The paycheck protection program was meant to help struggling small businesses hit by COVID-19. Instead, a lot of the money went to those with the best relationships — not the neediest or most deserving.
With additional reporting and editing by Janet Novack.
With nonessential medical services on hold during the COVID-19 pandemic, patient visits and revenues at Families First Pediatrics’ two locations in Salt Lake Valley, Utah have fallen by half. But Dallen Ormond, 49, a nurse practitioner and PhD who owns Families First together with three physicians, thought Congress had given him a way to avoid laying off any of its 9 M.D.s, 8 NPs or 75 other staff members: a Paycheck Protection Program loan.
On April 3, just a week after being authorized by the CARES Act, PPP began accepting applications for $349 billion in money. Ormond immediately submitted his request for $557,000 to JPMorgan Chase, Families First’s regular bank. His banker, he says, told him the practice was the fourth business in Salt Lake City to apply. Under the terms of PPP, loans equal to 2.5 months of an applicant’s average 2019 payroll (with a maximum $100,000 per worker in salary counted) are guaranteed by the Small Business Administration and will be forgiven, tax free, so long as all workers are kept on at full pay for eight weeks after the loan is issued and 75% of the money is spent on payroll, with the rest going to certain items such as mortgages, rent or utilities. All businesses and nonprofits with under 500 employees were eligible to apply for the $10 million max loans; in a special provision, restaurant and hotel chains were eligible if they had fewer than 500 workers per site.
This relief seemed tailor made for Families First Pediatrics—a way to keep a highly trained staff that cares for tens of thousands of children a year intact. On April 17th, Ormond heard from the bank: the practice’s application had been approved. But it was too late. Funding for the PPP program had already run out. Yet before the well ran dry, JPMorgan Chase had dished out $20 million in PPP money to two subsidiaries of Ruth’s Hospitality Group, the steakhouse chain parent that has a separate credit line with the bank. “Please tell the powers that be when this is all over I hope they can find someone to save their newborn baby’s life as they enjoy their $50 steak,’’ Ormond fumed in an email to Forbes.
In a later interview, Ormond expressed a view that is widely held by not only disappointed PPP applicants, but also some lenders and savvy business types: In the rush to dole out money, banks favored certain customers, using Uncle Sam’s cash to shore up existing relationships with big clients. The rationale? Even if the loans were 100% guaranteed, it was better to deal with businesses they knew best.
Dallas Mavericks owner Mark Cuban puts what happened neatly in perspective. It makes “total sense” he opines, to believe the allocation of PPP loans was driven by connections. “These are the customers the banks know the best and can approve the fastest, and most likely are among the biggest of their small business customers because that’s who they would spend the most time with. Combine that with the fact that banks were understaffed and it was as much a race by banks to get access to a finite pot of stimulus as it was by small businesses and we get the mess we got.”
The government hasn’t released the names of successful applicants, but a review of data from the Treasury department shows that construction businesses got $45 billion, more money than any other sector, despite the fact that building projects weren’t halted in most states. Professional scientific and technical was second—- there was nothing to keep lawyers, accountants or financial planners from applying, even if they were working from home.
Another surprising group of recipients: publicly traded companies including ones already performing poorly. Altogether we found 71 publicly traded companies that got money. Of that, $75 million went to restaurant chains like Potbelly, Jura Sushi and Texas Taco Cabana as well as Ruth’s Chris, Shake Shack and Wendy’s franchisee Meritage Hospitality.
In all, we found more than $175 million going to non-restaurant public companies, many of them struggling and public since the 1990s and early 2000s. Collectively, before anyone had heard of COVID-19, these PPP recipients had racked up losses totaling over $8 billion. About a dozen recipients were penny stocks trading below $1 a share.
Among them: Westlake Village, Calif.-based biotech company MannKind, which had seen its stock plunge 95%-plus to little over $1-a-share after losing $500 million over the past five years, warning investors “there is substantial doubt about our ability to continue as a going concern.” It received a $4.9 million PPP loan from JPMorgan Chase. Another, CareView Communications, a maker of bedside-video monitoring equipment for healthcare facilities, burned through $2 million in cash last year and has $176 million in cumulative losses. Trading at $0.01 a share, it reported just $270,000 of remaining funds at year-end, but received nearly $800,000 in PPP cash from Bank of Oklahoma.
Others in industries seemingly little affected by the virus also received large loans. Costa-Mesa Calif.-based artificial intelligence software maker Veritone Inc.— $182 million in losses over the past three years— received $6.5 million from SunWest bank. Irvine, Calif.-based dental-equipment maker Biolase reported $232 million in stockpiled losses in over a quarter century on public markets and received $3 million in PPP cash from Pacific Mercantile Bank. Both companies offered going concern warnings to investors at the end of 2019.
Nikola Motor Company, a buzzy hydrogen truck startup with a multi-billion dollar valuation, received $4.1 million in PPP funds from JPMorgan Chase. In March, it announced a $3.3 billion merger with a publicly-traded company called VectoIQ, created by former General Motors vice chair Steve Girsky. The deal included a fresh $525 million capital raise from powerhouse investors including Fidelity and hedge fund ValueAct Capital, but it hasn’t yet closed. Nikola Motors CFO Kim Brady tells Forbes it needed PPP money as a cash bridge to retain its about 300 employees as the deal closes.
“There’s a difference between a high valuation and having cash,” says Brady. “We are a pre-revenue company with a lot of expenses…Our burn rate is high.” Since PPP funds will be used to retain staff, Brady says the lifeline follows the spirit of the Act. “We’re preserving high paying jobs,” he says.
Yet Verb, a previously thriving 30-person Austin-based HR startup that counts Whole Foods, Facebook, dating-site Bumble and the British publisher Pearson wasn’t so lucky. Its revenues are down 50% since the crisis hit. Cofounder and CEO Suzi Sosa reached out to two banks Verb had relationships with and found “neither was ready to accept applications.” So she turned to Cross River, a Fort Lee, N.J. bank that is a player in both SBA and fintech loans. On April 5, Sosa received an email saying Cross River’s PPP funds were already exhausted but that Verb’s application would stay live in case a second round of money is approved.
None of this seems to be illegal — although some fraud almost surely took place as hundreds of billions were shovelled out at record speed. The inequalities result from the rush to launch the program, the self-protective way banks handled the application process and some questionable policy decisions by Congress. Now, as Congress is moving to reauthorize another $310 billion for PPP, questions remain about the most equitable way to allocate taxpayers’ dollars.
One key policy choice: Congress didn’t require PPP loan recipients to be directly or dramatically impacted by the lockdowns. That stands in sharp contrast to the rules it set for businesses wanting to qualify for the Employee Retention Tax Credit, a far less generous program worth a maximum of $5,000 per worker. To be eligible for that Internal Revenue Service administered aid, employers had to experience a 50% decline in sales receipts or show that their business had been partially or wholly suspended as a result of a government shutdown order.
But to get a PPP loan, Congress decided, applicants would simply have to self-certify that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.’’
Why not require the same standards for the more generous PPP loans as for the tax credits? The banks complained the requirement would slow down the lending process and “we started to realize that no business would be unimpacted,” Senate Small Business Committee Chairman Marco Rubio, R-Fl, told NBC the day the loan program launched. But, he added: “I don’t want to read headlines that well financed, well capitalized companies….were able to suck up all the money and we ran out of money and now we can’t help the small business down the street.”
Now those headlines are everywhere—and the backlash is growing. On Sunday, Shake Shack founder and chairman Danny Meyer and CEO Randy Garutti posted on LinkedIn that the chain would return “the entire $10 million PPP loan we received last week to the SBA so that those restaurants who need it most can get it now.” (Shake Shack, which sports a market cap of $1.6 billion, has $112 million in cash on hand and recently sold another $150 million in stock.) Unfortunately, the money it’s returning can’t be funneled back to other small businesses in need.
Given all that, the banks’ behavior wasn’t surprising and was even predictable. “The banks are going to their bigger borrowers. They basically triage their best relationships with the biggest loans,’’ says Tom Capasse, Chairman and CEO of Ready Capital, a New York-based non-bank lender specializing in SBA and commercial real estate loans. “The selection bias is naturally weighted towards their bigger customers with the most exposure to help reduce (their own) credit defaults.”
Since April 3rd Ready Capital has pumped out $3 billion in PPP loans to 40,746 borrowers, with an average loan size of $72,803. By contrast, JPMorgan Chase, the top lender in the PPP program, issued $14 billion in loans to 27,307 borrowers, for an average loan size of $515,304, according to a statistical report Treasury posted last Friday (which doesn’t name JPMorgan Chase but makes it easy to identify). Overall, that report shows 1.66 million borrowers got $342 billion in loans averaging $206,000 through 4,975 lenders.
JPMorgan Chase said in a statement posted online that it got 75,000 applications from its own business banking customers in the first hour after its first cursory application went live on Friday April 3rd. On the following Monday, as it digested guidance from the SBA, it put up a new more detailed application form requiring more documents, including the IRS Form 941 submitted with payroll taxes. As it worked through problems (including with the SBA’s application system, which required manual input of information) we “looked to keep people in the same general order they had come to us” on April 3rd, the bank said. But, JPMorgan Chase added, some applications took more time to verify or complete. Translation: it was first come first served—-sort of.
As Congress gets ready to dole out the next $300 billion, Mark Cuban has a suggestion: hold a lottery. That seems fair, but politics dictates that it almost certainly won’t happen. Instead, Democrats are insisting that more of the money be steered to small businesses without banking relationships. Of the additional $310 billion being negotiated, the Dems want $60 billion to be set aside for lenders serving rural areas, minority groups and those without regular banking relationships.
A path towards greater equality might be as simple as appropriating more of the second round of loans to small community development financial institutions or CDFIs. These local banks are more likely to have ongoing relationships with small neighborhood businesses than mega-banks like JPMorgan Chase or Citi.
“If you’re a small business without a lending relationship with a large bank, you’re a faceless entity in some long queue,” says Margaret Anadu, head of Goldman’s urban investment group, which provides financing to real estate projects and social enterprises benefitting underserved communities. “Our CEO told the President he feels pretty strongly that there needs to be a designated tranche of the $349 billion earmarked for CDFIs and other mission-driven lenders,” she says. “It’s absolutely critical that these CDFIs get this money.” Goldman Sachs announced on April 7 that it had allocated $525 million to lend to small businesses, with $25 million in grants going to CDFIs.
To be fair, some PPP recipients are both worthy — and well-connected. Before the coronavirus struck, the 120-person travel booking site Hotelplanner.com was on pace for $50 million in net revenues this year. “Business is down over 90%,” reports Chief Operating Officer Bruce Rosenberg. That makes the West Palm Beach, Fl.-based company specializing in group bookings (including for Nascar and the Redskins), a seemingly-deserving PPP loan candidate. Nevertheless, Rosenberg says he believes it was the company’s strong relationship with regional executives of PNC bank that helped it land a $1.4 million PPP loan.
In a fresh twist on “relationship” banking personal connections were key to landing PPP cash whether the intermediary was a big bank, or a small one. Julio Gonzalez’s West Palm Beach Engineered Tax Services has thousands of customers for its specialty tax services (it looks for money to save from tax breaks like the research credit). His clients were generally only successful in getting PPP money if they had “real high level relationships with their banks at the president level”—and in most cases that meant local banks.
Nabil Cabbabe, president of tiny ($34 million in assets) Bank of Houston/Spirit Bank in Missouri says he made $9.7 million in loans mostly to borrowers he knew from prior stints at larger banks. Cabbabe himself wanted a $21,400 PPP loan to cover payroll at a shuttered after-school gymnastics center he owns with his wife. When the gym’s regular (big) bank didn’t appear to be acting on his loan request, he called a friend at another community bank who pushed it through, accepting QuickBooks screen shots as evidence of their 2019 payroll expense.
There are other factors in play besides sheer favoritism. Cabbabe and others note that it was harder for banks to lend to non-customers because the government didn’t waive anti-money laundering “know your customer” rules for the PPP lending race. But he argues big banks were also attempting, inappropriately, to slow down loans to businesses they were less comfortable with in ways that this federally guaranteed program simply didn’t require—for example, asking for tax returns when payroll numbers should have been enough. (To be fair, the banks have been burned in the past by Uncle Sam reneging on its own promises.)
One issue that has kept some of the most devastated companies from gaining funds is PPP’s dual aim: both keeping workers off the unemployment rolls and keeping businesses ready to reboot. “We’re looking at employees being ready, not lost in this process. We want businesses to stay intact,’’ Jovita Carranza, head of the SBA, said at a White House briefing on April 2nd, as the program prepared to launch. Of course some of the businesses most in need had already laid off workers by the time Congress acted. To address that fact, Congress wrote in a still ambiguous provision allowing the PPP loans to be forgiven provided workers were rehired at full pay for eight weeks after loan funds were disbursed.
To some business owners that sounds like a cruel trap. After eight weeks, they might still be closed and forced to lay off staff all over again. The Independent Restaurant Coalition, a U.S. trade group formed during the 2020 pandemic, estimates eatery sales will drop up to 50% for as much as 18 months after reopening. Their plea: give them three months after they’re allowed to reopen and operate at full capacity to bring all their employees back.
“The industry has seen profit margins compressed from 20% ten years ago to 5% now. That can’t sustain a 50% slide in sales,” says Camilla Marcus, a founding member who owns cafe West-Bourne in Soho. “We are going to need every level of government to work in collaboration with this industry if we are going to be able to reopen and sustain what’s going to be a very long and brutal recovery.”
The same can be true for many businesses in plenty of other industries. No matter what, it’s a treacherous road ahead for many.
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