The Paycheck Protection Program: Troubled Beginning, Improved Prospects?

By Joyce Beebe, Ph.D.
Fellow in Public Finance

The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act (Public Law 116-136), created the Paycheck Protection Program (PPP) to help small business owners stay afloat during the current economic downtown. Since its inception, the PPP has frequently dominated news headlines and generated criticism. This blog post reviews the major contentions and developments of the PPP and discusses potential improvements for this novel program.

The PPP’s Turbulent Path

After the application process started on April 3, the PPP was exhausted of its funds, a total of $349 billion, within two weeks. During this period, banks scrambled to get the program ready with limited time and little guidance from the Small Business Administration (SBA), and several banks were criticized for only processing applications from existing customers in the first few days. The unfunded small business owners were surprised that a massive program touted as a lifeline for small businesses was depleted of funds before they could even finish the applications. In response, Congress quickly passed a fourth relief package (Public Law 116-139) to provide another $310 billion of funds on April 24, but this did not stop the criticism.

Concurrent public company filings through the U.S. Securities and Exchange Commission revealed that about 350 publicly traded companies received PPP funds, initiating debates as to whether publicly traded companies should be the intended beneficiaries. Because the first round of PPP loans was limited, the participation of publicly traded companies potentially precluded small businesses from receiving the much-needed funds. In addition, the media reported that several well-known companies with substantial assets or alternative sources of funding also received PPP loans. For instance, Shake Shack reported close to $1 billion in assets and $600 million of revenue in 2019 and initially received $10 million from the PPP. Similarly, Ruth’s Hospitality Group had about $500 million in assets and over $460 million of revenue last year and initially received $20 million from the PPP. Both companies have subsequently repaid the PPP loans and issued new shares.

The SBA issued a key piece of guidance on April 23, requesting that companies evaluate whether they truly need the loans, consider their access to other sources of liquidity and carefully review their overall eligibility. The guidance specifically stated that “a public company with substantial market value and access to capital markets” is unlikely to qualify for the PPP.

The SBA also provided a window of opportunity for companies to return the loans before May 7. However, some entities were hesitant to act because they were concerned that the repayment would be viewed as admitting wrongdoing. The SBA extended the repayment deadline twice, until May 18, and assured the companies that they would not be subject to penalty upon repayment.

Following the SBA guidance, the House of Representatives’ Select Subcommittee on the Coronavirus Crisis specifically called for several publicly traded companies to return the PPP loans in early May. The subcommittee members stated that all publicly traded companies with market capitalization exceeding $25 million should return the loans. Some public companies followed the request and returned the money. Others expressed that it was unfair to group small publicly traded companies with multi-billion dollar public entities but eventually returned the money out of concerns about administrative complexity and uncertainty regarding program rules. Some publicly traded companies refused to return the funds, arguing that the law itself did not prevent publicly traded companies from applying. Despite all these considerations, preliminary estimates show that about one-third of loans ($434 million to $550 million) extended to publicly traded companies have been returned.

Regulatory Guidance

Many observers believe the rules and regulations regarding the PPP are not entirely clear. For borrowers, the PPP is appealing because its terms are generous, its eligibility is comprehensive, and the rules are simple. Any entity with less than 500 employees can obtain loans that are 2.5 times the average monthly payroll expenses, capped at $10 million. The interest rate on loans is 1% with a two-year term, and the loans are fully guaranteed by the government. The loans are forgivable if (a) at least 75% of funds are used to cover payroll, rent, utility and mortgage expenses over an eight-week period, and (b) the entity maintains employee headcounts and compensation levels. The Department of the Treasury and the SBA have intended that most loans will be forgiven.

There is no doubt that the PPP rules are less complicated than typical commercial lending procedures; it is also more straightforward compared with other SBA loans. Specifically, the PPP waives the “credit elsewhere” requirement, which means a borrower is not eligible for an SBA loan if he can obtain funds from another source. PPP applicants only need to provide certain expenses and fill out a short application — in which the borrower certifies in good faith that “current economic uncertainty makes the loan request necessary to support ongoing operations.”

This seemingly innocuous statement is the source of many controversies. Every borrower can independently define whether the funds are “necessary” for his operations and how much the current uncertainty has impacted his business. It is also subjective to ask borrowers to certify the statement “in good faith” without requiring detailed documents to substantiate the claim. In late April, the SBA provided a safe harbor by stating that it would audit loans that exceed $2 million. This essentially means that smaller loans are deemed to have met the requirement for the necessity of the loan in good faith. On the other hand, observers advised that larger borrowers should be ready to demonstrate to the SBA their basis for need, especially if they have any alternative sources of funds.

Several economists found evidence that the first round of PPP funds did not sufficiently reach the geographic areas with the most job losses or business shutdowns. Instead, locations that were economically least affected by the pandemic received twice as many funds as the hardest hit areas. To get better results, the researchers advocated for enhancing the role of banks in distributing the funds. However, certain banks may be unable to process the massive number of PPP loans due to the lack of infrastructure or guidance, while others are reluctant to participate due to their internal lending policies or strategies.

Although banks have not been ideal partners for the SBA, the lack of guidance also frustrates them. Due to the brevity of rules, some banks view processing PPP loans as an impending compliance nightmare. For instance, SBA guidance has expressed that banks do not need to independently verify information reported by borrowers nor confirm the accuracy of the documents submitted for loan forgiveness. The most recent SBA guidance issued over Memorial Day weekend states that “lenders are expected to perform a good faith review of borrower’s calculations and supporting documents.” It also instructs lenders to work with borrowers to correct material mistakes and exercise different levels of review based on the quality of data. However, some banks are still unsure what level of diligence and responsibility they have in processing the documents.

The Lawsuits

For a program that is barely two months old, the PPP already has multiple lawsuits under its belt. A group of business owners without employees, primarily sole proprietors and independent contractors, filed a class-action lawsuit against the SBA and the Department of the Treasury. These borrowers claimed that the rules are discriminatory because they were not provided equal access during the PPP’s initial funding period.

In early May, a California based software company Zumasys, Inc. filed a lawsuit against the SBA and the Department of the Treasury regarding the agency’s April 23 guidance. The company argued that the guidance changed its perceived risk profile of the PPP loans. Because Zumasys applied and obtained funds prior to issuance of the guidance, it wanted the court to clarify whether or not the guidance applies to the company.

From the government side, the Department of Justice prosecuted two individuals for committing PPP-related fraud, falsifying employee information to obtain loans. Legal practitioners predict that this is only the beginning; they expect a significant amount of government litigation, involving situations such as applicants overstating payroll costs or the number of employees or misrepresenting the nature of their business.

What Does the Data Show?

The second round of PPP loan applications has shown different funding patterns from the first round, although it is uncertain whether the difference constitutes an improvement. For example, the average loan size from the first round was $206,000, and the latest data from round two shows an average loan size of $73,000 (from April 27 to May 8). The smaller average loan size potentially implies that the PPP loans are reaching vulnerable small businesses, including micro-businesses and mom-and-pop storefronts. However, it does not tell us whether the funds have reached the hardest-hit areas where job losses are the highest.

In contrast to the quickly exhausted funds in round one, after five weeks, the PPP still has $150 billion. This sends mixed signals. From a positive perspective, it could mean that businesses are more careful in evaluating their needs or that the economic re-opening has improved some businesses’ operations. From a negative view, it could mean that the lack of clear guidance has had a chilling effect on small businesses or that some small businesses have already shut down before they were able to apply for the loans. In the coming months, the data released by the SBA will provide more clarity.


The PPP is an unprecedented program created for an unprecedented time. However, designing public policies during this pandemic is not easy, and policies with the best intentions can still go wrong. Lawmakers responded quickly to alleviate long-term damage to the economy by providing the PPP as a temporary source of liquidity for small businesses. Although the PPP has had a rough start, the lessons learned over the last two months can guide the SBA to improve the PPP administration during its last month of operation. In addition to closely monitoring additional guidance from the SBA to further clarify program rules, all parties should pay attention to congressional discussions regarding whether or not borrowers should be allowed more flexibility in using the PPP funds.