Many small businesses say the Paycheck loan program is flawed

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Since the Federal program for the protection of paychecks Founded earlier this month, small businesses in the United States have raised nearly $ 290 billion in loans to survive the devastating economic storm caused by the corona virus. It cannot be enough.

Many small business owners contacted by CBS MoneyWatch complain that the design of the credit initiative is too restrictive and hinders employers who need some flexibility in deciding how and when to use credit.

“The important point here is that this program is touted as helping small businesses, but in many hotel and service business cases, its usefulness as helping the business is actually very limited,” said Joe Walsh of Green Clean Maine. He runs the house cleaning company with 35 employees in Portland, Maine.

Joe Walsh, owner of Green Clean Maine, an environmentally friendly cleaning service in Portland, Maine, said the Paycheck Protection Program was not ideal for his company.

Courtesy of Emilie Sommer / Emilie Inc Photography


Legislature did not launch the paycheck program as a small business bailout. Rather, it should help companies to employ workers. With this initiative, companies can take out a low-interest loan that is a maximum of 2.5 times their monthly pay slip. The loan and accrued interest will be fully paid as long as companies spend most of the funds on employee retention or reinstatement.

While this may sound good in principle, the rules effectively compel business owners to continue paying employees, even if companies are closed and unable to generate income. As a result, various types of small businesses are poorly suited to the credit initiative, the owners say:

  • Companies for which payroll accounting is only a small part of their total costs.
  • Firms that primarily employ minimum wage workers are better off collecting the increased unemployment that is also part of the government’s $ 2.2 trillion economic relief package.
  • Companies that rely on contract workers who are excluded from payroll when calculating paycheck loans.

David Audretsch, professor of economics at Indiana University and co-editor of Small Business Economics, estimates that the Paycheck program doesn’t work for 40% of the country’s 30 million small businesses.

The result: Millions of small businesses that employ nearly half of all workers in the United States may not see much benefit from the main government initiative that was launched to help these businesses.

“It feels good that money is being spent now, but I think there will be a lot of people – from workers to small business owners to policy makers – who will be dissatisfied with this program,” said Jason Furman, a former President Obama’s top business advisor and professor at Harvard University’s John F. Kennedy School of Government.

A tricky two-point test for forgiveness

The Paycheck program offers two-year loans at an interest rate of 1%. But small businesses can fully grant the loans within a few months and make money effectively by passing two tests (both by June 30).

First, a company must have the same number of employees as on February 15, or a number of employees equal to the average number of employees in the first two months of 2020. Second, each employee must earn less than $ 100,000 a year. At least 75% of earnings must be paid from February 15th (through June 30th).

However, these two criteria may be difficult to meet. For example, if a small company has already fired workers, they must be hired retroactively by February 15 and wages paid back – a potential danger as some workers have moved on. If employees cannot be recruited, a company can hire new employees to reach their number of employees before the virus occurs. However, this only fulfills the first test, not the second, which means that the loan is only partially granted.

In order for small businesses to qualify for lending, the paycheck program also provides that they don’t spend more than 25% of their rent, pension, and debt payments. The remaining amount of the loan must be used for paying employees.

“I would not worry that the government would not come out and do not lend these loans,” said Joseph Most, a lawyer and accountant at Berdon LLP, a small business accounting and consulting firm. “I think the process of forgiveness will be more difficult than what they imagine.”

“The housekeeper cannot call”

Walsh, who applied for a $ 280,000 loan, said these restrictions made it impractical for Green Clean Maine, an environmentally friendly cleaning service that looks after around 400 families. Currently, the company’s sales have dropped to zero – there is no way to clean houses remotely – and he doesn’t want to endanger his employees or customers by continuing to work.

A uniform paycheck would require him to put his employees on hold even though he doesn’t have a job for them right now, he said. “”The aim of the program is to reinstate your employees, regardless of whether you are open or not. This presents companies with a number of problems. Since we are in a service business, you cannot work remotely. The housekeeper can’t call, “he said.

Nevertheless, Walsh applies for the loan because he urgently needs help.

“I will accept it and I will continue to talk about the restrictions in the hope that we can make some rule changes,” he said. “In the meantime, we have to work with it, so we’ll just work with it.”

Not just about employing workers

Justin Moore, general manager of Uncle Bobbie’s Coffee and Books in Philadelphia, expressed concern that the loan program, while designed to protect workers, does little to help small business owners cover unpaid expenses.

“The focus was on payroll, payroll, and payroll, which makes a lot of sense in theory. However, if you are unable to spend the money on other expenses, there will be no business you can go back to.” to, “said Moore to CBS MoneyWatch.” The main limitation is that so much of the credit has to be on the payroll for it to be given when companies have other needs. “

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Coffee shop manager Justin Moore says the loan he applied for for the Paycheck Protection Program protects workers, but does little to cover unpaid expenses.

Photo credit: Courtesy of Justin Moore


Employers also consider what is most convenient for their employees – they stay on the payroll or have them apply for extended unemployment benefits. The Coronavirus Aid, Relief, and Economic Security Act provides an additional $ 600 for weekly government benefits, making some workers higher than Coronavirus wages.

Evan Carroll, who has three hair salons for pigtails and crew cuts for children in North and South Carolina, has fired all 25 of his employees, including hairdressers and salon managers, most of whom have now applied for unemployment. He was recently granted a $ 107,000 paycheck loan that he plans to accept, if only because he sees no better alternative.

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Evan and Kristine Carroll, owners of three Pigtails & Crewcuts franchises in North Carolina and South Caroline.

Courtesy of Evan Carroll


Even so, Carroll said he would not help his employees by keeping them on the payroll. “Most of my employees would make more money from this additional federal unemployment income,” he said.

“There is no point in paying them now, and if I do, I will have used up all of these funds before we reopen,” Carroll added. “I want to use the money when we open up again to make sure our employees stay on their pre-pandemic income even if they can’t work full time.”

An easy solution?

Smaller changes in the rules for using paycheck loans would make a big difference, small business owners said.

“In an ideal scenario, the government would provide us with the resources and allocate them to the best of our knowledge and belief – by paying bills and dealing with other expenses,” said Moore, noting that he had a stack of bills due End of April. “Other companies in this ecosystem in which we are involved also need this money, like my landlord.”

He is likely to spend more than 25% of his loan on non-wage related expenses and expects to incur debt.

“You get nervous when you have a five-figure mountain of debt on your balance sheet,” said Moore. “But at this point it is better to have money than not to have money.”