Downsides to the Paycheck Protection Program (PPP) – Ease

Downsides to the Paycheck Protection Program (PPP)


Earlier this month the Paycheck Protection Program was set in place with the objective to help struggling businesses maintain their employees. 

Being that COVID-19 threatens to permanently damage the economy, the federal government has deemed several stimulus packages as helpful in limiting its effects. The PPP is a way of 'loaning' businesses the money they need to keep their employees during the crisis. The money is distributed through banks with a cap of $10 million per company and a limit of 2.5x monthly payroll. 

Hundreds of thousands of small companies like Ease - Essential Home Care™ have already applied for the loans. Many companies are desperate as they are running out of money to pay their employees. Without a PPP loan, many of those same companies would have to re-hire people in a matter of months. 

Frictional Cost

Through the rushed process of distributing these hundreds of billions of dollars, there are bound to be inefficiencies. Banks are forced to make quick decisions as to who is eligible to receive the loans and for how much. This results in many businesses receiving money that they don't actually need and others receiving too little. The calculation is based on very few factors, the main of which is the average payroll expense in 2019. Unfortunately for new businesses like ours, the expense is not calculated using the months you have been in business but the entire 12 months of the year. Other issues exist for businesses that are growing rapidly. The program only accounts for a 25% buffer for all businesses. What happens to businesses that have doubled their payroll in the last year? The money they receive is insufficient to keep all their employees on payroll.  

Marc Cuban points out another frictional cost in the lag time between the approval date for the PPP and the actual distribution of cash,

"Banks are playing themselves. They’re being banks and they’re trying to determine if the credits are good and that’s leading to a lot of small businesses that are left out in the cold." 

The Macro Cost

From a macroeconomic perspective, this program seems wise as it keeps people employed, companies in business, and the economy strong. Is there a downside? Of course. Nothing is ever free-- especially anything with a dollar amount that starts with the letter "T".  While the government seems to effortlessly pass out gobs of money back to American taxpayers, there is always someone that has to foot the bill at the end of the day. While it is difficult to say where that money is being re-directed from, we do know that funding for the WHO has been one of the victims. Trump has targeted its reluctance to deem COVID-19 as a global epidemic until very late in the game as a reason to terminate funding. It can be assumed that many similar organizations will follow suit.

Costs can also be tracked into the phycological realm. Business owners are left forever at ease knowing that the government is likely to have their back during the next economic downturn. This may result in poor capital management. Businesses will ride closer to the edge by spending greater portions of their "rainy day" emergency reserves. This means that should the government be unable or unwilling to bail out small businesses in the future, these businesses would be the first to go.

A Small Business Perspective

Our current position as a small business has placed us in a perfect trajectory to not only limit the toll that the coronavirus takes on us as a business but benefit from the upsides. For the majority of Americans that have not lost their jobs, they have each received a check in the mail that they are prepared to spend on things that they wouldn't have otherwise. This opens the door to new customer acquisition. Though our current workload has been lightened, there is still plenty to be done and we are still hiring. Our minimal downsides have been overly compensated from the PPP allowing us to expand even more aggressively. Though the money is audited and must me spend on payroll, this is money that we would have been spending no matter what. This allows the money that we would have spent to go towards growth. 

Another company Marsbags has also seen an increase in sales. They have adjusted their typical sales pitch from selling recreational bags to emergency preparedness bags. With just one change they have seen a huge influx of sales. 

A Large Business Perspective

I recently had the opportunity to sit down with Michelle Carr of Encompass Health, a publically traded home care and hospice company. She told me of the upsides that are in store for them. She explained that the previous requirements needed for a patient to qualify for home care have been lowered. This allows for their nurses to help in alleviating the overwhelmed hospitals. As a business, this means more sales, more employment, and a fatter bottom line. 

In summary, COVID-19 brings a particular set of challenges but should a business or person be prepared to pivot and adapt to the changing environment, this crisis can benefit them financially. 

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