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14 years in 14 days: Inside the chaotic rollout of the SBA’s PPP loan plan to save America’s small businesses

The government was under a time crunch to get much-needed funds to small businesses in a matter of days. But unintended consequences left many companies out in the cold.

Nick Gitsis has been working hard to see his small family restaurant through the coronavirus crisis. Located in what he describes as a “sleepy town” in Warsaw, N.Y., Gitsis’s business, SilverLake Family Restaurant, has been getting creative to keep the money going and retain its 25 employees. “We have a drive-thru window for takeout, but we’re even selling some bread and cheese and milk and cucumbers to make it easy for the people who don’t want to get exposed in the grocery stores,” he tells Fortune.

Gitsis applied for a roughly $125,000 loan from the Small Business Administration’s Paycheck Protection Program through his local bank of 30 years, Five Star Bank. But on April 18, he was informed there was no money for his loan after funds ran out the Thursday before—shortly after finding out that big restaurant chains, like Ruth’s Chris Steak House, received millions in loans.

“They get their millions the next day, and this is a company that’s making [millions] a year,” he says. “It was disappointing, because that’s not a small business. I thought the aim of the PPP is to help small businesses keep people working.”

Funds for the first round of the SBA’s Paycheck Protection Program ran out on April 16, and now many small-business owners are frustrated that over 200 publicly traded companies received over $750 million in loans, according to a New York Times report—and several large restaurant chains including Shake Shack, Potbelly, and Ruth’s Chris Steak House qualified for $10 million loans (the maximum loan available). In addition, three public companies affiliated with Monty Bennett, a Texas hotelier, applied for $126 million, including Ashford Hospitality Trust, which applied for $76 million in 117 separate loans, according to regulatory filings. Some small businesses are even suing banks like JPMorgan Chase, Bank of America, Wells Fargo, and US Bank for allegedly prioritizing these bigger customers.

The rollout of the SBA’s Paycheck Protection Program was chaotic, and problems were exacerbated by an intense time crunch that tasked lenders and the government with distributing $349 billion to small businesses in a matter of weeks. Banks were waiting on guidance from the government on how to roll out the loans till the night before the program was set to debut. On the day of the launch, many small businesses were upset over some big banks prioritizing current lending or business customers first, and in just 13 days, the initial $349 billion ran out.

It was “more than 14 years’ worth of loans in less than 14 days,” U.S. Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza announced in a joint statement when funds first ran dry.

In all of 2019, the SBA guaranteed less than $30 billion in loans, leading some observers to be impressed the program got off the ground—and worked—at all. Maria Earley, a financial services regulatory and enforcement partner at international law firm Reed Smith, “applaud[s] the regulators for getting the thing up as quickly as possible,” she recently told Fortune. Even many smaller banks told Fortune they thought the program was doing a lot of good in their communities. Indeed, money has already been approved for over 1.6 million businesses. Brett Palmer, the president of the Small Business Investor Alliance (SBIA), based in Washington, D.C., was active early on consulting with Congress for the CARES Act, and he tells Fortune, “It’s very easy to Monday-morning quarterback the writing of the CARES Act” and criticize its shortcomings. “But when this was written, it was with almost zero time, getting blindsided, and really at the front end of a maelstrom. You didn’t know what was coming, and you just knew it was going to be god-awful. The triage situation they put together was the best they could,” he says. “Nothing works perfectly, but the underlying structure really hit the nail on the head with what small businesses need.”

Through interviews with small businesses, small banks, lawyers, and industry experts, Fortune pieced together a picture of a well-intentioned program with a multitude of unintended consequences that has left many small businesses—those same ones initially targeted to receive much-needed help—still struggling to get lifeline funds.

The beginning

When by early March the coronavirus was starting to spread across the U.S., many state governors made the tough choice to issue stay-at-home orders in hotspot cities (like New York). And for most small businesses, that meant an immediate hit to—or even cessation of—their income.

In response, Democrats and Republicans in Congress debated over a bill first proposed by Sen. Marco Rubio as part of the larger $2.2 trillion CARES Act, to provide loans (which could become forgivable grants) for small businesses. This was later named the Paycheck Protection Program. The program partnered the Treasury and Small Business Association with banks and other SBA lenders to fund loans, which were intended for small businesses (which the PPP defines as 500 or fewer employees). The money was intended to flow to those “who could not get money like that from anywhere else,” Sen. Rubio, the chairman of the Senate Committee on Small Business and Entrepreneurship, recently noted in a video on his Twitter.

Of course, no legislation gets written without the help of lobbyists. The National Restaurant Association, headquartered in D.C., had an ask: that chains be allowed to participate. Hospitality and restaurants were deemed some of the hardest hit by the coronavirus pandemic, leaving many devastated amid the crisis.

Carve-outs written into the nearly 900-page CARES Act by Congress allowed larger companies and franchises in industries like hospitality and restaurants to receive funds, so long as they did not have more than 500 employees per location. “Clearly, people have seats at the table when legislation is being written,” notes Christopher Rossi, a partner who focuses on small business investment companies (SBICs) at law firm Pepper Hamilton.

Indeed, in a post on LinkedIn following general outcry, Shake Shack executives wrote they would return their $10 million PPP loan, stating, “Our people would benefit from a $10 million PPP loan, but we’re fortunate to now have access to capital that others do not…Until every restaurant that needs it has had the same opportunity to receive assistance, we’re returning ours.” The company is publicly traded, with 189 locations and nearly 8,000 employees, and nearly $595 million in revenue last year.

SBA PPP-Shake Shack-Loan
Large restaurant chain Shake Shack qualified for a $10 million loan.
Ben Gabbe—Getty Images

Others like Ruth’s Chris Steak House, whose owner was able to receive $20 million in PPP loans through two subsidiaries, announced it was also returning the money following pressure from new SBA guidelines.

“Optically, I think it looks terrible,” says Ken Logsdon, a partner at international law firm Dorsey & Whitney. But the bigger chain companies that, in many cases, had thousands of employees, were technically eligible for the program.

And restaurant chains weren’t the only larger businesses receiving loans. Companies like biotech Wave Life Sciences and cruise ship company Lindblad Expeditions, both of which have market caps of over $200 million, also received loans. AutoNation, an auto retailer with a market cap of over $3 billion, also received and later returned a $77 million loan. And according to a New York Times report, several large but less known companies received funds despite having financial or legal problems.

Following backlash about the kinds of companies getting the loans, those like Sen. Rubio declared aiding “multiple subsidiaries of a national brand [like Ruth’s Chris]” was not the intent of Congress, and that “the regulatory guidance allowing this does not reflect legislative intent & should be corrected,” he said in a tweet on April 20.

Congress waived certain rules, but not others

There was always the issue of time.

Those like the SBIA’s Brett Palmer had input from the beginning. He advised members of Congress about the needs of small businesses for the CARES Act, and notes that one thing was always clear: The more restrictions put into the bill, the more harm would be done to businesses in the interim waiting for funds. “I explained that to the folks who were writing the bill this time [and] said, you’re going to have to get comfortable that there are going to be problems…if you want to get the money out fast,” he recounts. “There was no way to build something that was going to work for everybody, but they were trying to.”

The plan was put together hastily: Based on the rapid impact of nationwide shelter-in-place orders, the funds needed to get to small businesses quickly. The Treasury’s Mnuchin set what many banks found to be an unrealistic timeline: “This will be up and running tomorrow,” Mnuchin said on the eve of the April 3 launch. “You get the money. You’ll get it the same day.”

In the interest of time, the PPP was largely created out of the traditional SBA 7(a) loan program, with a few changes—including the 500-employee guideline and, perhaps most notably, carve-outs for certain industries like accommodations and food services that fall under the North American Industry Classification System code 72. Those modifications departed from SBA rules to allow those businesses to qualify.

In the meantime, some small banks were funding much smaller loans. David Reiling, the CEO of Minnesota-based regional bank Sunrise Banks, tells Fortune that his bank was processing loans for as little as $1,300. “My empathy goes out to those workers that work at Shake Shack or Ruth’s Chris that are the waiters and dishwashers,” he says, but “a $10 million loan at our rate on a rough basis is 40 loans—that’s 40 more businesses” that could have been funded. But “to the extent that someone is able to take on such a large borrowing, of course that crowds out [smaller businesses],” John Asbury, CEO of regional bank Atlantic Union Bank, based in Virginia, tells Fortune. The bank was able to get over 6,500 loans approved before funding from the first round was cut short and had thousands of applications backlogged for the second round.

But there was another debate ongoing about the kinds of exceptions made for certain businesses that deviated from traditional SBA guidelines.

One area largely excluded from these waivers was private equity. Private equity trade groups including the American Investment Council (AIC) and the Association for Corporate Growth (ACG) lobbied heavily early on to include private equity–backed companies in the $349 billion PPP round, arguing against certain affiliate rules that apply to regular SBA loans. Private equity is what Pepper Hamilton’s Rossi characterizes as a “disfavored political group.” At issue: so-called affiliate rules. These are based on a complex set of tests including ownership (majority stake), stock options, management, and control of a company—but generally, if a PE firm owns a majority stake or controls a number of portfolio companies, those companies are considered to be affiliated, which in many cases could drive the employee count for any one business far above the 500-person threshold and exclude lots of businesses that might otherwise qualify for the loan. But several lobbying groups largely failed to amend affiliate rules for Round 2 of the PPP. The ACG, a middle-market group for investors and professionals, announced on April 4 that it received notice “from many of its members of massive layoffs anticipated” due to affiliation rules for the PPP.

Meanwhile, SBIA’s Palmer tells Fortune, “Candidly, we would have liked to see the affiliation rules be broader,” to cover more realms of private equity and venture capital–backed companies—including those who would otherwise qualify for SBIC investment (one hallmark requirement for companies to qualify for SBIC investment is to have employment primarily in the U.S., he says, something that would go a long way in safeguarding jobs via the PPP). That also includes some family-owned businesses that may have multiple companies (like a roofing company and a restaurant, he notes) getting “tripped up” by the affiliate rules.

The upshot: “The fact that we’re seeing the Ruth’s Chrises and Shake Shacks taking advantage of this program because they have the luxury of not having to worry about the affiliate rules,” Logsdon notes, is “a good glimpse of what happens when you pull [the rules] back.”

Fintechs were largely left out

Funding Circle’s Ryan Metcalf has been frustrated.

Metcalf, the head of U.S. regulatory affairs for the U.K.-based fintech lender, notes that lenders such as his specialize in the mom-and-pop-type companies with smaller loan needs largely overlooked by bigger banks. Though many fintechs applied to become SBA-approved lenders, approvals came late in the game. In fact, Fortune reported that many fintechs like Funding Circle, OnDeck Capital, BlueVine, PayPal, Intuit’s QuickBooks, and Square received approval from the SBA just as Round 1 funds ran out.

Given their smaller client base, some argue the smallest of businesses might have had a better shot at getting funding had fintechs been approved to lend sooner. An analysis of SBA data by Plaid, a fintech company providing software to some nonbank lenders, found that nearly half of the PPP funding in Round 1 has gone to just 4% of small-business applicants. For one, Funding Circle preprocessed thousands of loans before the second round opened up, and Metcalf says some 61% of those PPP applications were for $50,000 and under (the average loan size BlueVine has processed is also $50,000). Meanwhile, Jackie Reses, head of Square Capital, tells Fortune the fintech’s average loan size thus far has been just $25,000.

“The reality is this program has not met the needs of the grand majority of true small businesses, Main Street small business,” Eyal Lifshitz, CEO of BlueVine, recently told Fortune of the first round of the PPP.

Welcome to Round 2

The million-dollar question: Who will give the money back?

So far, several of the larger companies at the forefront of the controversy (including Shake Shack, Ruth’s Chris Steak House, Wave Life Sciences, and Kura Sushi USA, a subsidiary of a Japanese restaurant chain, with loans ranging from $6 million to $20 million) already announced they would return the loans, among others including NBA team the Los Angeles Lakers. As of Tuesday, 18 public companies have returned loans so far, according to Washington, D.C.–based data analytics firm FactSquared, which built a tracker. But many others (of the 41 largest public companies to receive the PPP loans) have either confirmed their intent to not return the loans, or the decision was pending, according to a recent CNBC report.

Now, as Congress deploys another $310 billion for the program—pushing the total since its inception to an eye-popping $659 billion—many of the issues are back at the fore. But inked into the bill (and bolstered by additional guidance) are some notable provisions aimed at remedying those issues from the first go.

SBA PPP-Trump Signing Ceremony
U.S. President Donald Trump speaks during a signing ceremony for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act, on Friday, April 24, 2020.
Anna Moneymaker—The New York Times/Bloomberg/Getty Images

New guidelines from the Treasury and SBA, noting it is “unlikely” that public companies “with substantial market value and access to capital markets will be able to make the required certification in good faith,” and thereby qualify for the loan, has many public companies already returning loans (or feeling pressured to). On Monday, the SBA said some $2 billion of loans were either denied or returned, just as the SBA’s system opened back up, which will be added to the current $310 billion pool.

Additionally, Mnuchin told CNBC on Tuesday the government will audit any company taking out more than $2 million from the PPP. Sen. Rubio also recently announced the Senate Committee on Small Business and Entrepreneurship “will conduct aggressive oversight” into the use of the PPP amid concern it was lacking in the first round.

For those smaller companies, the new PPP funding round includes some $60 billion for Economic Injury Disaster loans, $10 billion of which are grants. And of the $310 billion for PPP loans, $60 billion is set aside for small institutions, including half of that sum for lenders with $10 billion or less in assets—an attempt to help service those smallest businesses who missed out on Round 1. However, those like Funding Circle’s Metcalf still don’t think it’s the right medicine for what’s ailing the program. He argues if the SBA wanted to cater to the smallest businesses, it would allot separate money for loans $50,000 and under, or for companies with 20 or fewer employees, for example, rather than refueling smaller lenders whose average loan size can be in the hundreds of thousands.

“They got it wrong on this round, and hopefully there will be an additional round after this [$310] billion because it will go in a matter of days,” Metcalf suggests.

Round 3 is also already on the brain for Atlantic Union Bank’s Asbury: “The real question in my mind is, if after the second round of funding, there is still great demand from the program from the traditional businesses that qualified, the smaller ones, will Congress support a Round 3 of funding? I hope they will.”

But for those like Nick Gitsis, not getting the PPP loan for his local restaurant soon means permanent layoffs. He tells Fortune he has already had to lay off some staff and is keeping many on through what he calls an “on-call basis.”

Gitsis was informed Monday that he’s in the queue for new funds but hasn’t heard anything more.

More must-read finance coverage from Fortune:

—Why Goldman Sachs thinks Q1 GDP will be “worse than it looks”
—5 lessons for the coronavirus recovery, from an expert on success and failure in crisis
—What the law says about forcing employees back to the office
—This time, the banks were ready: How the Big Four prepared to survive the coronavirus
Where investors can find income in a coronavirus-crushed market
—Listen to Leadership Next, a Fortune podcast examining the evolving role of CEO
—WATCH: Why the banks were ready for the financial impact of coronavirus

Subscribe to Fortune’s Bull Sheet for no-nonsense finance news and analysis daily.

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