The Paycheck Protection Program was a lifeline for millions of small businesses brutalized by the pandemic. Over a four-month span, the government program distributed $523 billion in forgivable loans to more than five million companies. The average recipient got just over $100,000.
And then there were the roughly 300 business that received loans of $99 or less.
Judith Less, who runs a thrift shop in New Jersey, got $27. Nikki Smith, a baker and caterer in Oregon, collected $96. A.J. Burton, the founder of a record label in Arkansas, got $78. And Susana Dommar, a chiropractor in Texas, received a loan for just $1.
Stephanie Ackerman, a self-employed college admissions consultant, was shocked when her loan deposit, for $13, showed up in her bank account.
“That’s supposed to help my business? It was a joke,” said Ms. Ackerman, whose company, Tomorrow Today College Consulting in Red Bank, N.J., lost months of sales last spring as the coronavirus crisis took hold.
The tiny sums were equally frustrating for the banks and other lenders that made the government-backed loans. For each, they were paid 5 percent of the value — meaning they collected just pennies on the smallest loans, far less than they cost to make. Ms. Ackerman’s loan netted her lender, Bank of America, a fee of 65 cents, paid by the government.
The profusion of minuscule loans is yet another illustration of how the relief program’s hastily constructed rules sometimes led to absurd outcomes. And they’re poised to be repeated: In last month’s stimulus package, Congress allocated $284 billion to restart the loan program, which ended in August, and give a second round of loans to the hardest-hit businesses. Lending is scheduled to begin this week.
Congress created the Paycheck Protection Program in late March to help small businesses retain their employees through what lawmakers anticipated would be a short disruption.
Sole proprietors — self-employed entrepreneurs, including freelancers and gig workers who drive for Uber and Lyft and make deliveries for companies like DoorDash — were an afterthought. They weren’t eligible to apply for loans in the program’s first week. When it did expand to include them, the government created an alternate set of rules that blocked those individuals from receiving loans unless their business was profitable. That restriction did not apply to larger companies — meaning that unprofitable companies were eligible as long as they had salaried employees.
Small businesses were eligible to borrow 2.5 times their average monthly payroll, up to $10 million, to cover their workers’ wages and some other expenses, like rent and utilities. So long as most of the money was spent paying workers, the loan could be fully forgiven, giving recipients a rare infusion of free money to help them endure shutdowns and other disruptions as the pandemic wore on.
For companies without salaried employees, the Small Business Administration, which ran the P.P.P., told banks and other lenders to look at the profit the business owner reported on their 2019 taxes — even though payroll and profit are totally separate measures of a company’s business activity.
The loan that went to Amy Jeanchaiyaphum, a photographer in Minnetonka, Minn., illustrates the pitfalls of that approach. Ms. Jeanchaiyaphum, like most sole proprietors, doesn’t pay herself a fixed salary. Any money she makes first goes to cover her company’s expenses; she lives on the remainder. In 2019, her gross sales added up to a modest five-figure sum, according to her tax return.
After taking legally allowed deductions for equipment, insurance, travel costs and other operating expenses, Ms. Jeanchaiyaphum reported and paid taxes on a profit of $458. Following the S.B.A.’s rules, her lender, Wells Fargo, treated that as her annual salary and issued her a loan in August for the maximum amount for which she qualified: $95. (For that, the bank collected a $4.75 fee.)
When she saw that number, Ms. Jeanchaiyaphum assumed she must have made a mistake on her paperwork. She tried without success to speak with someone at Wells Fargo. She also reached out to the local S.B.A. office, where she said an official told her the loan couldn’t be increased. Frustrated and defeated, Ms. Jeanchaiyaphum accepted the tiny loan.
S.B.A. representatives did not answer repeated questions about the rules the agency created for sole proprietors. But lenders and accountants — who have spent months poring over the program’s complicated and frequently revised rules — noted that the relief effort was focused on minimizing job losses, not preserving struggling businesses.
“What’s payroll for a solo entrepreneur?,” said Sean Mullaney, a financial planner in California who worked with several clients on their loans. “This was created in almost in a fog of war, and there’s lots of scattershot things in it.”
Unprofitable and Out of Luck
Sole proprietorships are the most common business structure in America, accounting for around 26 million businesses, according to the latest I.R.S. data. Many are sidelines — workers who pick up an occasional freelance project or collect royalties report it on their taxes as business income — but millions of people rely on their business income as their primary source of support.
Yet, because of the S.B.A. edict that sole proprietors had to be profitable to get a P.P.P. loan, many didn’t qualify. Nicole Davis, an accountant in Georgia who specializes in small businesses, estimates that about 60 of her sole-proprietor clients were locked out of the relief program because their companies are not profitable.
“They were surprised; they thought they were eligible, and it was hard to explain why they didn’t qualify,” Ms. Davis said.
Some sole proprietors who got little or no aid from the Paycheck Protection Program were helped by other government relief programs. Many qualified for expanded unemployment benefits under the $2 trillion CARES Act, which are not typically available to those who are self employed. And millions of business owners got loans from a second S.B.A. program, the Economic Injury Disaster Loan system, which offers low-interest loans. But those, unlike P.P.P. loans, must be repaid.
Lenders Didn’t Win
The rule barring unprofitable sole proprietorships is a significant obstacle for lenders that work in vulnerable communities.
“It’s barbers, stylists, drivers, janitorial — really small mom-and-pop businesses. If they had a negative number on their Schedule C, they just weren’t eligible for anything,” said José Martinez, the president of Prestamos CDFI, referring to the tax form sole proprietors use to report their earnings.
The tiny loans were also unprofitable for lenders. The smallest loan made by Prestamos, a division of the nonprofit social service group Chicanos Por La Causa, was for $74. For that, it was earned a $3.70 fee. (Last month’s stimulus bill increased fees for lenders on loans under $50,000; they will now be paid half of the loan’s value, to a maximum of $2,500).
Some big banks chose not to work with businesses that qualified for so little. JPMorgan Chase, the program’s largest lender, set a $1,000 minimum on its loans, a spokeswoman said. (A few smaller ones were done as exceptions, she acknowledged.) Two other national lenders, Bank of America and Wells Fargo, did not set minimums; each made scores of loans to sole proprietors for sums as low as $1.
“Our P.P.P. loan review processes and payroll verification were conducted in accordance with S.B.A. guidelines, which did not mandate a minimum loan size,” said Manuel Venegas, a Wells Fargo spokesman.
Bill Halldin, a spokesman for Bank of America, said that loan amounts were determined “by S.B.A. requirements and the documents submitted by businesses.”
Ms. Ackerman, the college consultant, kept her $13 loan, and plans to file the paperwork to have it forgiven. Others rejected such scant aid.
“I was so flabbergasted, I sent it right back,” said Jeff Ostashen, a self-employed trucker in Lakeland, Fla., who got a $17 loan from Wells Fargo. “It felt like a slap in the face.”
Still, Mr. Ostashen — whose sales have been slow since the pandemic began — plans to apply for a second loan. “I’m going to try again and see what happens, and hope and pray for the best,” he said.
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