These Small Business Owners Got Paycheck Protection Loans, But They Are Afraid To Use The Money
“It’s a catch-22,” said Rick Schmutzler, founder of GYM Sportsbar, with locations in New York City, Los Angeles and Fort Lauderdale.
The problem is a key rule that in order for a P3 loan to be canceled, a small business owner must spend at least 75% of it on payroll expenses in the first eight weeks of the loan. The remaining 25% can be spent on mortgage interest, rent, utilities, and interest on other corporate debt securities.
This means that for companies that have had to shut down and let their employees go, they have to rehire their workers – many of whom have just started receiving unemployment benefits – and pay them for eight weeks even if there is no no work to do. Then one of two things will happen: the business will not yet be allowed to reopen and its employees will have to return to unemployment; or the company may reopen, but find it difficult to pay its employees because it is unlikely to turn a profit quickly.
If the company does not spend the money according to the rules, it must repay the part of the loan that has not been canceled at an interest rate of 1% over two years.
Schmutzler expects that when his three bars reopen, they will operate at a loss for months, as most states are unlikely to let restaurants and bars run at full capacity, he says. said, and many departing customers may be too scared to come.
Currently, he uses part of his PPP loan to pay employees who have not yet received unemployment benefits or other financial aid. As for the rest of the loan, he is trying to find the best ways to spend it to give his business – and by extension his staff – a chance to survive. Beyond salary expenses, Schutzler may also use part of the money to pay for antibody tests for staff.
“If I have to pay back half the loan, well, I’ll pay it back,” he said. “But I’m not going to do anything stupid for the company.”
Kurt Huffman, owner of ChefStable restaurant group in Oregon, sees the PPP loan as a welcome lifeline, but says the eight-week window to qualify because forgiveness is way too tight for restaurants. So rather than spending his loans now when his restaurants are closed and his employees earning more on unemployment, he instead decided to use most of the money to help support payroll for the first six to 18 years. months after the reopening of its restaurants. But the move means he’ll have to pay back the portion of the loan he didn’t spend in the first eight weeks, plus interest.
“We would rather survive and live to fight another day, even if we ultimately owe the government money,” Huffman said.
Those in other industries are also concerned. Walter Rowen, owner of glass decorating company Susquehanna Glass in Columbia, Pa., Says it may not be able to reopen until early June, when it is already nearing the end of its eight-week term.
“They give me money to allow me to get the employees back on the payroll, but limiting the amount of time in which I can do it. Nobody thought about it, ”Rowen said.
Lisa Ashton had the same problem. She received a PPP loan for her business, Northern Lights Holistic, a wellness center in Portsmouth, Rhode Island. But she quickly realized she couldn’t spend it in eight weeks, especially since her business won’t be allowed to open until June 1. She called her bank and asked him to return the money to her.
“I explained the situation to them and told them it would be too much money to spend on me,” Ashton said. Her bank has agreed to take back half – and she can now pay her 16 freelancers and rent until July 1, without having to go into debt. “I won’t have to worry about interest or whatever accumulating … and being stuck with this payment. So I feel really good about it.”
But many business owners won’t have that luxury. They will have to repay the portion of their loan that they have not spent according to the program’s forgiveness rules. And the new debt will worsen their debt-to-income ratio, which could hurt their chances of securing further financing, according to Greg Ott, CEO of Nav, an online platform for small businesses looking for lenders and credit card.
Will Washington help?
Small business owners are hoping lawmakers will extend the eight-week deadline or reduce the percentage of the loan that must be used for payroll.
It is not known if either will happen. But a new report from the Inspector General overseeing the Small Business Administration recommends that the SBA revise its 75/25 rule to allocate how the money should be spent. The IG noted that the law that created the program does not create any such restriction.
Cowen Washington Research Group analyst Jaret Seiberg thinks there’s a good chance Washington will relax the 75/25 rule and might even extend the eight weeks.
“The Paycheck program is underperforming because the Treasury unilaterally demanded that 75% of funds be used for payroll within eight weeks of receiving the loan,” Seiberg wrote in a note to clients. “The frustration in Washington is that the Treasury could unilaterally solve the problems tomorrow because it created them.… If the Treasury doesn’t fix Paycheck, expect Congress to change the conditions in the next stimulus. ”