What is a small business?
If you thought “neighborhood restaurant doing take-out,” “shut-down retailer,” or “Mom ‘n Pop mechanic,” you’re right!
If you thought “publicly traded company that generates hundreds of millions of dollars in revenue while employing thousands of people,” you’re right!
The Federal Government’s Paycheck Protection Program was designed to provide $350 billion to coronavirus-affected small businesses, which are loosely defined by the Small Business Association as having less than 500 employees or annual receipts under $7.5 million.
But the program approved at least $982 million in loans to publicly traded companies and their subsidiaries, an amount that will rise as companies disclose receipts and fillings.
The loans are a bargain and max out at $10 million per applicant and are foregivable, meaning they don’t need to be paid back, as long as 75% or greater of it is used for payroll, rent/mortgages and utilities.
Any money that doesn’t meet those qualifications carries a 1% interest rate and must be paid back within 2 years.
The free money was hard to ignore for at least 264 publicly traded companies tallied by FactSquared, whose database includes the specific Securities and Exchange Commission filings for each entry.
Companies applied for multiple loans through subsidiaries or by having multiple locations apply for separate loans.
For example, the nation’s largest car dealership chain AutoNation received $77 million at 81 different locations, according to the company itself and Washington Post reporting.
So, a big comany could apply as a small business if it owns a chain restaurant location not exceeding $8 million in revenue, or a hotel not exceeding $35 million.
But the PPP application states that the loan must be necessary to support a business’ ongoing operations, and that alternate avenues of income, such as selling stock, must be explored.
The government oversight to this was that applicants were required to act in good faith.
The $1.7 billion burger chain Shake Shack received the maximum $10 million PPP loan and immediately started receiving online backlash. After being caught, the CEO of the 7,600 employee-company called the application process “confusing” and promised to return the money.
Between the approval and the return, the company raised $150 million selling stock options.
All in good faith.
Ashford Hospitality Trust invests “predominantly in upper upscale, full-service hotels,” and is reported to have accepted $76 million in PPP loans through multiple subsidiaries.
Ruth’s Hospitality Group, a holding company of restaurants that reported 2019 revenue of $486 million, accepted $20 million through two subsidiaries.
Since the approvals, the Treasury Department has stated, “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith... .”
Negative press and the SBA’s offering of immunity persuaded a few companies to follow Shake Shack’s lead and return the loans, including Ruth’s and AutoNation. By FactSquared’s count, 93% of them have not.
The majority of PPP loans are going to small businesses, and 74% of the loans are for $150,000 or less.
But that slice only accounts for 17% of the total money distributed.
A second round of PPP loans totaling $310 billion was made available on Monday through the SBA. Five hours into it, the SBA announced having processed 100,000 loans.
The over $1 billion applied for by public companies isn’t a large chunk of the $350 billion program.
But it could have been separated into 6,746 separate loans of $150,000.
Which would be welcomed by actual small businesses that have had to lay-off employees and shutter doors, by order or necessity.