The federal government wanted its coronavirus relief loans to go towards small, “Main Street” businesses. However several large public companies took advantage of a loophole. Now, Uncle Sam wants his money back.
On Thursday, the Small Business Administration issued new guidance that makes it even harder for large companies to access federal loans. It said companies that apply for coronavirus relief loans must certify that the loans are necessary. Additionally, the company cannot tap other sources of funding. Public companies have access to capital markets by definition, so it seems unlikely that any could truthfully fulfill the certification. Any company that tries to sneak in will risk drawing the ire of the Treasury Department. The said department will undoubtedly come down hard on anyone that tries to play the system.
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Over $550 million in forgivable loans were approved for roughly 150 large, publically traded companies through the Paycheck Protection Program. The program’s guidelines specifically restrict loans to businesses with 500 or fewer employees. However, certain businesses, particularly hospitals and restaurants, managed to skirt around this requirement. To make matters worse, large companies also applied for multiple loans through their subsidiaries. Therefore, some companies were about to rack of tens of millions of dollars in forgivable federal loans.
Big Businesses Getting Loans
The issue began to attract controversy last week when reports indicated that several companies with market values well above $100 million were receiving loans from the program. Meanwhile, smaller businesses were having trouble accessing any type of funding at all. Small business owners were incensed when they found out giant public companies like Shake Shack and Ruth’s Chris Steakhouse were tapping the program. The controversy sparked a public outcry which led the Treasury Department to clarify its lending guidelines last week.
After the controversy began to heat up, Treasury Department officials released a statement encouraging public companies to return the money. The Treasury said, “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.”
The PPP loan application requires businesses to certify that “current economic uncertainty makes the loan necessary to support … ongoing operations.“ The Treasury Dept.’s statement indicates that public companies will have a tough time justifying that they made that certification in good faith, and they could get in big trouble for lying on their applications if it came down to it.
The Treasury Department wants these large public companies to give back the money so that they can recycle it back into the program. However, the department granted a grace period for businesses to return the money without penalty. The Small Business Administration will deem any business that returns the funds by May 7th “to have made the required certification in good faith.”
Abusing a Loophole
Two dozen of the companies that received loans had more than 500 employees. However, many squeezed into the program through a loophole that excluded restaurants and hotels from this requirement. At least 15 companies that received loans had market values exceeding $100 million. DMC Global has a value of over $405 million and it received $6.7 million in forgivable loans. Molly Bennet, a large hotel chain, secured dozens of loans totaling almost $60 million by applying through several of its subsidiaries.
The House ratified the second round of PPP funding on Thursday. The new bill provides an additional $320 billion for the program. U.S. businesses rapidly depleted the $350 billion allocation for the PPP in the first round. So, the program needed financial ammunition in order to continue operating. Now the bill will head to the White House for President Trump’s final approval.
In the grand scheme of things, the $550 million in loans received by large businesses is only a small portion of the soon-to-be $670 billion PPP fund. Although, the idea of large corporations raiding federal emergency funds definitely didn’t sit well with many Americans.