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Financing Small Businesses During the Coronavirus Pandemic

Unintended Consequences of the PPP Program?

The government’s Paycheck Protection Program (PPP) has unintended consequences. Namely, the amount of money a furloughed or unemployed worker receives from unemployment funds can be greater than the regular salary received had that individual returned to work. The main reason is the $600 boost to unemployment benefits per week through July set in the federal stimulus package.

Applicants for loans from the PPP program geared towards small businesses also have unintended consequences. Applicants do not need to provide evidence that they have been harmed by COVID-19. They only need to certify that “current economic uncertainty makes this loan request necessary.” This self-certification requirement could be the reason organizations like Ruth Chris, Shake Shack, Harvard University and the LA Lakers received funds in the first go-around although they returned it after a public outcry. Others promised to do the same after being called out by Treasury Secretary Stephen Mnuchin including AutoNation Inc.

Within days of the start of the loan program it was disclosed that all of it had been committed prompting Congress to approve an additional $310 billion in funding for small businesses. The government needs to make sure legitimate small businesses are receiving these funds; otherwise, we may never meet the needs of small business people.

Unemployment Benefits vs Regular Pay

Unemployment benefit payments, when added to the state benefit, are projected to be greater than the regular pay for about 50 percent of the unemployed population. The average weekly payment to a laid-off worker should rise to about $978 from the nearly $378 the Labor Department said was paid on average late last year. The result is an incentive not to return to work even though the employer requests it.

The $600 payment aligns with working full time at $15 an hour—the minimum wage level proposed by many Democrats in Congress. The federal minimum wage—followed by 21 states—is $7.25 an hour and has been unchanged for a decade. Quite a differential and disconnect that Congress has ignored.

Critics of the program point out it is possible that furloughed workers could ask their bosses to leave them on furlough so they can collect the larger payments while avoiding health risks of returning to work. Employers, on the other hand, want the workers back on payroll, either so companies can reopen or the business can qualify for forgiveness of government loans.

SBA Loans

The implications for small business with respect to the Small Business Association (SBA) loans are substantial. The $2 trillion stimulus package included $500 bailout for distressed companies. The SBA loan program included $349 billion in low-interest loans for small businesses. These loan amounts are necessary to enable small businesses to survive during the COVID-19 pandemic and provide a way to rehire employees.SBA Loan

The PPP amounts are supposed to help small businesses (with less than 500 employees) that can no longer finance themselves through traditional means, like raising money in the markets or borrowing from banks under existing credit lines. Given the prevailing one percent interest rate on these loans, the loans are essentially free money. But, the borrower must maintain the size of its workforce to have the loan forgiven. The loan program requires that the federal money does not have to be paid back if employees are rehired subject to a percent of salaries test in relation to total operating expenses as explained next.

Another unintended consequence has to do with the fact that 75 percent of the funds must go for employee salaries, and no more than 25 percent on rent, mortgage interest and utility payments. Many small businesses have been forced to close and, according to their owners, a bigger need is to cover rent and other costs that may be greater than the 25 percent cut-off point. Just imagine a small business (i.e., restaurant/bar) in New York where rents are very high.

Repaying the Loans 

The PPP loans have to be repaid in 8 weeks unless the 75% of the employees have been rehired. This can be a problem for a small business because it may take longer than 8 weeks to determine if customers are returning and that triggers whether all/some employees can be rehired. Small businesses need more time to make that determination, say four months. This is also a factor in the 25%:75% split discussed above.

Another example of unintended consequences is Hoffman Car Wash in Albany, NY, that qualified for a small business loan. To get that loan forgiven, the owner is recalling the workers he furloughed when the state ordered car washes to close. This is happening even though the $13 per hour regular pay is dwarfed by the $23 equivalent payments per hour to stay home.

Fraud in the Program

Critics of the program also point out that at least seven companies that received a total of $45 million in loans under the program have had difficulties with the federal government. For example, MiMedx Group, a biopharmaceutical company in Marietta, Georgia, received a $10 million loan on April 21. On April 6, the company had agreed to pay the Justice Department $6.5 million to resolve allegations that it violated federal law by knowingly overcharging the Department of Veterans Affairs for medical supplies.

Giving money to a company that committed fraud is not a good look for the PPP program and is the kind of event that makes the public question whether any internal controls exist to check whether companies receiving loans actually qualify and need the funds. Trust but verify are the watch words.

Stay at Home or Return to Work

The decision whether to stay at home goes even deeper than previously discussed and illustrates the stay safe/earn money ethical dilemma for many workers. Here are some of the issues:

  • Unemployment benefits in total (state + $600) exceed weekly pay.
  • Wages after returning may be lower than expected because the amount of tips earned from personal service businesses (i.e., restaurant, bars, salons) decreases due to social distancing at work and a smaller number of customers.
  • Staying home reduces the risk of being exposed to the coronavirus at work.
  • Staying home enables a parent to help children learn to navigate the online learning resources used by most states that have closed in-person classes.
  • Staying home provides the time and space to reflect on life after the coronavirus.


I have written before about the need for a strong work ethic. The PPP encourages the opposite. Should we blame it on lazy workers? Yes, in part. But, the way the program was drawn up leaves a lot to be desired. The Congressional legislation was passed abruptly to help businesses and, as a result, was not well thought-out.

I cannot blame workers entirely for choosing to stay home and collect unemployment benefits. They are, in some respects, acting on their perceived self-interest and doing what is best, economically, for their families.

One argument for states to ease their stay-at-home regulations is the damage it is doing to our economy and harm to small businesses. While reopening should be balanced by safe self-distancing and protective equipment requirements, all states need to set concrete plans to reopen America. I believe the phase-in approach adopted by many states is fine. However, the public needs certainty and, I believe, a July 4 deadline should be set for all states to be in the final phase where activities are carried out using a "new normal." Large gatherings, business meetings, sports and entertainment activities could begin in the final phase based on safe distancing and size limitations.

We will never get to the point that the virus is eradicated entirely so we have to learn to live with it and be prepared for another round of COVID-19 infections and, quite possibly, future pandemics. Setting a July 4 deadline gives people hope the transition will come to an end and a new normal will begin. If necessary, that date can be changed. Let us hope small businesses have been able to survive during the transition period.

Posted by Steven Mintz, aka Ethics Sage, on May 5, 2020. Dr. Mintz is the author of Beyond Happiness and Meaning: Transforming Your Life Through Ethical Behavior that is available on Amazon. You can sign up for his newsletter and learn more about his activities at: Follow him on Facebook at: