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As the federal government gets ready to approve a new round of low-interest stimulus loans for small businesses, White House officials are looking to avoid the mistakes that occurred during the first phase of the plan. FOX Business has learned the Treasury Department is looking to close various loopholes that plagued the Payroll Protection Program (PPP) and deprived many small businesses from getting their hands on the money while some larger profitable businesses feasted on the low-interest loans.
The PPP legislation was intended to help small businesses—those with 500 or fewer employees hardest hit by the coronavirus-related shutdowns and quarantines—to obtain cheap, forgivable loans that would serve as a lifeline until the pandemic receded and businesses could reopen.
But as FOX Business chronicled over the past two weeks, the initial program was riddled with loopholes that allow profitable financial firms, law firms and even large publicly traded restaurant and hospitality chains with far more than 500 employees to tap into the program. These companies were able to move to the front of the lending line because they have deep banking relationships with financial institutions doling out the money.
The big banks have told FOX Business they were forced to hand out money to their best customers because the Treasury Department and the Small Business Administration didn't provide guidelines on what types of businesses should benefit the most from the PPP, and they would have faced tremendous legal liability.
The upshot has been a disastrous rollout of the program with many businesses obtaining these loans even though they don't need the money because they are profitable and can tap public lending markets. Small business lobby groups say these loopholes deprived thousands of legitimate small businesses from getting their fair share of the loans, meaning they had to lay off employees or close down permanently.
Banking sources tell FOX Business that the Treasury Department, under pressure from banks and small business groups, is looking to close some of these loopholes to make the program more equitable; Treasury has been issuing guidance on a rolling basis as it observes changes that need to be made. One potential fix under consideration is to make public companies ineligible for the next tranche of loans. Companies like Shake Shack and Potbelly Sandwich Shop came under tremendous heat when it was revealed they got millions in PPP loans, even though these companies can also tap public markets cheaply because of Fed actions. Shake Shack returned the funds and raised money from the public markets.
FOX Business could not determine what other possible loopholes might be closed or if Treasury has made a firm commitment to making the program more equitable to small businesses. A Treasury spokesman said, "It's fair to say that we are looking at ways to make the program even more effective at reaching its intended recipients."
Other officials at Treasury contend they are doing the best they can under a difficult situation where they had to get lots of money out quickly to prevent the small business economy from going into freefall. They point out that despite some issues with PPP — issues they’re now looking to address — for the most part the money has been going where it is needed to go. They note the initial $350 billion round was launched in just a week and point to the fact that 74 percent of the loans given were for less than $150,000 meaning very small businesses received these loans.
The Senate approved the additional stimulus money as well as expanded PPP lending Tuesday afternoon. The House will likely vote Thursday, but this bill should be law as soon as Thursday night or Friday morning. PPP loans may begin getting distributed as early as this weekend.
The new stimulus money includes a total of $321 billion for PPP loans.
But even this might not be enough to satisfy loan demand for small businesses looking to survive the pandemic shutdown. The first tranche of the money, around $350 billion, lasted just two weeks ago and would have been depleted faster if banks had their systems completed on time. People with knowledge of the legislation believe the new funds will only last for three to four days given the intensity of demand.
When asked whether the new round of funds would run out in the days after the stimulus was passed, a Treasury official responded, “We hope that is not the case.”