They wrote a convoluted law to do what could have been accomplished much more simply by directly paying 75% of payroll to employees for qualified small businesses for two months and covering up to 25% of payroll in overhead costs directly paid to the businesses. But if they'd done that the banks wouldn't have been able to rake off 5% in admin fees and it would have been perceived as a direct transfer payments to people (something they only do with tax cuts), not as a small business
loan, so we get this bizarre 'take it, spend it, apply to get it forgiven' mechanism instead.
My take on the PPP is that the Federal government is making employers into unemployment insurers: It doesn't matter if the same employees are hired or if they even show up, so long as the level of employment (head count and 75% of payroll) is maintained. According to the SBA’s Interim Final Rule:
“...the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgiveable [sic] purposes described below and employee and compensation
levels are maintained.” [emphasis added]
They don’t even care if you are open or have any trade to speak of, they just want you shoveling the money out the door to employees.
I also think there is a really shitty bit of bureaucratic interpretation going on here. The initial information stated that you could use all of the money for fixed operating expenses at your discretion, including payroll if you actually need it, but the SBA’s Interim Final Rules modified that:
“While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)) ... the Administrator... has determined that 75 percent is an appropriate percentage ... This limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection...”
The reason that interpretation sucks giant elephant ass so badly is that if you are a restaurant, for example, the payroll is the only thing you can control. If you are closed, you still pay your rent and pass-through expenses, interest, etc. That's what small businesses needed help with, not being unemployment insurers. And the spend and hope it gets forgiven? A hell of a risk to take. One of my clients pointed that out to me. I expect that there will be litigation over this eventually--regulators are not allowed to rewrite laws and the SBA explanation can be construed as an admission that the regulators understood the law but decided not to follow it as written.
Honestly, there are so many inconsistencies and holes in this that I don’t think anyone has any definitive answers. For example, it appears that you could take the loan, hire no one, bank the proceeds, pay the fixed overhead (rent and utilities and so on) with it, and then apply for forgiveness of what you actually spent up to the 25% of the loan cap. When the bank then decides what part of the loan is forgiven, you could pay off the balance immediately with the 1% interest accrued to that point and walk away with a few months of free rent and utilities. It also creates a perverse incentive: since you have to shovel the money out the door at no real benefit to your business if you are actually shuttered and with the risk that you might even owe it if the loan isn't forgiven for some reason, your better choice may be to hire no one: your ex-employees can stay on unemployment and you don't risk owing a debt. Or you could hire your family and friends for no-show jobs to fill out the payroll for eight weeks then get it forgiven. Meet my new executive VP of strategic management:
It is a stupid scheme…Sure hope I get my money
