The Small Business Administration issued new guidance on Thursday making it less likely that big publicly traded companies can access the next round of funding for the U.S. government's small business relief program. It also stepped up pressure on public companies that have tapped funds to return the money.
The update comes after a public furor that largecompanies tapped the facility, known as the Paycheck Protection Program, for hundreds of millions of dollars in loans while thousands of small businesses have yet to receive funding.
Companies applying for the coronavirus relief funds must certify that the loans are necessary and that they cannot tap other sources of money, the SBA said. By definition, public companies have access to the capital markets. For instance, Shake Shack said it returned the $10 million it got through the PPP after it sold $150 million in new shares.
"Borrowers still must certify in good faith that their PPP loan request is necessary," the SBA said. "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, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification."
The change comes as a second round of funding for PPP, after the initial $350 billion was depleted last week, is set to be approved by lawmakers later Thursday. The program is set to get $310 billion in fresh funds, and industry executives have said that even this amount will likely last only days. There is no guarantee that lawmakers will approve more money for the program after that.
While the spirit of the PPP, a key component of the Trump administration's $2 trillion-plus economic response to the coronavirus pandemic, was to help small businesses, the rules during the program's initial round allowed large restaurant and hotel companies to apply for loans of up to $10 million.
When that happened, and companies including Ruth's Chris Steakhouse and Potbelly Sandwich Shop were revealed to have used the program, small business owners became incensed.
The backlash deepened as companies worth more than $100 million in the stock market successfully applied for relief. Companies includingDMC Global,Wave Life SciencesandFiesta Restaurant Groupwon the loans, according to a Tuesday research note from Morgan Stanley.
Lenders including JPMorgan Chase and Bank of America have borne the brunt of the critique as small business owners claimed that bigger companies got preferential treatment when applying for the lifeline. JPMorgan has specifically denied that allegation, while also disclosing that clients of its commercial banking division, which caters to larger companies, generally fared better than those of its small business department.
In its latest guidance, the SBA appeared to allow banks to rely on borrowers' certification about the true need of their loans.
But in a key detail, the SBA indicated that large public companies who tapped the PPP before the rule change can avoid scrutiny by returning the relief loans in two weeks:
"Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith," the SBA said.
Here's what the SBA said on public companies getting loans:
"Question: Do businesses owned by large companies with adequate sources of liquidity to support the business's ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, 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, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification."
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FAQs
Dozens of publicly traded companies received forgivable loans totaling more than $500 million from the Small Business Administration's Paycheck Protection Program, according to a Wall Street Journal analysis. Shake Shack Inc. was the biggest recipient by market capitalization, while Ruth's Hospitality Group Inc.
Will government forgive SBA loans? ›
Effective March 13, 2024, all borrowers, regardless of loan size, can use SBA's direct forgiveness portal. Applying for forgiveness using the portal can take as little as 15 minutes. The questions you will be asked in the portal correspond to those asked on SBA Form 3508 , SBA Form 3508EZ , or SBA form 3508S.
Are SBA loans government backed? ›
Lenders that work with SBA provide financial assistance to small businesses through government-backed loans.
Why is it difficult for small businesses to get loans? ›
Factors that impact business loan approval
Lenders place the heaviest weight on your cash flow, credit history and time in business. They'll use this information to approve or deny your loan and determine your interest rate. Don't get discouraged if your business doesn't meet all these standards.
Who is not eligible for an SBA loan? ›
First and foremost, your business must be for-profit and operate within the United States or its territories. Non-profit organizations are not eligible for SBA loans. Additionally, you must have exhausted all other financing options, including personal assets, before turning to an SBA loan.
Are SBA loans public knowledge? ›
The U.S. Small Business Administration (SBA) is required to disclose information requested under the FOIA unless it falls under one of nine exemptions and three exclusions. Please note that SBA is experiencing a significant increase in the number of FOIA requests since the onset of the pandemic.
What happens if I can't pay back my SBA loan? ›
If you can no longer repay your SBA loan, you can end up defaulting on your debt. Once that happens, you can face a long series of consequences. First, the lender will attempt to collect the debt. If it's unsuccessful, the lender may seize your collateral to recover its losses.
What happens to a small business loan if the business fails? ›
What happens to a small-business loan if my business fails? If your business fails, you're still responsible for repaying your loan. As in the case of default, if you can't repay, your lender may seize your collateral and/or personal assets to recover its losses.
What happens to an SBA loan if the business closes down? ›
If you have an SBA loan, it can be discharged along with other unsecured debts. However, if you pledged collateral for the loan, like your business equipment or property, the SBA might use those assets to repay the loan before other creditors.
What is the difference between a commercial loan and a business loan? ›
Commercial and business loans are the same: a company borrows funds from a lender to cover costs. Though these terms are often used synonymously, there is a thin line of difference between the two. The term "commercial loan" refers to the services focused towards larger firms.
The 7(a) Loan Program, SBA's primary business loan program, provides loan guaranties to lenders that allow them to provide financial help for small businesses with special requirements. 7(a) loans can be used for: Acquiring, refinancing, or improving real estate and buildings.
What's the difference between an SBA loan and a regular business loan? ›
Types of SBA Loans
SBA loans are especially valuable when business owners cannot secure funding from other sources. They come with the benefit of interest rate caps, longer loan amortization and the ability to access capital with less equity than a conventional loan.
What is the easiest SBA loan to get? ›
Thanks to the wide range of permitted loan uses, an SBA Express loan is financing that's easy to approve and is likely perfect for your startup's needs.
Why are banks reluctant to lend money to small businesses? ›
Small Businesses Have High Operating Costs and Slow Growth
Most banks want to see a business's growth projections before financing them. However, small businesses often grow slowly, which makes it hard for banks to service their loans.
What is the rejection rate for small business loans? ›
What if they reject you? All valid concerns, but none of these worries should keep you from chasing the debt financing your company needs. Only about 37% of small businesses apply for financing, and of those who do apply, banks reject around 80%.
Can a public company take loan? ›
Regarding loan accepted by a Public Company, in brief, 3 categories of loans have been prescribed under Companies Act, 2013. 1. Loans which can be accepted ex. Loan from Directors, Loan from any other company, banking institutions, Central Govt.
Are publicly traded companies eligible for PPP loans? ›
According to a study forthcoming in the Review of Corporate Finance Studies, half of all public companies qualified for the loans, but only 42% of those eligible chose to take them. That compared to 87% of all eligible private companies. (The PPP generally excluded companies with more than 500 employees.)
What industries are prohibited for SBA 7a? ›
Most businesses can apply for the SBA 7(a) loan, but a few, like gambling businesses, government-owned organizations, lending firms, and nonprofits, are ineligible.
Can a public company give loan to its holding company? ›
The loans are utilized by the borrowing company for its principal business activities. Holding Company is Public Limited Company: In case holding Company (Borrower) is Public Limited Company. Lender (Subsidiary) can give loan to such holding Company because such transaction shall not fall u/s 185.
