Why the Small-Business Stimulus Loans Don't Work for All

Summary

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WSJ Your Money Briefing: "Why the Small-Business Stimulus Loans Don't Work for All"

Date: May 1, 2020
Host: J.R. Whalen
Guest: Yuka Hayashi, Wall Street Journal Reporter
Theme:
This episode focuses on the Paycheck Protection Program (PPP) and examines why the much-needed small-business stimulus loans are not working effectively for every business—especially those in high-cost, urban environments. The discussion explores program limitations, impacts on business owners, and structural issues that worsen the financial strain during the Covid-19 pandemic.

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Main Theme Overview

The episode investigates the real-life frustrations of small business owners struggling with the terms of PPP loans, particularly the program’s restriction on using more than 25% of the money for non-payroll expenses like rent and utilities. It also highlights the difficulties in accessing funds and the critical role of banking relationships, with insights from reporter Yuka Hayashi and business owner Kate Luzio.

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Key Discussion Points & Insights

1. PPP Loan Structure & Small Business Frustrations

• The $660 billion PPP initiative was designed primarily to keep workers on payroll.

• Major Limitation: At least 75% of loan funds must go to payroll; only 25% can go to other expenses (e.g., rent, utilities).

  • Yuka Hayashi: "For businesses that are located in big, expensive cities, New York is the prime example of that. That 25% in many cases is not enough to cover their rent and other costs." (02:03)

• Impact:

  • Businesses forced to bring back workers even if still closed, simply to qualify for loan forgiveness.
  • Leaves little flexibility for covering essential overhead, particularly in high-rent urban areas.
  • Some owners consider walking away from loans due to these constraints.

2. Challenges in Accessing PPP Loans

• Success often hinged on a strong, pre-existing banking relationship.
  • Example: Kate Luzio, founder of Luminary, credited her proactive approach and relationship with her banker for her success:
    • "I think being prepared very early on really helped." (05:01)
• Many small businesses faced hurdles due to overwhelmed banks and lengthy queues.
  • Yuka Hayashi: "...millions of them are still waiting to get their funds. And a big reason for that is some banks have so many applicants that it's taking them a long time to get to a lot of their customers." (05:43)

3. Origins and Policy Trade-offs of the PPP

• The 75/25 rule on fund allocation was set by the Treasury and Small Business Administration after the legislation was passed, surprising many business owners.

  • Yuka Hayashi: "...the administration officials from the Treasury Department and the Small Business Administration put together a package... And when those details were announced several days later, they included this cap on non payroll expenses, which surprised a lot of people." (04:06)

• Policy Rationale:

  • Treasury Secretary Steven Mnuchin clarified the primary intent was to maintain employment rather than cover total overhead.
  • Hayashi: "But when they were designing the program, they were not envisioning a crisis that would last for such a long time." (03:25)

• If more flexibility were added (e.g., 50/50 split on payroll and other costs), the cost of the program would potentially double, making it unsustainable at a national scale.

  • Yuka Hayashi: "The current program right now is $660 billion. So double of that is $1.3 trillion. It's a huge amount of money." (06:24)

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Memorable Quotes & Moments

• Frustration with PPP Constraints:

  • Yuka Hayashi: "This is a very, very frustrating situation for a lot of businesses, particularly if they are already closed and have laid off employees." (01:03, repeated at 02:43)

• On Proactive Preparation:

  • Kate Luzio (Luminary): "I also immediately called our accountant and said, what are we going to need here? ...I think being prepared very early on really helped." (05:01)

• On Ballooning PPP Costs with Greater Flexibility:

  • Yuka Hayashi: "If we were to have a program that would cover both payroll costs and non payroll costs, like rent expenses, that would probably double the size of the fund." (06:24)

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Notable Segments & Timestamps

| Timestamp | Segment | |-----------|------------------------------------------------------------------------------------| | 01:03 | Hayashi explains why PPP terms are frustrating for closed small businesses. | | 02:03 | Detail on the 75/25 payroll vs. non-payroll allocation, and its impact in cities. | | 03:25 | Discussion on the policy's intent versus long pandemic realities. | | 04:06 | The role of the Treasury and SBA in establishing the allocation cap. | | 05:01 | Kate Luzio describes how preparedness and banking relationships enabled access. | | 05:43 | Hayashi addresses delays and challenges in securing loans due to bank bottlenecks. | | 06:24 | Hayashi quantifies what expanded PPP flexibility would mean financially. |

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Summary & Takeaways

• The PPP's rigid allocation rules leave many urban small businesses struggling to survive, especially with high fixed costs like rent.
• The rule design did not anticipate the pandemic's length and ongoing shutdowns, putting businesses in difficult positions.
• Strong pre-existing banking relationships made a significant difference in loan access.
• Expanding aid flexibility would require massive increases in government funding, highlighting the tough trade-offs policymakers face.
• The episode underscores the importance of responsive, adaptable policy in crisis situations—and the real-world consequences for America’s small businesses.

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Transcript

[Small Business Owner 1]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Small Business Owner 2]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner 1]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Small Business Owner 2]

they need while increasing megastore profits. They deserve it, don't they?

[Advocate Against Durbin Marshall Bill]

Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your money briefing for Friday, May 1st. I'm J.R. whalen for the Wall Street Journal. The $660 billion Paycheck Protection Program is meant to help small businesses stay afloat during the coronavirus pandemic, and it's helped a lot of them pay the bills and keep workers on staff. But some business owners in larger cities are worried that even with a loan, only being able to allocate a relatively small part of the money for non payroll expenses could put them in a bind.

[Yuka Hayashi]

This is a very, very frustrating situation for a lot of businesses, particularly if they are already closed and have laid off employees. For these companies, if they want to qualify for grants, they're going to have to bring back workers even when their businesses are closed.

[J.R. Whalen]

That's Wall Street Journal reporter Yuka Hayashi. Coming up, she'll explain more about those rest, including how they got into the program in the first place. Many small business owners in big cities who've taken out loans through the Paycheck Protection Program or PPP find themselves in a tough spot. They can pay workers and avoid layoffs, but they may not have the money they need to pay for rent and utilities. Wall Street Journal reporter Yuka Hayashi is here to explain why. So, Yuka, how does the allocation of funds for small businesses contribute to this problem?

[Yuka Hayashi]

The program requires businesses to spend at least 75% of the funds on payroll to keep workers employed or rehire workers if they have already let go their employees. And that leaves only 25% to cover other essential expenses, including rent and utility payments. And for businesses that are located in big, expensive cities, New York is the prime example of that. That 25% in many cases is not enough to cover their rent and other costs.

[J.R. Whalen]

Is that enough of a hurdle for some small businesses to have to walk away from the loan opportunity?

[Yuka Hayashi]

This is a very, very frustrating situation for a lot of businesses, particularly if they are already closed and have laid off employees. For these companies, if they want to qualify for grants, they're going to have to bring back workers even when and at the same time, they have these rent bills, utility bills piling up. They would rather spend the money to cover these expenses in order to survive.

[J.R. Whalen]

Treasury Secretary Steven Mnuchin has said the intent of the loans was to encourage hiring and employee retention, but not pay all of a business's overhead. How is that going over with business owners you spoke with?

[Yuka Hayashi]

You know, using this program to maintain employment, keep people employed, was the primary goal when Congress set up this program. But when, I believe when they were designing the program, they were not envisioning a crisis that would last for such a long time. So while businesses are waiting for money to arrive, they are quickly running out of funds. So now they are desperately hoping to use whatever money they can get in terms of government assistance in order to pay their bills.

[J.R. Whalen]

But didn't the Small Business Administration have major influence on this cap for non payroll expenses being in the bill?

[Yuka Hayashi]

It certainly did. After Congress passed the legislation to set up this program, the administration officials from the Treasury Department and the Small Business Administration put together a package that includes all the details on how this program is run. And when those details were announced several days later, they included this cap on non payroll expenses, which surprised a lot of people.

[J.R. Whalen]

Some small business owners have said that working with their bank, maybe it wasn't always easy, but it might have been the key for them to secure a loan. On another one of our podcasts, Secrets of Wealthy Women, the guest on the latest episode was Kate Luzio. She's the founder of a female focused workspace in New York City called Luminary, and she talked about how she was able to leverage her relationship with her bank even before the loan package was passed. This is Kate.

[Kate Luzio]

I called our banker and said, okay, are you doing this? If this goes through, will you be, you know, approved lender? I understand. I also understood how difficult it has been in the past to historically get a business, a small business loan. So I knew the documentation that they would be looking for and what would be required. So I do believe that my background, I had a bit of a leg up because I knew what they would look for. I also immediately called our accountant and said, what are we going to need here? And, you know, even before, before we knew that it was going to be passed. So I think being prepared very early on really helped.

[J.R. Whalen]

Yuka, have you heard from small business owners that working with their bank was a challenge?

[Yuka Hayashi]

So businesses that have had a close relationship with banks and banks happen to be the ones that are willing to help small businesses. In this case, they tend to have had easier access to funds. Remember that under this program, so many small businesses, I think millions of them, are still waiting to get their funds. And a big reason for that is some banks have so many applicants that it's taking them a long time to get to a lot of their customers.

[J.R. Whalen]

Now, if payroll and non payroll costs were given equal weight in the loans package, how would that drive up the costs?

[Yuka Hayashi]

If we were to have a program that would cover both payroll costs and non payroll costs, like rent expenses, that would probably double the size of the fund. The current program right now is $660 billion. So double of that is $1.3 trillion. It's a huge amount of money.

[J.R. Whalen]

All right. That's Wall Street Journal reporter Yuka Hayashi. Yuka, thanks for coming on the show.

[Yuka Hayashi]

Thanks for having me.

[J.R. Whalen]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[Small Business Owner 1]

Access to affordable credit helps me pay my employees that I don't really need it.

[Small Business Owner 2]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner 1]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Small Business Owner 2]

they need while increasing megastore profits. They deserve it, don't they?

[Advocate Against Durbin Marshall Bill]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.