Should rich execs be able to get PPP loans?
When it was announced that Kanye West’s clothing company Yeezy received a PPP loan in the midst of the pandemic, Reddit users took to the platform determined to crucify West. They felt he didn’t deserve the loan. After all, why would West’s company need government assistance when he is worth $1.3 billion and started construction on a new mansion this summer?
But Yeezy wasn’t the only big brand to get a PPP loan. A few weeks later it was announced that other billionaires, including Don Hankey (Midway Car Rental), Alec Gores (Gores Vitac Holding), and Jim Justice’s (governor of West Virginia and one of the state’s wealthiest) all received PPP loans worth millions of dollars.
It was instances like this, coupled with other misconceptions and regulatory hiccups that only helped fuel the belief that PPP loans were a waste of tax dollars because they were further padding the pockets of the rich instead of those actually in need. In reality, these misconceptions couldn’t be further from the truth.
PPP loans have nothing to do with an executive’s net worth
Federal PPP loans have covered paychecks for as many as 51 million small business employees nationwide. On a local level, 93 percent of small business employees in Utah were supported by a PPP loan says David Carlebrach, VP of international investment for World Trade Center Utah.
Regardless of the internet’s angst over the high profile loans, thousands of companies were helped in some way by PPP funding and these rich executives weren’t wrong for applying for such funding. After all, there weren’t many rules that determined which businesses deserved funding over others.
In fact, it was exceptionally easy to apply for a loan. To qualify, the business must: 1) support less than 500 employees (though, there are exceptions to this rule depending on industry and other factors), and 2) Have the principal location of business be inside of the US. By regulation standards none of the billionaires did anything wrong for applying to the program, they were just using the funding available to them.
“People thought that if you weren’t severely impacted by the [economic downturn] that you weren’t supposed to apply,” says Carlebrach. “But there was no test.”
According to regulations, even though West’s net worth could keep Yeezy afloat for a few years in the event that everyone stopped buying sneakers, there was nothing keeping his company, or others like it, from applying for the program based on executive wealth alone. But that doesn’t mean the program wasn’t riddled with other kinds of problems.
PPP loans are about helping employees
“[Yeezy] probably isn’t the only company who got a PPP loan who probably didn’t need it,” says Roger Christensen, SVP of marketing at Bank of Utah. Christensen explains that despite public misconceptions about the program, the sole purpose of PPP was to keep employees paid and contributing to the economy, regardless of the worth of company executives.
“It’s important to remember that the money is to be used for employees. Even if the owner [of the company] is wealthy, the funds are there to help them,” says Christensen. “[West] can choose to lay off his employees, or keep them employed with the funds, [it is up to him.] That was the whole point of the program.”
Christensen and his team at Bank of Utah also mention that while the funds are to be used to protect the paychecks of company employees, it will only cover up to $100,000 per employee. Additionally, the amount lent to qualifying companies had nothing to do with the worth of the company, rather it was dependent on the amount they spent on payroll in 2019.
On June 5th, the government announced a round of changes to the program that would broaden the scope of funding even more. To receive total loan forgiveness, a company can now use 60 percent of the funding on payroll (75 percent prior) with 40 percent (25 percent prior) allotted to cover other business costs. If the company spends more than 40 percent on other business costs like rent, mortgage, or utilities, they might not qualify for loan forgiveness.
Those who filed after June 5th would have a five-year loan term with one percent interest if they were unable to have the loan fully forgiven. Those who filed before June 5th would have a two-year term loan. Regardless of how the company chose to slice it, the terms of PPP loans were attractive no matter the industry.
“That’s why there was such a rush, it was basically free money,” says Rand Matthews, SVP at Bank of Utah, mentioning that despite the public concern of funds running out, a surplus of 138 billion was left over when the program closed to new applicants on August 8th.
That doesn’t mean PPP loans were always fair
Christensen says that the government’s desire to get the funds to market as quickly as possible could be part of why as many as 52 percent of small businesses were denied before program regulations were changed. He also says that many banks were too overwhelmed with the sheer number of applications and they couldn’t properly process all of them, or assist their clients with some of their most pressing questions about the program.
“I think a lot of people weren’t denied, but the larger banks were so overwhelmed with applications that they didn’t have time to get through all of them. So they were like ‘where’s my loan?’ But the banks didn’t have the capacity to handle those,” says Christensen. “The government kind of just said ‘here, handle it.’”
Not only that, but regulations around the program were changing regularly and it was tricky for loan processors and borrowers to keep up with changes in requirements. According to Carlebrach, some small businesses had trouble getting their employees to return to work after their loans had gone through and they could finally pay them. After all, details of the PPP program coupled with an additional $600 unemployment stipend from the CARES Act made it more attractive financially for some employees to stay home.
“People don’t want to go back to work if they’re making $35,000-$40,000 a year on unemployment and it was more than they were making before,” says Carlebrach. “I’m not saying [the government] should have capped it, but there should have been some incentive for these employees to return to work once their company was prepared to hire them back.”
Gerri Detweiler, head of market education at Nav mentions other glaring program missteps that left independent contractors completely uncovered by company loans. “Many [small businesses] rely on independent contractors, so when they said ‘you cannot collect PPP on behalf of an independent contractor, they need to apply on their own,’ those companies still needed the contractors to do the work. But those contractors already got their PPP on their own behalf, and they’re not going to work for free.”
It wasn’t just the independent contractors who were left in an uncomfortable situation due to the specifics of the program―self-employed workers also struggled. According to Detweiler, requirements for these workers included the guidance to apply based on their net income from 2019. But because the government had also extended the tax deadline for a majority of these workers, no one was sure what their net income would be.
These lapses in application requirements make it easy to see why individuals were frustrated by the number of wealthy executives who received loans on behalf of their companies, even if these companies weren’t doing anything wrong by applying. After all, if Yeezy got a loan over a neighbor’s self-employed business due to program requirements, it’s natural to have frustrations.
“There were definitely some aspects of the program that make you wonder if the SBA really understands how small businesses operate,” says Detweiler.
Regardless of the issues, those familiar with the details of the program say that for the speed in which the government made PPP possible, things could not have gone better. The program did exactly what it was supposed to do: it protected the paychecks of workers.
“The way the program was designed was to help keep these employees on payroll and I think that some were confused because they were looking at these as a lifeline for businesses but it was actually a lifeline for workers,” says Detweiler. “The program was designed to keep workers on payroll and not laid off, it did exactly what it was supposed to do.”