Small Business Owners Sign PPP Loans Without Clear Terms

Randy George had never laid anyone off in his 20 years running his bakery and café in Middlesex, Vermont. But after Vermont Gov. Phil Scott shut down restaurants to slow the spread of the coronavirus, half of his sales disappeared virtually overnight. He’s had to put 28 of the staff of Red Hen Baking Co. on furlough. George decided to sign up for a loan through the Paycheck Protection Program, created by Congress’s CARES Act relief bill to help small business owners stay afloat. At first, the program was funded with $350 billion, an amount that ran out about two weeks after it began; Congress is now working on a deal to add another $320 billion.

The key feature of these loans, which are being run by the Small Business Administration, is that they are supposed to be entirely forgiven if an owner spends most of the money on payroll and doesn’t lay anyone off. The details of how that forgiveness will work, however, are far from clear, making some small business owners wary to use it at all.

In bank loan contracts reviewed by The Intercept, owners have been asked to sign onto terms that said that “forgiveness may apply” or “all or part of the Loan may be forgiven” — releasing the banks from liability but giving business owners no contractual guarantee of loan forgiveness, or even guidance on how to comply with the rules or how to pursue it. One didn’t mention forgiveness at all.

The application materials, which are produced on SBA letterhead, have even fewer details. “Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities,” most applications read. No other information is offered about what “covered” means. The CARES Act contains some details about how these are defined, but it’s buried in an almost 900-page bill.

And no concrete information has been given to small business owners about how they should go about getting their loans forgiven. Some owners were told that to gain forgiveness, they’d have to submit a request to their banks. Others were told that they have to go straight to the SBA.

That’s left many people questioning whether the loans will indeed be converted to grants at all. “The keystone, the cornerstone of this program is not assured,” George said.

A week after he applied, George’s banker sent him the loan papers. “I fully expect[ed] to see among the four documents … a fifth one with fine print on what exactly you need to do in order to get the maximum forgiveness on a loan,” he said. Instead, his bank included an addendum stating, “Lender makes no representation or promise to Borrower with respect to governmental forgiveness of any amount of the loan or related interest. Borrower understands that the Program currently contains conditions under which forgiveness may apply and agrees to understand and comply with such conditions as they exist and may change over time.” It instructed him to apply for forgiveness through the SBA. It also said that he agreed to hold the bank harmless for its interpretation of loan forgiveness.

“Basically … you are responsible for this loan,” George summarized. He was informed that he had six days from looking over that document to decide whether to sign it.

For a PPP loan to be forgiven, the SBA has signaled that 75 percent of the money has to be spent on keeping all the full-time equivalent staff on payroll, and that the rest of the 25 percent can be spent on rent and utilities. That, too, differs depending on paperwork. Some applications say, “Not more than 25% of the forgiven amount may be for non-payroll costs.” Others are less direct: “Due to likely high subscription, it is anticipated that not more than twenty-five percent (25%) of the forgiven amount may be for non-payroll costs.”

Many details haven’t been spelled out. George doesn’t know, for instance, what “full-time equivalent” means. He had just hired someone and had scheduled him to start in the middle of March, but he had to tell him not to come in once the pandemic hit. Does he need to make sure that person is on his payroll? What if he can’t get the same number of staff to come back because people would rather collect enhanced unemployment benefits than risk coming back to work for him for eight weeks? What about the part-time employees who certainly won’t come back for partial pay if they can get $600-plus a week from unemployment? And by when do they need to be back on payroll: by June 30, the end of the PPP program, or within eight weeks of when his loan is issued? “There’s a lot that could be left open to interpretation,” he said.

When he asked his banker these questions, “His response was, ‘Don’t worry so much about the forgiveness right now, you’re overthinking it,’” George recalled. “He has no answers.”

The Small Business Administration didn’t respond to requests for comment or clarification.

When George asked his banker these questions, “His response was, ‘Don’t worry so much about the forgiveness right now, you’re overthinking it.’”

The details are far from a distraction for George. The biggest loan he has ever taken out before was for $200,000 over five years. “That took a lot of planning to figure out how we’re going to make that work,” he noted. And now he is being asked to sign onto a $411,000 loan with few details about whether he’ll have to pay it. He can’t afford to take on a loan like that, even with a 1 percent interest rate. “This thing is only attractive if you have the forgiveness,” he noted.

In the end, even without the information he wanted about forgiveness, George decided to sign the paperwork for his loan. His banker warned him that the funds in the PPP program were running low, so he rushed to get it in under the wire. “A half hour later, the money’s in our account,” he said. “It’s almost spooky.”

Minneapolis-based Smart Set owner Kevin Brown has been through tough times before, like 9/11 and the 2008 recession. But nothing like this. His print services business has fallen by about 75 to 80 percent. He doesn’t want to lose any of his employees — it’s technical work and takes three to six months to train someone — so the PPP was very attractive.

But Brown, too, has gotten little clarity on the requirements. At first, it was just the application. “As far as a financial bank instrument, it’s about as thin as I’ve ever seen,” he said.

His loan document came through on April 21. “All or part of the Loan may be forgiven if Borrower satisfies and complies with the terms and conditions for loan forgiveness under the Act and Rules,” it states. “If the loan is not fully forgiven, Borrower will remain liable for the full and punctual payment and satisfaction of the remaining balance of the loan.” It lays out some details about timing — that the eight-week period will begin as soon as the money is first disbursed, and that employees must be rehired by June 30 — but does not explain which employees or how many will be considered full-time equivalents.

He called his banker for more clarity. “He said they are getting very little guidance from the SBA, so they are operating on a ‘good-faith’ basis,” he said. “All of these banks are trying to make up their own rules just so that they can go to the SBA and say, ‘Yes, we did our due diligence; these people qualify.’”

It’s a way of shielding themselves from liability. But it also leaves small business owners holding the bag. Brown has done many bank loans before. He’s never signed a loan document “where it says the bank may do this or may not do this,” he said. “That’s not what a contract is.”

Without clarity on forgiveness, a number of the small business owners The Intercept spoke with were considering taking any PPP loan funds they received and putting them in a bank account, untouched, until they knew more. That way, they could send the money back if it won’t be forgiven and not be on the hook for a loan they didn’t even want. But it also means that they won’t be using it to quickly get employees back on their payrolls as was intended.

That’s what Andrew and Brianna Volk plan to do with their money. The couple own the Portland Hunt and Alpine Club, a 50-seat restaurant in downtown Portland, Maine. They’re one of the lucky small business owners; they got through the chaotic process that shut many people out and already have their PPP money. But it’s gone straight into a bank account and has more or less sat untouched.

The couple voluntarily shut down their restaurant a day before their state enacted a mandatory closure, putting all but one of its 12-person staff on furlough. “We really value our staff,” Andrew Volk said. “I want to hire people back.” But until there are more details, he’s holding onto the money, and his bank had no answers. The couple’s loan document made no mention of forgiveness at all. “Nobody seems to know specifically how do you get forgiven for this,” he said. “There aren’t answers to these questions because they haven’t written the rules yet.”

“Nobody seems to know specifically how do you get forgiven for this. There aren’t answers to these questions because they haven’t written the rules yet.”

Danny Schwartzman, owner of Minneapolis-based Common Roots Café, was also able to get through the initial chaos of getting his application in quickly. But now he’s waiting for more clarity. “I still don’t know if we’re going to take it,” he said. “I still don’t have any clear sense of how practical this is for a business like mine.” So he hasn’t even asked his bank for the final paperwork to get the money he’s been approved for.

“It would have made a lot more sense to provide direct support,” he argued. That’s what other countries, such as Denmark, France, Germany, the Netherlands, and the United Kingdom have done: directly paying companies for their payroll costs. Denmark and the Netherlands, for example, have promised to pay companies up to 90 percent of their workers’ wages.

Kelly Conklin also argues that it doesn’t make sense for the money to be given out through loans. He and his wife, owners of Foley-Waite Construction in Kenilworth, New Jersey, went through the SBA loan process before when they took out a loan to buy their building.

The document his bank gave him for his PPP loan looks different. “Past loan documents we have signed for less money were pretty buttoned up. … The requirements under the terms spelled out,” he said. “Here there is almost no specificity, especially as it applies to forgiveness.” It reads, “Forgiveness is not automatic and Borrower must request it. Borrower is not relying on Lender for its understanding of the requirements for forgiveness such as eligible expenditures, necessary records/documentation, or possible reductions due to changes in number of employees or compensation.” It also adds, “Any Loan balance remaining following forgiveness by the SBA will be fully reamortized over the remaining term of the Loan.”

That’s not what he needs now. “I don’t want any loans, I’m not asking to borrow money,” he said. A loan, he noted, is something he would take out to cover the cost of getting more business — and with the knowledge of exactly how much it would take to get him there. This money, instead, is “filling the hole for this event over which we had no control.” It’s not money he ever expects to make back.