An Open Letter to Congress: The PPP Can (and Should) Be Better

As the U.S. prepares for another round of stimulus, which is likely to include another shot at the Paycheck Protection Program, a loan program designed to keep people employed, small business’s problems will not be over–not by a long shot. Once the next stimulus gets approved, confusion and uncertainty, rather than comfort, will likely be the first reaction from the business community and those tasked with administering the program. 

To this day, the government is still trying to answer essential questions that small-business owners and banks have about the program. They are scrambling to find answers to these questions because they either did not consider them when they initially released the program or have realized that their initial answers no longer fit the current economic situation. Questions about fraud, loan forgiveness, and deductibility of expenses have plagued the program from the beginning. To make the next PPP rollout better, here are five suggestions that stemmed from the Mobilization of Economic Relief Advocates panel discussion I hosted last week:

1. Target aid to actual small businesses in the hardest-hit industries. Focus on the local restaurants, gyms, and hotels with less than $1 million in revenue and fewer than 500 employees. A lot of these smaller businesses did not have the same resources or knowledge base to obtain PPP funds before the money ran out. These businesses also require a lot less money to stay afloat. For them, a loan of even $10,000 could mean the difference between closing their doors and staying open.
2. Make the application procedures and requirements the same across all banks. Streamline the application processes to avoid double verification for many borrowers. Borrowers had to certify in the beginning that they needed the money because of economic uncertainty and then, months later, were asked to prove the necessity of the loan if they took over $2 million. Verifying the necessity of the loan needs to be done only once in the beginning. Many may argue that making the application process more streamlined will increase fraud, but we also need to think about the businesses that are days away from closing their doors. There is a tradeoff between fraud and speed, and we need to find the correct balance. 
3. We need clear guidelines for loan forgiveness, taxability, and deductibility of the loan. While PPP money doesn’t count as taxable income, the IRS has declared that any expense paid for with forgiven PPP funds cannot be counted as a tax-deductible expense. So, in theory, any PPP funds that are forgiven will ultimately increase a company’s income, and by extension, its tax liability. Any taxes due will depend on the overall taxable income of the entity, which now includes PPP funds. What that means is that some businesses will have the appearance of having made a profit when, in reality, that’s not the case. That means they might owe taxes–equal to upwards of 25 percent of their loan’s total proceeds.
4. Before the launch of a new program, we’ve got to give liquidity to the banks. This is not the government’s money; this is the banks’ balance sheets. Small banks have a finite amount of capital that they can put up against programs like this. We need a system in which the Federal Reserve can quickly transfer liquidity to banks so that they have the liquidity they need to fund loans. 
5. Require the banks to make these loans to businesses that aren’t necessarily their customers. Big institutional banks did a lot of loans, but they had no incentive to lend to businesses that weren’t already their customers. Also, since banks make more money with larger loans, they had little to no incentive to help get all of the actual small businesses loans. That meant all of the smaller banks were swamped with loan requests and they didn’t have the liquidity or capacity to handle it. Get those big, institutional banks to work with companies that have $1 million and less in sales and give them priority.