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
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.
Can a publicly traded company get an SBA loan? ›
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. Inc. was the biggest recipient by market capitalization, while Ruth's Hospitality Group Inc.
Will government forgive SBA loans? ›
Business owners defaulting on their SBA loan can apply for loan forgiveness, but that does not guarantee the SBA will approve the request. It is more commonly referred to as an "offer in compromise". The SBA evaluates your case and discusses the matter with the lender.
Did small businesses have to pay back PPP loans? ›
Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.
Are SBA loans government backed? ›
Lenders that work with SBA provide financial assistance to small businesses through government-backed loans.
Who is not eligible for 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 Freedom of Information Act (FOIA) gives you the right to request access to records from any federal agency. 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.
What if I lost my business and can't pay back my SBA loan? ›
You may also submit an OIC to the SBA and your lender to find an alternative way to repay your loan if you have gone out of business. You should also be prepared for the lender to try and collect the collateral you promised to secure the loan if you can't repay it.
What happens to SBA loan if 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 happens to small business loan if 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.
An EIDL cannot be forgiven; as a result, the whole amount due must be paid.
Are all PPP loans being investigated? ›
The U.S. Small Business Administration (“SBA”) is auditing all companies that received PPP loans of $2 million or greater, while the Department of Justice (“DOJ”) and other federal agencies are ramping up the number of investigations and prosecutions of PPP loan fraud.
Do businesses have to pay back SBA loans? ›
While there are specific cases where you may not have to pay back an SBA loan, in nearly all cases, you do have to pay back the loan, just as with any other traditional small business loan.
What is a 7a loan? ›
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.
Who backs the SBA? ›
The SBA provides a government-backed guarantee on part of the loan. Under the Recovery Act and the Small Business Jobs Act, SBA loans were enhanced to provide up to a 90 percent guarantee in order to strengthen access to capital for small businesses after credit froze in 2008.
Who pays back SBA loans? ›
If your business and personal assets are not enough to cover your debt, your SBA lender will file a guarantee request with the U.S. Small Business Administration. In other words, by making this request, your lender is asking the SBA to repay the portion of the loan that was guaranteed by the government.
What makes a business eligible for SBA loan? ›
Eligibility requirements
Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding. The lender will provide you with a full list of eligibility requirements for your loan.
What is an eligible passive company SBA? ›
An Eligible Passive Company must use loan proceeds only to acquire or lease, and/or improve or renovate, real or personal property (including eligible refinancing), that it leases to one or more Operating Companies for conducting the Operating Company's business, or to finance a change of ownership between the existing ...
Can independent contractors get SBA loans? ›
Self-employed workers or independent contractors looking for funding may consider loans from the U.S. Small Business Administration (SBA). SBA loans can be used for a number of small business needs, including paying for marketing, expanding inventory, or buying equipment.
Is the SBA a privately owned company? ›
SBA was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns; preserve free competitive enterprise; and maintain and strengthen the overall economy of our nation.
