Five good reasons to run from the Paycheck Protection Program

Because it sounds so good, there is an enormous buzz around the new Paycheck Protection Program. Some businesses are in desperate times right now and I think that the PPP might be a great option for them. However, we are passing on it with extreme prejudice and if you can pass on it, I advise you to as well.

First, a quick reminder of what the PPP is. Essentially, the government has given the SBA around $600 billion to distribute as “quick” loans to small businesses to try to entice them to keep employees on the payroll. These loans can be forgiven if the business actually uses the money on payroll and a few other expenses. A loan that is forgiven is free money, which is a big reason why the SBA ran out of the first round of funding within days (and will undoubtedly run out of the second round within a few more days).

Who does not like free money? I get it. I will admit that at first, the PPP looked good to me too. That is especially true because a business does not currently have to be in a bad position to get the loan. You simply have to certify the following verbiage in the application:

Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.

The truth is that essentially ANY business could agree to that certification in good conscience. We don’t know what the future holds. While our business is strong and growing at the moment, we do not know if supply chains may be severed next month and shutter us.

However, after a bit of reflection, we decided to pass, and here are the five reasons why:

The funds are limited and other businesses need the money more than us.

$600 billion sounds like a lot of money but it is a drop in the bucket compared to what small businesses may need. Many businesses are on life support and if our taking the money takes away another business’s ability to survive, we don’t want to do it. If you have the ability to survive without this loan, you might consider passing just to give other companies a fighting chance.

We could face public backlash and possibly government scrutiny.

You may have noticed that companies are already getting backlash for taking the money. They tend to be publicly traded companies that have to publicly disclose that kind of information. However, down the road, even small, privately-owned businesses will be exposed through the Freedom of Information Act (FOIA).

If our business weathers COVID-19 without issue and someone down the road gets our loan information, we could end up in a media story. And if we end up a media story, we will get government scrutiny as well. At that point, it will not matter too much whether we were right or wrong in taking the money. What will matter is the court of public opinion. In today’s hyper-politicized and judgmental environment, we don’t want to take on that kind of fight.

We could go to jail for taking the loan.

That certification I quoted above is not precise. It is pathetically imprecise actually, with a lot of wriggle room. I can justify all day long why I might feel that economic uncertainty might destroy my business next month but what if that does not happen? What if my business continues to grow?

And if my business does grow, what happens if I end in the media crosshairs and eventually the government’s crosshairs? It is absolutely possible that an aggressive prosecutor could press charges against us for fraudulently applying for a loan that we did not need. At that point, I would be faced with an expensive legal battle and the daunting task of persuading some judge to agree with me. Does that sound appetizing or like a sure thing? If you think so, you have not had much experience in legal matters.

If you think I am making too much of this risk, read this.

There may be better options to compensate employees.

We have furloughed some employees for safety reasons but we are still paying them. However, if we were unable to pay them, unemployment insurance might be a better option for them than the PPP. I wish I could say that was not true, and I find it ridiculous, but with the extra $600/week the federal government is paying in unemployment benefits, many employees actually want to get laid off. In some cases, employees resent employers that get the PPP.

The advantage of UI over the PPP is pretty obvious. If you assume that your PPP loan will be forgiven, the government is going to end up paying your payroll regardless of which of those two options you choose. However, with UI, you are shifting the responsibility of the expense from yourself to the government. You don’t have to cross your fingers and hope to get your loan forgiven, and you don’t have to find cash while you wait for it to be forgiven.

On the flip side, UI has a risk as well in that your company UI rate may go up. In Georgia, we are told that our UI rate will be unaffected by this situation but to be very honest, we don’t necessarily believe that. If you trust the government on such things, you have more trust than me.

The “forgivable” loan may not be forgiven.

This is the biggest risk to this deal. You simply cannot count on forgiveness. Already, politicians are trying to do away with forgiveness provision for some businesses. In other words, they may stress test it where only businesses that can demonstrate true hardship get their loans forgiven.

Let’s look at the situation from the perspective that your loan may not be forgiven. If you are a retail store and you don’t have any sales, you don’t need many (if any employees). So essentially, during a horrible business environment, you are borrowing money for an expense you do not even need. That is not good business decision making. In fact, it is exactly the opposite of good business decision making.

Companies that are in trouble need to be cutting costs right now in order to fight another day and yes, that means cutting employees in a lot of cases. You don’t have to worry too much about them. As I mentioned already, they will likely make more unemployed than employed and if you survive, you can hire them back down the road.

Again, if you believe your politicians, you are in a different place than me. My advice is not to trust politicians on the forgiveness of this loan.

Should ANY small business do the PPP?

While I have spent a lot of time bashing the PPP, I would not say it is a bad idea for everyone. Small businesses with these characteristics might consider it:

  • Desperately need short term cash. (The ability to get loans outside of SBA programs is obviously limited right now and this loan does have a low interest rate.)
  • Need employees through the crisis. (You are not just paying people to show up without work for them to do).
  • Have a plan/ability to pay back the money in the next few years without counting on it to be forgiven.

In other words, the businesses that should pursue the PPP should be businesses that actually need it. Businesses that just want free money should pass. It really is as simple as that.

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