The Small Business Administration’s Paycheck Protection Program reopened yesterday after Congress passed a second round of funding, offering an additional $310 billion in small business relief.

These emergency loans give small businesses a second shot at surviving the COVID-19 pandemic after the U.S. government’s initial $350 billion federal relief program—part of the sprawling $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES) stimulus package signed into law in March—fell short of helping most businesses impacted by the crisis.

The SBA loans, which are eligible for companies with fewer than 500 employees, provide more than twice a company’s average monthly payroll costs—up to a maximum of $10 million—and can be forgiven as long as companies agree not to lay off staff and use the money on payroll, rent or utility payments.

The problem? A backlog of applicants overloaded the system and the lending program was exhausted in less than two weeks, with very few small businesses receiving anything, leaving untold thousands of companies without the critical lifeline they needed to stay afloat. According to an April 22 LendingTree report, only five percent of the small business owners surveyed had received a PPP loan, even though 60 percent had applied.

What happened? The federal loan program was tapped out by large corporations—famously, restaurant chains Ruth’s Chris Steak House, Shake Shack and Potbelly Sandwich Shop, as well as Trump-connected data-collection firm Phunware and about 200 other publicly-traded companies—who made headlines when it was discovered they’d snatched up millions in emergency coronavirus loans meant for small organizations, essentially sucking the initial round of funding dry and leaving small businesses in the cold.

Some of these publicly-traded businesses were able to secure the PPP loans by taking advantage of a loophole that stated only that applicants must have fewer than 500 employees per location (as opposed to companywide). Others were able to secure loans more than once, through the use of subsidiaries, taking far more than the PPP’s $10 million limit.

Photo: Pierre Hauser

Photo: Pierre Hauser

“While the program was touted as relief for small businesses, we also learned it stipulated that any restaurant business—including restaurant chains—with no more than 500 employees per location would be eligible,” Shake Shack said in a statement posted to its LinkedIn page. “There was no fine print, anywhere, that suggested: ‘Apply now, or we will run out of money by the time you finally get in line.’”

Call it a crisis within a crisis. In the average crisis manager’s playbook, COVID-19 is a catastrophe of biblical heights, but now, an unlikely centerpiece of what has become both a public health emergency and an economic disaster are the national brands that find themselves in the spotlight for usurping a relief program that was intended to keep struggling businesses afloat, essentially profiting from a pandemic and widening the national income gap in the process.

Predictably, news that these national brands had taken valuable PPP funding from small businesses resulted in public outrage and calls for boycotts. In response to the backlash, Potbelly (which received $10 million), Shake Shack (which received $10 million) and Ruth’s (which received $20 million by applying through two subsidiaries) have each since returned the funds in a desperate attempt to change the narrative amid the mounting outcry.

“The fact that there are millions of small businesses across the country who were unable to get funds from the original round of PPP funding, while corporations like Shake Shack and Potbelly were approved will negatively affect these brands for at least as long as the crisis lasts,” said Eric Yaverbaum, CEO of Ericho Communications and author of “PR for Dummies” and “Leadership Secrets of the World's Most Successful CEOs.”

Yaverbaum told O’Dwyer’s that despite apologies and public announcements of the loans’ return, a lingering resentment among consumers and small businesses who missed out on the funds will probably linger “due to what can be framed as an instance of corporate greed.” The public will also likely question the motive behind the return, Yaverbaum said, as most will recognize it for the PR opportunity it is, which could further influence purchasing habits when the country reopens.

“However, the quick turnaround on these returns and subsequent apologies by the brands means they’ll recover more quickly than if they’d left it to fester,” Yaverbaum said. “While they’ll certainly feel the squeeze in the short-term, depending on how long this pandemic lasts, a sincere apology, coupled with a grand gesture, can repair some of the damage done by applying for—and accepting—these loans. Don’t be surprised if one or more of these companies takes the apology a step further by providing direct financial aid to hard-hit small businesses in the near future.”

Wall Street over Main Street

Corporations aren’t the only entities facing a backlash over their exploitation of the Paycheck Protection Program: the crisis has now put banks in the reputational crosshairs as well. Although the SBA is required to process the PPP loans it receives on a first-come, first-served basis, no such rules apply for the individual SBA-approved lenders that process them, essentially allowing banks the freedom to determine which applications the federal government sees first. According to data provided by the Small Business Administration, nearly half—45 percent—of the loans given out in the program have been in the amount of $1 million or more.

"I have participated in at least three client board of directors meetings in recent weeks, and when the PPP issue was raised, the reaction from the leaders across the table has been scorn for some institutions, especially one who is among the biggest,” said Tom Butler, president of Butler Associates, which represents multiple financial institutions, including community based and infrastructure lenders and those in the SBA space. “They were seeking solutions, but made clear that the banking-trust that they had appeared to be seriously fractured, and when the time was appropriate, might need to be reevaluated."

Now, a series of class-action lawsuits filed in California and New York—against Bank of America, Wells Fargo, JPMorgan Chase and U.S. Bank—allege these institutions unfairly gave priority to larger companies’ loan applications over smaller ones, clients for whom banks are generally incentivized to lend money given that their higher-value loans bring higher commissions. According to data released by the SBA, approvals for smaller loans—those under $150,000—surged near the end of the program’s initial run, suggesting the largest loans had been “front-loaded,” or pushed ahead so banks could maximize the payout they received while leaving small businesses in limbo. A recent analysis of financial records by National Public Radio found that U.S. banks have collected more than $10 billion in fees from processing these loans.

“The internal cost structures and compensation programs of most banks will always favor larger SBA loans over a high volume of very small SBA loans,” said Richard Lawless, a career banker and entrepreneur who spent three years investigating the Department of Justice while working with the FBI, U.S. Attorneys, Securities and Exchange Commission and U.S. intelligence agencies. “The cost, time and effort of processing a $10,000 SBA loan is very similar to the cost, time and effort to process a $1,000,000 SBA loan. Loan officers are paid compensation based on a percentage of the loan amount, producing an understandable desire to pursue the larger loan requests first. All of these real world challenges should have been addressed in the legislation to encourage banks to treat all size loan requests with equal urgency. The program was not structured in a way to encourage banks to sacrifice time and manpower to facilitate solely the smallest loans.”

K Street cashes in on relief funds

Aside from lacking the cash reserves of larger companies, your average mom-and-pop also typically doesn’t have the influence or ability to make inroads with legislators, tools that many publicly-traded corporations use on a near daily business. O’Dwyer’s counted nearly 40 companies and trade groups for the month of April so far that have hired K Street lobbying firms for the expressed purpose of revising the Small Business Administration’s rules regarding PPP loans so that they might be expanded to include their respective industries.

Noticeably not-so-small business Hilton Worldwide retained lobbying support with Harbinger Strategies to inquire about the PPP and the Treasury Department’s Exchange Stabilization Fund as they pertain to the hotel industry. Telecomm giant ​Sinclair Broadcast Group—which posted more than $3 billion in revenue in 2018—is lobbying Congress as well as the FCC and the National Economic Council regarding PPP eligibility with respect to broadcast stations.

​Then there are the trade groups. The International Franchise Association, the National Association of Home Builders, the ​Affordable Housing Developers Council, the Petroleum Marketers Association of America, the Small Business Investor Alliance, the Wireless Internet Service Providers’ Association,​ the Community Associations Institute, the Consumer Credit Industry Association, the National Association of Federally-Insured Credit Unions, the New York Bankers Association, the Structured Finance Association, the American Shrimp Processors Association and​ the National Indian Gaming Association are among the industry associations that have hired lobbying firms in an attempt to advocate on Capitol Hill for a rewrite of small business loan rules, according to Lobbying Disclosure Act documents filed with Congress in April.

It’s been a busy month in Washington. O’Dwyer’s also identified more than 50 companies that had filed for lobbying representation between April 1 to April 15 alone in the hopes of gaining access to coronavirus stimulus dollars through the CARES ACT, representing virtually every business imaginable, from sporting goods stores (Dunham’s), to department stores (Century 21, Aaron’s), to clothing companies (Arelle Apparel Group), to food giants (The Hershey Company), to entertainment (Ticketmaster), to book stores (​Barnes & Noble), ​to schools (Culinary Institute of America), to fintech companies (C2FO), to casinos (​Penn National Gaming), to medical staffing (ADEX), to airport restaurant management companies (OTG Management).

Tyson Foods ran full-page ads yesterday in the New York Times, the Washington Post and other outlets, issuing the ominous warning that the company’s recent closure of processing plants due to COVID-19 outbreaks could potentially result in food shortages across the country. The food processing giant, which employs about 100,000, called on the federal government’s support so its plants would “remain operational so that we can supply food to our families in America.” (In a twist of irony, the ad’s placement in the Washington Post ran beside a story that reported some Tyson workers weren’t provided with adequate protective gear and were forced to continue working at crowded plants while ill.)

Bailout 2.0

The expanded second round of federal funding that was released yesterday offers a glimmer of hope for the estimated 100,000 small businesses that assumed they were near the finish line when they had their loan applications processed in early April, only to find themselves sitting in the pipeline along with countless others, waiting for the crapshoot chance of getting the relief they need.

If the recent past is a reliable indicator, Paycheck Protection Program 2.0 will also undoubtedly run dry very soon, but in the meantime, the SBA has become a target of renewed criticism for other reasons. From the very beginning, the PPP has been plagued with problems, from website crashes to nigh-universal confusion regarding its cumbersome application process. And now the process has apparently hit a few additional snags, with the SBA’s electronic filing system crashing within minutes of opening after it was flooded with a backlog of applications from the first round of loans on top of the new ones. These issues only compound an initiative that, so far, has remained out of reach for a majority of small and local businesses across the country.

“The government was forced to use the best tool available to them for the distribution of these rescue loans. That tool was the Small Business Administration,” Lawless told O’Dwyer’s. “The high volume of applicants that the current legislation encouraged has completely overshot the capacity of the SBA and their partner banks to respond effectively."

In an April 26 statement, the SBA issued new guidance for the next round of funding in an attempt to prohibit large companies from accessing the loans. Treasury Secretary Steven Mnuchin additionally announced today that there will be a mandatory review of any company receiving more than $2 million in PPP funds before those loans are forgiven, to ensure they're being used in accord with the program’s intent.

“I think it was inappropriate for most of these companies to take the loans … we don’t think they ever should be allowed to,” Mnuchin told CNBC today. “I never expected in a million years that the Los Angeles Lakers—which I’m a big fan of the team—but I’m not a big fan of the fact that they took out a $4.6 million loan. I think that’s outrageous.”