Black entrepreneurs got short shrift.

The program’s rules were a moving target. If recipients wanted their loan to be forgiven, they had to use 75% of the money for payroll. Then 60%. And they needed to do it in eight weeks. Then 24. The Internal Revenue Service told PPP recipients that they couldn’t deduct normal business expenses if they used forgiven loans to cover them. Members of Congress, including top-ranking Democrats and Republicans on both the House and Senate tax committees, said that’s the opposite of what they intended.

And while the program saved countless jobs, nobody can say just how many. Neither lenders nor the SBA ensured that borrowers faithfully reported the number of workers they were supporting with the loans, which makes the Trump administration’s estimate of 51 million jobs preserved by the PPP untenable.

Instead, the agency collected a mountain of invalid — and often absurd — data. One example: The SBA’s database of PPP borrowers shows that 20 nail salons across the U.S. each said they had 500 employees, or 10,000 nail techs in all. But the 20 salons borrowed a total of only $220,000 through the PPP — or about $22 for each of those employees.

The SBA said it expects better job numbers to come with loan-forgiveness applications. As of Nov. 22, lenders had submitted more than 595,000 of those, representing about 11% of participants.

Congress is considering a plan for a new round of PPP funding that would target the aid to businesses with no more than 300 workers — and only those that lost at least 30% of their revenue in any quarter of 2020. The legislation would set aside funds for minority-owned businesses and smaller borrowers. In the first round, 13% of minority-owned businesses said they couldn’t get a loan, compared with 8% of all businesses, according to the U.S. Chamber of Commerce.

Entrepreneurs need more flexibility from the program, said Brendon Ayanbadejo, who operates roughly 50 Orangetheory Fitness sites, most of them in California. The gyms received $4 million from the PPP, and Ayanbadejo and other investors have chipped in $10 million more, he said. Even so, gross revenue is off by as much as $180,000 a day, he said, and he’s had to furlough hundreds of workers because of state-mandated closures while he also grapples with making rent payments.

“The Achilles heel for the PPP is that it’s not going to help us bring back employees anymore,” said Ayanbadejo, a linebacker for the 2013 Super Bowl-winning Baltimore Ravens. “If we could use our money more at our discretion, that would have been better for us. It gives us a better chance to open, and if we’re open then we’re going to have employees, and of course then we’re going to pay them.”

Bloomberg News
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