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The Paycheck Protection Program and what it means for small business

5/11/2021 4:14:00 PM
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As part of the original economic relief package, the CARES act, Congress approved an additional $900B spend as part of an interim final rule, part of which, $284B to be exact is earmarked towards round 2 of the paycheck protection program PPP. It is a mixed bag of goodies and opinions on the program’s effectiveness and reach are diverse.

Market Liquidity

Mortgage Interest rates are at their historical lows with US prime at 3.25% which is the lowest it has been since 2008. The new money that the fed pumps into the market as part of the CARES act, will add even more liquidity allowing small businesses to borrow at a low interest rate. This is good for the economy but not so good for the risk of rising inflation.

Second draw PPP loans

The "second draw PPP loans" will allow US businesses borrow up to $2M that can be forgiven essentially converting them to grants provided the business does not shutter or layoff employees and the money is used to fund payroll expenses. PPP loan forgiveness guidelines have been released and businesses can apply for forgiveness of loans that were disbursed from the PPP funding program. Businesses can start the PPP loan application with their current bank or find approved lenders on the small business administration's site ( to start the application process.

Second draw loans are available only to businesses with fewer than 300 employees as opposed to 500 in the original PPP. The new version of PPP includes special measures for businesses with less than 10 employees. Public traded companies cannot participate in the updated version. Businesses can use funds from the PPP as legitimate expenses for protective equipment for employees.

Oddities in the PPP program

In our opinion there are several oddities in the new program

Businesses can use the funds from PPP to pay rent or mortgage AND deduct taxes on their rental or mortgage bill. Traditionally you pay taxes on earned revenue and tax forgiveness on expenses funded from a borrowed asset are in our opinion, unheard of but they help businesses conserve their resources and add to the company's bottom line enabling them to fund growth.

The program seems to be fixated on the pre-virus economy. The second draw loans are available to businesses that experienced a drop of least 25% in gross receipts in any quarter in 2020 compared to the same quarter in 2019. Some businesses like service providers have contractual terms that helped them stay afloat during the pandemic. With the aftereffects of the pandemic manifesting themselves in the economy in 2021, businesses that will fail are not sufficiently protected from these effects.

Businesses that received PPP are required to spend at least 60% of the loan amounts on payroll costs. It would be better if the government can shift this focus to replacing lost revenue, allowing businesses to make timely decisions on employed workers and the workforce make up post pandemic.

Compared to other industries, restaurants can receive 3.5 times the cost of their payroll while this is limited to 2.5 for other industries. Sure, the restaurant industry has suffered but if people are willing to go out and eat which has been the case then this is in our opinion biased preferential treatment and knee jerk reaction by Congress.

The goal for the PPP was twofold. One, to preserve the collective production capacity of small businesses by preventing pandemic related bankruptcies. The original PPP was amazingly effective in addressing this and in our opinion prevented the economy from a deep recession. The second goal was to increase GDP. We witnessed very strong growth in the GDP in the last quarter of 2020.

Based on the goals that the PPP was originally designed for, it has been a very effective tool in counter acting the effects of the pandemic and keeping the economy humming.