In April, when the federal government offered $ 349 billion in loans to small businesses reeling from government shutdown orders due to the pandemic, funding ran out in just 13 days, prompting Congress to quickly approve a $ 310 billion second round.
Since then, small businesses have become increasingly reluctant to take money.
As of Tuesday, more than $ 130 billion remained in the fund, known as Paycheque Protection Program. Even more striking was the fact that several days in the past month, more money was returned than borrowed, according to data from the Small Business Administration, which oversees the program – highlighting its disorderly execution and confusing rules that have discouraged some small businesses from using the money.
Thousands of businesses that got the loans returned the money, according to the lenders. For some owners, the terms of the program were too restrictive; for others, the loan forgiveness criteria were too vague. Some public enterprises that received these loans fired them after a public outcry, and in the initial rush, some borrowers accidentally got duplicate loans that they too have returned.
A total of around $ 12 billion has been returned, Treasury Secretary Steven Mnuchin said at a Senate hearing on Wednesday. The amount of loans outstanding under the program fell to $ 510.2 billion at the end of May, from $ 513.3 billion in the middle of the month, according to data from the Small Business Administration.
As of Tuesday, the amount of loans approved was edged up to $ 511.4 billion – indicating that changes Congress made to the program last week to make it less restrictive could push more money out the door.
But obstacles remain. The chaotic execution of the program has “dampened the willingness of many small businesses to even apply for loans during the second cycle. PPP and caused many companies to pay back the disbursed loans for fear of doing something wrong, ”Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, a business group, said last week at a hearing on the responsibility for the response to the pandemic. Committee, a watchdog group.
The turn of events is remarkable for a $ 2.2 trillion Congressional Coronavirus Relief Program signing program, which was taken just a few months ago. an intense borrowing frenzy by desperate business owners. After all, small businesses are always in dire straits. Even as states begin to reopen, millions of stores across the country remain closed and could go bankrupt.
On Wednesday last week, Congress moved to relax the rules of the program and give more flexibility to companies spending their aid, and President Trump signed the bill on Friday. The change has been widely welcomed by small business advocacy groups and will help many borrowers.
The changed rules could help the remaining $ 130 billion move faster. “I expect we will certainly see the companies that were on the sidelines now taking it,” Mnuchin said.
But revisiting their loan terms on the fly – which has happened several times since the program began in April – is a nightmare for borrowers struggling to save their businesses.
“Borders move like a video game,” said Caren Griffin, owner of University Spa, a spa hotel in downtown Denver. His business has been closed since mid-March and won’t reopen until July, at the earliest.
Ms Griffin was on the verge of paying off her loan of $ 66,272 because she didn’t think she could use it within eight weeks, as the program originally planned. The new changes give it 24 weeks, which gives it more time to decide whether or not to use the money when – and if – it will reopen.
She is not sure she will. Redesigning your spa to comply with the new safety guidelines will be expensive, and no one knows when guests will be ready for high-quality services like massages and facials. Ms. Griffin, who is 63, wonders if she would be better off shutting down the business and retiring.
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“I’m going through a dozen different scenarios to see what our cash structure might look like if we reopened with changes in our hours and services,” she said. “We will not go back to normal. It’s clear.”
For many small businesses that rely on foot traffic, like restaurants and nail salons, even the more flexible lightening terms might not be enough.
“I cried the day I fired him,” said Shelly Ross, owner of Tales of the kitty, a cat sitter in San Francisco, which recently gave up using its $ 75,000 loan and returned the money. “I thought it would save my business, but I feared I would be financially ruined if it wasn’t forgiven, and no one could give me real answers about it.”
Ms. Ross started Tales of the Kitty in 2003 and has grown it into a thriving business with 14 employees and a busy schedule of 10,000 client visits per year. In March, her sales plummeted due to the pandemic, forcing her to lay off.
For their loans to be fully canceled, companies must keep the same number of employees on their payroll as before the pandemic, at the same salary. This is a tough hurdle for business owners whose businesses remain closed. Ms. Ross expects her sales to remain slow at least until Thanksgiving.
Much of the paycheck program was aimed at preventing workers from becoming unemployed by funneling money to their employers, and it has made progress toward that goal. Extension numbers published on Friday showed gains in industries who received loans to small businesses and hinted that the program had helped offset at least some of the economic damage caused by the shutdown.
More than 4.5 million businesses, from solo workers and small restaurateurs to retailers and professional service companies with fewer than 500 employees, have gotten help. For the majority, it was a lifeline.
But many lenders are ready to end the program. Although the government will continue to process loans until June 30, Wells Fargo stopped taking new applications last month. The same was true for many community banks, including OceanFirst, a regional bank in Toms River, New Jersey, which has loaned $ 500 million to 3,000 businesses.
Requests had slowed to a trickle, said Christopher Maher, the bank’s chief executive. He cut off new loans because he wanted to steer his employees towards the next major challenge in the program: loan cancellation.
“It will be much more difficult to work on the repayment calculations and documentation than to make these loans in the first place,” said Maher.
The paperwork to prove that a loan meets the terms is long and complicated; the Small Business Administration 11-page application because the loan forgiveness is much more complex than the loan application itself. Any portion not remitted becomes a debt that must be repaid within five years. (The initial term was two years.)
The lack of clarity regarding the loan cancellation cemented Ms. Ross’ decision to repay her loan. She was just considering paying her employees to stay home for eight weeks, which the program allows, but was worried about having to lay them off again when the money runs out.
Then, the week after she got her loan, the Small Business Administration released her pardon request. Ms. Ross has tried to do the math for her business, but her staff are mostly part-time employees with flexible hours. She consulted with her accountant, accountant, lawyer and lender to find out how much of her loan could be eliminated.
No one could give him definitive answers. Afraid of ending up with a big debt, Ms. Ross returned the money.
Many trade groups for lenders and small businesses, such as the Consumer Bankers Association and the Small Business Majority, have requested blanket cancellation for loans under $ 150,000. So far, the Small Business Administration and the Treasury Department – which is calling the shots on most paycheck program terms – have indicated no willingness to grant this.
Adam Markowitz, an accountant in Florida who works with dozens of clients who have taken out payday loans, said he was unable to determine whether his own loan, of $ 34,500, would be canceled entirely. He awaits further information on the many unresolved technical issues.
“The only consistent thing about this program is that it has been a mess every step of the way,” he said.