Opinion: The Payroll Protection Program Isn’t Helping Smaller Businesses

I officially started Klik Media LLC on December 27th, 2017 after walking into a Capital One bank, meeting with a banker, and depositing $15k into a newly established business banking account.

One of the things I’m proudest of is the fact that we’ve never fundraised, taken out a loan, or relied on other sources of funding after that initial deposit. We’re a business built from essentially nothing, and in our lifetime have paid over $1.3m in payroll to employees and contractors. We’ve hired individuals into their first jobs, have seen senior members start families, and rolled out a full healthcare plan to ensure our team stays safe.

After aggressively scaling in the edu industry, we’ve been working to diversify our portfolio with companies such as [solidcore] and Vida Fitness, along with an increased focus on multi-location service businesses in verticals such as healthcare. In light of COVID-19, we saw our projected revenue drop by over 15% within a two week timeframe. That may seem like a small number, but remember we’re bootstrapped- we don’t have the ability to burn cash- we’ve invested everything back into the business along the way to fuel further growth.

We’re fortunate to have a base-level of stability, and from here we plan to scale back up. But like many small businesses, we went through a round of layoffs, payroll re-evaluations, and other quick cost-cutting measures to ensure we survive this crises.

The passing of the Payroll Protection Program by Congress appeared to be a lifeline to small businesses. A large business that fundamentally cannot produce revenue such as Carnival Cruises can rapidly raise $6b within two weeks. A business such as Marriot, which repurchased $2.3b of stocks in 2019, despite holding only $225m in cash at the end of 2019, made the decision to furlough tens of thousands of workers. The majority of small businesses aren’t as lucky- there are very few moves a true small business can make to ensure survival.

In short, the PPP provides employers with up to 500 employees a loan covering 2.5 months of payroll at a very attractive interest rate, 1%. If that money is spent on payroll, it can be forgiven- meaning businesses are effectively granted 2.5 months of payroll. For a bootstrapped business like ours, that’s a godsend- we can stabilize and focus on hiring and continued growth.

The program was launched Friday, April 3rd (it was a mess), and relies on banks to distribute the funds to small businesses. So in effect, we go to a bank, fill out a loan application, and the bank gives us the loan rather than receiving funds directly from the government.

Here’s the problem- banks aren’t ready due to poor communication by the SBA, and the majority of banks are requiring a previous business banking relationship to apply, which was not a part of the legislation. So for a business like ours, we have to use Capital One. Capital One isn’t yet taking applications (as of Sunday, April 5th), despite the program launching Friday:

I personally bank with Wells Fargo- given the previous relationship, one would assume that we could work with them instead. Unfortunately, we’ve never had a business banking account with Wells Fargo, meaning we aren’t eligible as a company (again, not a requirement in the legislation):

This is playing out in mass quantities across the US. Some banks are taking an even more extreme approach, such as Bank of America, which is requiring a previous business loan from Bank of America to be eligible to apply.

There is going to be a group of companies who go bankrupt due to the botched implementation of this program. What’s worse is that small businesses have spent the last week preparing their application rather than focusing on other sources of funding.

I stayed up until 12:01am Friday morning to apply for the program, as the SBA stated it would be ready to go. By 12:20am it was clear the banks weren’t ready- the only guidance we received from Capital One (among others) is that they would update their websites once ready. This isn’t the banks fault- they received 30+ pages of updated guidance within the hour they were supposed to launch.

The guidance from the SBA has been to talk to your banker. It is good advice, however, small businesses like ours don’t have a banker. Outside of talking with someone for 20 minutes when launching KLIK, we haven’t ever worked with a financial institution. Most small employers have the same problem.

The unfortunate reality of the PPP is that businesses with up to 500 employees are able to apply, and they are receiving faster prioritization from the banks. Phone calls to every major lender take over 30 minutes right now, and the response is the same- you aren’t eligible because you aren’t our current client.

As of 2016, 17.6% of employers have fewer than 20 employees, and this group is going to go bankrupt in the next few weeks if this process isn’t fixed. These are the companies without strong access to capital.

After Friday’s launch, the latest numbers from the Small Business Administration place the the average loan amount at $308,518, or $123,407 per month in payroll. A business at this run-rate is likely pulling in $1.5m-$5m in revenue a year at minimum. This is NOT the small mom and pop businesses that need it most (KLIK shouldn’t be prioritized over these small employers either).

This program can work, and is something almost every small business owner supports- but only if the true small employers are granted access quickly. A multi-million dollar a month payroll shouldn’t be in the same bucket as an employer spending tens of thousands of dollars. The access to capital is vastly different for larger organizations.

Banks need to shore up the application process, and open the opportunity to those who need it most- those without direct access to capital. Without it, these smaller employers are going to go under, and we’re all going to see the impact in our local economies.