Small businesses have 'a million questions' about paycheck relief loan as applications come due

Key Points
  • The SBA has set Friday as the day that small businesses can start applying for the paycheck protection program.
  • Loans of 2.5 times a company's average monthly payroll are forgivable as long as businesses use them for wages, rent and utility costs. 
  • Business owners say the details are confusing and banks don't have all the answers.
Jourdain Degarmo, CEO of Mr. Muggles' Dogs
Joe Drypolcher

Jourdain Degarmo had to lay off all seven employees from his doggie day care in San Francisco last month after California's shelter-in-place order required nonessential workers to stay home. Degarmo has continued paying salaries with his cash on hand but needs help from the government to keep those checks rolling.

On Friday, Degarmo and millions of small business owners like him will start applying for government-backed loans that will let them pay people not to work with the hope that once the economy reopens companies can pick up where they left off. With jobless claims for last week surging to a record 6.6 million, the Trump administration is desperate to keep money flowing so families can pay rent and put food on the table.

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'It's only right'—Jim Cramer says government has to help small business

"I want to retain my staff and the people who have worked for me for years," said Degarmo, 30, who owns Mr. Muggles Dogs with his husband.

But confusion about the Small Business Administration loans is widespread at banks and among potential borrowers. The banks responsible for accepting the applications and distributing the money aren't all up to speed and, inundated with inquiries, are relaying differing messages to their clients. CNBC reported on Thursday that JPMorgan Chase, the biggest U.S. bank, told customers by email that it would likely not be ready to start taking applications on Friday. Bank of America's loan portal came online Friday morning, making it the first major bank to get up and running.

Business owners, meanwhile, are unclear on the details of the program and uncertain whether they'll have to pay anything back as the application form continues to get revised. Degarmo said he contacted his credit union on Wednesday and was told to reach back out in a day or two for more information. He's relying on his accounting firm to help him through the process. 

"They're really the ones navigating this for us because I don't understand any of it," Degarmo said.

Chase may not be ready for SBA's payment protection program
Chase may not be ready for SBA's payment protection program

PPP: A loan you might not have to pay back

The loan in question is the paycheck protection program (PPP), and it accounts for $349 billion of the $2 trillion coronavirus rescue package, or CARES Act, passed by Congress and signed into law last week. Businesses with fewer than 500 employees are eligible, and that includes independent contractors. Employers can apply to receive up to 2.5 times their average monthly payroll expense, including health-care benefits, for annual salaries up to $100,000. Loans max out at $10 million.

The main point of confusion for some businesses is that PPP really isn't a loan in the traditional sense, because they might never need to pay it back.

Employers that keep their staff or hire back furloughed workers while cutting wages by no more than 25% are eligible for full forgiveness if all of the money is directed to payroll, rent and utility costs over an eight-week period. The amount of forgiveness drops for companies that don't abide by all the requirements.

"It's effectively an equity injection with no ownership," said Scott Orn, chief operating officer of San Francisco-based Kruze Consulting, which advises start-ups and small businesses on accounting, tax and financial matters. "The government is buying jobs."

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Orn, who previously worked in venture debt, commends the Treasury Department for putting a large package together quickly and getting an application out that's short (two pages) and accessible. But after spending hours reviewing the eligibility requirements and talking to bankers, some issues still aren't clear, he said. 

For one, there's a lack of consensus on whether contractors are included in payroll costs, Orn said. Additionally, the government hasn't given banks enough guidance on how to handle the application process. Banks will be reviewing the applications and doling out the money, but they don't know when the government will pay them back, or if they'll be financially responsible if loans aren't processed correctly.

"I've had two bankers say to me that they're worried about getting left holding the bag," Orn said. "Banks are worried about liability and they're worried about how quickly the SBA will refund the money back to them."

Three other types of loans available

The initial challenge many business owners face is figuring out which loan is the right one.

The SBA set up a website — Coronavirus (COVID-19): Small Business Guidance & Loan Resources — with four options for accessing capital.

In addition to PPP, businesses can apply for:

Meredith Erin, co-owner of online clothing company Boredwalk in Los Angeles, said she applied for an emergency loan on March 16, and then heard about another coronavirus-related relief loan that's accepting applications this week. It's a lot for her and her husband, who runs the business with her, to figure out while they try and take care of their five employees and keep the site going. 

Erin is part of a network of e-commerce executives who are sharing information with each other, but everyone is confused, she said. They don't know how much money they can get or at what interest rate.

"I still have a million questions that I don't have answers to," Erin said. "We're trying to talk to people at SBA and are talking to colleagues who are going through the exact same thing we are to try and figure it out."

In Columbus, Ohio, Taj Schaffnit, CEO of online commerce company eRetailing Associates, had to let go of over two-thirds of his 95 employees last month. With revenue down by half and the virus rapidly spreading, Schaffnit said he felt a "moral obligation" to keep people safe since he wasn't operating an essential business.

Employees at eRetailing Associates
eRetailing Associates

Like the Boredwalk owners, Schaffnit has looked at multiple options for capital, but he wants to avoid taking out a traditional SBA loan because he's doesn't know if the business will ever ramp back enough to justify taking on debt. The payroll protection money makes more sense because it enables him to pay employees during this period of extreme uncertainty, but he's not sure if he'll be able to keep the workers on when the loans runs out.

"You still have to do what's prudent and financially responsible for the viability of the business," said Schaffnit, whose company specializes in customized apparel. "You could bring them back for eight weeks but if you don't have the volume after that, what do you do?"

Tech start-ups face an added wrinkle

Many of Orn's clients are venture-backed tech companies, which face an additional layer of complexity under the SBA's guidelines.

Venture firms are typically attributed a level of control by the SBA that makes their portfolio companies ineligible for small business loans. Yet, according to the National Venture Capital Association, 97% of companies that have raised venture funding since 2015 have fewer than 500 people and still experience the volatility associated with small businesses.

In a March 27 letter to Treasury Secretary Steven Mnuchin and SBA head Jovita Carranza, the NVCA asked that the program be available to tech start-ups, which are suffering along with the rest of the economy. A number have already announced mass layoffs because of the collapse in travel, tourism and consumer spending. 

"Failure to provide clarity that small businesses with equity investors are eligible for the loan facility will cost jobs not only at startups, but at many of the independently owned service-oriented small businesses in communities across America," wrote Bobby Franklin, CEO of the NVCA. "These startup workers, who include engineers, customer service representatives, and human resources professionals, are the very customers that service-oriented small businesses such as restaurants and coffee shops rely on for sales making an economic comeback post crisis even more difficult."

What about rent relief?

Schaffnit said that in trying to stay educated he has the benefit of working with Fifth Third, an Ohio-based bank that has expertise in small business loans.

In San Francisco, Shirley Ng has had a very different experience with Wells Fargo.

Ng, who owns a small office furniture and equipment business called Cycon Office Systems, said she went into a local Wells Fargo branch earlier this week and was told by a banker that the company isn't doing the SBA loans yet. Ng said she was told to come back Friday, when the bank would hopefully have a better understanding of what to do.

Ng is trying to determine whether to pursue the payroll protection money because it doesn't address her biggest need: rent relief. She employs only one other full-time worker and a few part-timers, but pays $16,000 a month in rent for office and warehouse space in San Francisco and Daly City.

In Daly City, the landlord is giving her one month free. But according to an amended lease agreement from her San Francisco landlord, Ng is being asked to defer April and May rent — over $21,000 — and pay it back over the course of a year. If she can't pay, the money will come out of her deposit, the agreement says. 

Ng knows she's losing at least two months of revenue and is uncertain how much business there will be after that. Her landlord won't budge.

"How do I make up for $21,000 in 12 months?" Ng said, adding that her lawyer has advised her not to sign the lease. "The government has to do something about the rent or the landlord."

CNBC's Jordan Novet contributed to this report.

Correction: Shirley Ng's business has office and warehouse space in San Francisco and Daly City. An earlier version misspelled the name of one of the cities.

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