Smaller Businesses Get Their Shot at PPP Funds

YOUNGSTOWN, Ohio — In the second round of the Paycheck Protection Program, the smallest of small businesses are finally getting their shot at funding that will help them keep their workers employed.

While many news reports on Round One of the program focused on businesses getting loans that don’t fit the common definition of small business – such as the Los Angeles Lakers or Ruth’s Chris Steakhouse, both of which returned their PPP loans after public outcry – this time around banks are seeing more sole proprietors and businesses with only a handful of employees getting funded. 

As of May 5, just over a week after the second round launched, the SBA reported there was roughly $130 billion in funding remaining, which SBA Region 5 Director Rob Scott expected to last about another week. The national size of the average loan was $76,000, down significantly from the $206,000 seen in the first round.

“We’re not going through the funds as fast; but we’re reaching more businesses. And because they’re lower loan amounts, the money is going farther,” he said during a May 5 conference call. “The average loan size – which we continue to see go down – [means] that money is being stretched farther.”

Throughout the region, all banks are reporting a lower average size of loans despite generally getting more loans approved in the second round. 

At Home Savings Bank, Mahoning Valley Regional President Frank Hierro reports the bank – the combined Home Savings and First Federal Bank of the Midwest – had 1,700 approved loans for a total of $192 million as of May 5, with the Valley accounting for some 350 loans worth $45 million. Cortland Bank had approved roughly 180 loans for $10 million, says President and CEO James Gasior. And Mercer County State Bank chief lending officer Ron McNeely said, also on May 5, the bank had submitted 100 applications totaling $4 million.

Farmers National Bank President Kevin Helmick says his institution had 1,432 loans approved for a total of $188.9 million as of May 4. The same day, Middlefield Bank President Thomas Caldwell says his bank had 472 “active submissions” – either loans approved or ones still waiting to be sent to the SBA – totaling $47 million. 

Combined, the five banks report $442 million in PPP funding for about 3,900 businesses as of May 6. 

First National Bank of Pennsylvania reported getting approval for 18,000 businesses totaling $2.6 billion across its seven-state footprint. On May 1, PNC reported $14 billion secured for 70,500 businesses .

“We’re seeing in Round Two, the average loan size is about two-thirds of the first round. You can make the assumption that these are smaller businesses because it’s all based on payroll,” Middlefield’s Caldwell says. “They’ve been able to keep people employed. The biggest uncertainty – and not just about this program, but all of COVID-19 – is how long this will keep going. None of us know the end time of this.”

Across the board, the banks say businesses applying in this round are smaller than those that got loans through the first round of the Paycheck Protection Program. Many of the applicants in the first round were “large small businesses,” Gasior says, such as manufacturers and logistics companies. This time around, most of the applicants have far fewer employees.

“To me, that’s an indication that the larger small-business customer, those who have advisers working with them, got in line and got through in Phase One,” Farmers’ Helmick says. “Phase Two was so important because a lot of businesses don’t have an accountant or attorney or even a banker they work with every day, but they were getting around to [submitting their application].”

Adds Mercer County State Bank’s McNeely: “The first time through, it was primarily corporate borrowers and the second time has been predominantly sole proprietors and self-employed individuals. The loan size this time around is about a third of the loan size we saw the first time.”

The reason the typical size of Round Two applicants is shrinking, many suggest, is because they didn’t have the resources larger companies did to prepare their applications before the $349 billion allocated to the first round was exhausted.

“[Bigger businesses] had the internal resources to gather the information and prepare to apply,” Hierro explains. “The smaller entities and individual sole proprietors might have to go to an accountant or someone outside to get that information and turn in an application.”

With the second round of funding lasting longer than expected – some industry representatives said before Round Two opened April 27 that funding may not last five days as banks worked through their backlogs of leftover applications from the first round – it doesn’t seem likely quite yet there will be a third round.

“The president has said if there’s a need, he’ll advocate for it. Congressional leaders have said the same thing. The great thing about small business is that it’s not a partisan issue,” the SBA’s Scott says. “If there’s a need for Round Three of PPP, I’m sure Congress, with the support of the president, will definitely get it. Whether or not that will need to happen, it’s speculation at this point.”

The next question staring down PPP recipients and banks alike is the forgiveness aspect. If a business that receives funding maintains its pre-virus employment for eight weeks and spends at least 75% of its loan on payroll, with the remainder spent on approved costs such as utilities or rent, the loan is forgiven. Otherwise, it maintains its two-year term at 1%. 

Very little guidance has been issued on how businesses will go about providing the documentation to have their loans forgiven. The first weekend in May, the Treasury Department issued its first guidance on the topic, adding an entry to its frequently asked questions document stating businesses will not be penalized for employees that decide against returning to the company, provided the business makes a good-faith effort to bring them back.

“On the forgiveness portion, complying to the PPP loan to make it forgivable is going to be a situation where there’s more guidance that’s needed,” the SBA’s Scott says, noting that more guidance will be issued in the future. “This is a first step in providing that. When the legislation was passed, we couldn’t envision everything; so we’re issuing those FAQs and guidances to put more meat on the bones.”

Further, he adds, it isn’t required that businesses reopen. They just have to have their staff on their payrolls.

“It is immaterial whether or not that business can open their doors or at what capacity,” he says. “All of this is to keep people on payroll. I understand that some businesses won’t be able to reopen or be at half capacity. But the goal of the legislation is to keep people paid.”

While banks don’t know exactly what documentation businesses will need, they still have a good idea of what needs to be tracked.

“We’ve gathered information from the Cares Act and what’s available from the Treasury and SBA. We talk with peer institutions. We have a partner that has a relationship with the SBA, so there’s some industry perspective,” says John Lane, chief credit and risk officer for Middlefield Bank. “The key is going to be tracking expenditures closely, which most businesses already do in the categories that are forgivable: payroll, rent, utilities. Look at the opportunity for determining if you’re going to use the payroll period available for 2020 or the period from 2019. That’s a critical decision you’ll have to make. They may be different and that may be important in determining how you file for forgiveness.”

It’s too soon to tell, the bankers say, whether the Paycheck Protection Program is truly successful. Early indications point to businesses being on better footing than they would be without it; but the soonest any concrete evidence would arrive is the eight-week mark, when businesses will begin to have their loans forgiven.

“As we do forgiveness applications for the loan, if we find that we’re forgiving most of them, then yes, it’ll be safe to say it worked as intended,” Lane says. “But we won’t know until that eight-week cycle ends and we know how borrowers used the funds.”