Payroll Protection Program loans help, but businesses still hurt
Oregon Businesses have done better in the second round of the Paycheck Protection Program loan program.
The Small Business Administration said 31,119 loans to Oregon businesses were approved between April 27 and May 1. The average loan is around $97,000.
The Small Business Administration has been tasked by the U.S. Government with distributing money to American businesses who are suffering during the coronavirus shutdown. Congress gave the SBA nearly $660 billion over the past two months for government-guaranteed, forgivable loans.
As of Friday, May 8, there was approximately $130 billion in PPP funding still available for small businesses.
The SBA outsources the loan management to banks and credit unions who are much closer to the local businesses.
The $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act provided $349 billion for the PPP loans.
Round one ($349 billion) lasted two weeks but was criticized when it came out that — beyond the delays, paperwork and red tape — some loans went to 15 publicly traded companies with market values of more than $100 million. Companies that no one considered small but who had less than 500 people at each location, such as Shake Shack, The Los Angeles Lakers and Ruth's Chris Steak House, were dragged onto social media and shamed into returning their money.
For round two ($310 billion), the Department of the Treasury issued new guidance on CARES Act funding, targeting smaller companies and smaller banks. The guidance said firms had to show they could not raise money any other way.
In the first round, 1.6 million PPP loans were issued, of which 18,732 went to Oregon companies, totaling $3.8 billion.
By Monday, May 4, the second round of the Paycheck Protection Program has issued 2.2 million loans worth $176 billion — including 31,000 loans worth $3 billion to Oregon firms.
In the first round, the average loan size was $206,000. In the second, $79,000.
Eric Corrigan, managing director of Commerce Street Capital, says a third round of funding will be needed. Like others, he said the SBA was unprepared to process $350 billion of notes in 10 days and had antiquated systems, and offered limited and conflicting guidance and no documentation. Smaller banks stepped up and had employees pull seven-days-a-week, 18-hour days to process loans.
"Banks found it natural to focus on their own customers first. The imposition of KYC/AML/BSA requirements was a huge deterrent to help new customers."
Corrigan added that there are currently around 97,000 brick and mortar branches in the United States of banks and credit unions. While they have been closed during the pandemic, banks and customers were still being serviced. Which raised the question, "Do we need all that real estate tied-up in unproductive use?"
Scott Showalter is the president and CEO of the Oregon Symphony, which has 76 full-time musicians, performs for more than 200,000 people each year at Portland's Arlene Schnitzer Concert Hall and beyond, and has a $22 million annual budget.
The Oregon Symphony applied for and received a loan of $2 million in the first round, through Umpqua Bank.
"The calculus by which PPP is determined includes compensation for effectively two-and-a-half months, and then per a complex set of parameters, some or all of that money can be forgiven at a later date," Showalter told the Business Tribune. That requires that the Oregon Symphony has on staff its FTE (full-time employee) equivalent. When the ban on performing came in, they furloughed the entire orchestra and laid off about half of the staff — in total, almost 100 people. Using the $2 million PPP loan, they have rehired those people for eight weeks. After which they likely will not be performing music still, so they will furlough the musicians again in mid-June.
"So, it's a way to keep people employed," Showalter said. "That's the federal government's plan as I understand it, and so that's great. But it doesn't change our dire financial outlook in the long-term. Because at our core, what we do is bring people together in a confined space on a frequent basis. And that's precisely what we're not allowed to do. That's the only way we earn money."
Half their income comes from ticket sales, the rest from donations and grants. A symphony without thousands of ticket holders gathered together to listen to it is not a going concern. The symphony also has programming to bring music to schools, libraries, neighborhoods, correctional facilities, immigration centers, homeless shelters, and hospitals.
"Right now, we cannot perform in any of those venues. We can't even perform with one another within social distance. Wind instrument players can't wear a mask over their face," Showalter said.
The symphony has asked the state of Oregon for $5 million in emergency funding to stay alive. "Until we receive financial relief, streaming digital content allows us to remain present in peoples' lives and utilize the talents of our musicians and staff," he said.
The recent virtual gala was a hit because, while watching on a screen is not as fun as a black-tie feast, it did reach more people who could donate.
Applications opened at noon, and Showalter's team submitted at 12.02 p.m., but they quickly got a message that they would need to use another bank or wait for a second round.
"And then Umpqua Bank (stepped in and) championed the application and made it possible to push it through to meet the deadline," he said.
After Umpqua did its due diligence, it applied to the SBA. When the loan was approved, Umpqua wired the $2 million to the symphony.
The symphony plans years ahead, with contracts with musicians, recordings, ticket sales as well as the usual concerns with health care and staffing. It's a massive operation to stop dead in its tracks.
"If we were to completely turn off the lights, and then at some point in the future start up again, it would take a long ramp-up period."
Days not years
Tom Keenan, president of Keenan & Partners, is based in Portland. His firm advises individual financial institutions on asset quality, particularly valuation and sale of branch and admin facility assets.
Asked if applying for Paycheck Protection loans is an onerous process, he said, "No. There were a large number of unknowns when the first round of the program was launched. But banks and credit unions throughout the state have the process down by now. Nobody had ever done this before."
Companies applying need to send in their 2019 full-year payroll tax form data, and the first quarter of 2020, either on tax forms or in payroll processor records, because tax day was delayed three months. "They had to sign in good faith saying that they were in business of February 15, 2020, that the funds will be used to retain workers and maintain payroll and-or be applied to the business's mortgage, rent, and utilities, and that the business needs it because it was affected by the coronavirus."
Keenan added that complaints flowed during the first round because larger banks were sometimes not getting back to customers as quickly as smaller banks, and sometimes offered the loans only to pre-existing customers. "But banks headquartered in Oregon have done an outstanding job, and many didn't discern between existing customers and new customers when taking applications."
Keenan says there's still some risk.
"The treasury and the SBA may add additional guidelines on criteria affecting the loan. As this had to happen so fast, the treasury and the SBA have issued additional guidance after the program launched. That's to be expected. Usually, a program of this magnitude would take one or two years to plan out. Here they had one or two days."
Credit Unions: take that to the bank
Lynn Heider, the spokesperson for the Northwest Credit Union Association, told the Business Tribune the SBA has a list of lenders, but "credit unions are generally able to react a little faster. If an institution of any size is not an SBA lender, they have to get certified."
The financial institutions that were already certified as SBA lenders were able to get loans into the queue faster because they did not have to apply for the designation.
Heider said she couldn't imagine any financial institution forwarding an application to the SBA that they knew wasn't strong.
"They may already be making business loans and not have ever worked in the SBA framework. Some companies applied with multiple lenders to get in the queue and get approved, then notified the other lenders."
Credit unions don't pay stockholders on Wall Street. Instead, they are not-for-profits and are owned by the members. Earnings, in excess of expenses and required reserves, are reinvested in the members, often in the form of lower loan rates or better returns on savings.
In any case, they worked around the clock.
"Oregon credit unions that participated in the Paycheck Protection Program loans redirected as many employees as possible to focus on small businesses that needed PPP loans. These teams worked days, nights, and weekends during both phases of the program to help fund loans and protect thousands of jobs," Heider said.
Paycheck Protection Program loans are forgivable loans for small businesses to offset some of the losses experienced by the response to the COVID-19 pandemic.
The loans are meant to provide a direct incentive for small businesses to keep their workers on the payroll. The loans are at one percent annual interest for two years, so long as the company uses them to keep its staff employed.
The banks lend their own money, but on such favorable terms that the risk is low.
PPP loans can be settled in three ways:
They are forgiven if they are spent on eligible items — mainly payroll — within 60 days. Then the banks get the money back from the SBA, that is, the taxpayer.
If the loans are not forgiven, they turn into a two-year loan at 1 percent interest.
If the borrower defaults, the SBA pays back the bank.
If a lender is disqualified after receiving the loan, then the bank takes the loss.
According to a report in the Portland Business Journal, for every 1,000 firms, Oregon and Washington received 202.1 and 199.5 PPP loans. The national average was 273.4.
The numbers for red states such as North Dakota, Nebraska and South Dakota were all above 500. California had only 149.1 loans per 1,000 small firms.
The Business Journal article explained that those red states had "a large number of state-chartered community banks. Such institutions seemed more eager than large national banks to process low-margin PPP loans."
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