Who Decides What Is A Small Business For PPP Loans?

The Paycheck Protection Program (PPP) has been extended with an additional $310 billion amidst lawsuits, controversies, and allegations of crony capitalism. 

The fund for forgivable loans, designed to cover 8 weeks of business and encourage small businesses to retain employees, was flawed by design. In addition to being first-come, first-serve and lacking federal oversight, a central problem of the PPP continues to be who should be considered a small business.

“The ‘PPP’ came with no user manual and it was extremely confusing,” wrote the CEOs of Shake Shack, Danny Meyer and Randy Garutti, in an open letter. Shake Shack was one of numerous companies that applied for a PPP loan, were approved, and then decided to return the money.

All that is legally required is a “good faith certification” of eligibility from the borrowers. Since Shake Shack had less than 500 employees per location and it was in the “accommodation and food services industry,” it was eligible.

“That meant that Shake Shack – with roughly 45 employees per restaurant – could and should apply to protect as many of our employees’ jobs as possible,” wrote Danny Meyer and Randy Garutti. 

Yet additional guidance issued by the SBA and the Treasury last week put pressure on the borrowers to meet eligibility requirements. Specifically, public companies “with substantial market value and access to capital markets” wouldn’t likely be able to make a certification of eligibility “in good faith,” the SBA said in a statement released April 23rd.

So far, 21 publicly traded companies have returned the loans.

“In view of these new guidelines and to avoid any further disputes at a time when the business environment is the most difficult it has seen, the Company has repaid the loan,” announced DMC Global Inc.

“Out of an abundance of caution and in light of the new guidance, the Board of Directors of the Company determined to repay the full amount of the Loan to the lender,” wrote Ballantyne Strong Inc. in a statement filed with the SEC.

Companies such as IDT Corporation reaffirmed their need for the funds in their SEC filing, despite their decision to return the money.

In response to the controversies, the SBA announced earlier this week that it will be reviewing loans of over $2 million. Over half of the publicly traded companies that received loans that would have been subject to scrutiny under this new decision. 

A number of other actions taken by the government signal increased federal regulation of the Paycheck Protection Program.

The new bill includes a reserve of $60 billion for smaller lenders. Half is designated for community financial institutions, insured depository institutions, and credit unions with assets worth less than $10 billion, and the other half is for insured depository institutions and credit unions with between $10 billion and $50 billion in assets.

Additionally, for six hours last night the SBA only accepted loans from lending institutions with less than $1 billion in assets.

The banks, for their part, have deferred to the government’s eligibility guidelines.

“Wells Fargo is working as quickly as possible to assist small business customers with the Paycheck Protection Program in compliance with the regulations and guidance provided by U.S. Treasury and the SBA,” the bank told ABC News.

And yet Wells Fargo, JPMorgan Chase, Bank of America, and U.S. Bank are all being charged in class action lawsuits by small business owners.

These banks “prioritized loan applications seeking higher loan amounts because [they] … generated larger loan origination fees for the banks,” according to text appearing in all four lawsuits filed in the Central District Court of California.

Although the interest rates paid to the banks were meant to incentivize smaller loan amounts, loans of over $2 million carried an interest rate of 1 percent. JP Morgan Chase alone processed over $14 billion worth of PPP loans, making their revenue from processing fees at least $140 million.

These four banks are being charged with unfair business practice, fraudulent business practice, unlawful business practice, as well as false advertising and fraudulent concealment according to the lawsuits.

They “concealed from the public that it was reshuffling the PPP applications it received and prioritizing the applications that would make the bank the most money,” state the complaints, instead of processing the applications on a first-come first-serve basis.

The additional guidance published by the SBA last week clarified that small businesses could indeed have more than 500 employees if it qualified as a “small business concern.” 

According to the regulatory definition of a “small business concern,” a small business needs to be (1) independently-owned and operated and, (2) not dominant in its field of operation. Additionally, a business should fit certain size requirements based on the number of employees or gross annual receipts.

Due to a special provision in the CARES Act, businesses within the “accommodation and food services industry” that have less than 500 employees per location are eligible. This is how Shake Shack, Potbelly Sandwich Shops, and Taco Cabana received loans.

According to the SBA’s size industry chart, a number of industries have to adhere to a restriction on the number of employees, while others must adhere to a restriction on gross annual receipts.

Small businesses in manufacturing, and wholesale trade, for example, have restrictions based on employee size. Quantum Corporation, is a data storage company that has a market valuation of approximately $200 million, according to the SEC. It received the maximum loan amount of $10 million, and can be considered a small business because the SBA’s standards for its industry dictate that the business only need to have less than 1,250 employees. According to FactSquared, it has 800 full-time employees.

Any businesses with under 500 employees does not have any limitations on annual receipts, according to the text of the CARES Act. This is how companies such as Veritone, Aquestive Therapeutics, and PolarityTE received loans.

Of the publicly traded companies (with market values listed) that received PPP loans and had less than 500 full-time employees, over 20 percent had a market value of over $100 million, according to data compiled by FactSquared. 

For other publicly-traded companies it is still unclear how they qualify as a small business, and if they will hold on to their loan under increased scrutiny. The non-profits that are eligible, including religious organizations, have no obligation to report the loans they have received.