The key federal relief program for restaurants and other small businesses ran out of funds Thursday, but that may not be the loudest gripe of operators who have counted on the money to stay in business.
Congress is widely expected to restoke the Paycheck Protection Program (PPP) with hundreds of billions in low-interest loans that morph into grants if the borrower meets certain criteria. If the lawmakers really want to help restaurants through the COVID-19 crisis, operators say, they’ll use the opportunity to fix the problems that undermined the intent of the PPP, from the application process through the repayment conditions.
Many of the restaurateurs who’ve landed one of the loans say the would-be grants of up to $10 million have meant the difference between shutting down for good and limping through the pandemic until easier days return.
Forty-three of the 130 franchisees of the Beef ‘O’ Brady’s and Brass Tap casual restaurants qualified for loans averaging $100,000, and “the number is growing every day,” says Chris Elliott, CEO of the sister chains. (The program’s administrator, the Small Business Administration, is not accepting applications until more funds are allocated, but many aid requests were already in process or OK’d. The dual chains’ mutual parent, for instance, is still awaiting its approved funds.)
“It’s huge,” says Elliott. “For many of them, that’s how they’re staying in business until their dining rooms open back up.”
But getting there wasn’t easy. The process for obtaining a PPP loan was revealed just a few days before the initiative went into effect. “It’s kind of like fixing your car while you’re still driving down the road,” says Elliot. “The information you would get one day would come back the next day with a correction or an alteration.”
The loan rate, for instance, was doubled in the eleventh hour by the U.S. Department of the Treasury, from an across-the-board 0.5% to a fixed 1%.
“We just kept at it,” says Elliott. Executives plowed through the CARES Act, a tome-like slab of legalese. They spoke with every franchisee to help them navigate the process, which built on the SBA’s existing network of 1,800 approved local lenders. That number would grow to 5,000 14 days later.
“It’s kind of like fixing your car while you’re still driving down the road. The information you would get one day would come back the next day with a correction or an alteration.” —Chris Elliott, Beef ‘O’ Brady’s and Brass Tap
Banks complained right up to April 3, the start date of the PPP, that they lacked guidance from the SBA on how to process loan requests. Meanwhile, applications poured in. One lender told an MSNBC anchor that it had fielded 10,000 applications in two hours.
The volume overwhelmed a system that had granted a total of 66,000 loans worth $30 billion in 2018. Now it had $349 billion to allocate, with hundreds of thousands of businesses facing shutdowns if they didn’t get a lifeline as soon as possible.
“The volume was so high that the servers kept crashing,” says Matthew Sussman, operator of the Table, Donkey and Stick restaurant in Chicago, as well as a concept called Danke in the city’s Revival Food Hall.
He tried to apply to three lenders, including PNC, with which he already had a relationship. “I logged in with my bank ID and tried to upload the documents maybe a hundred times, and kept getting an error message,” he says. “Something was obviously wrong.”
He eventually had to show in person, before obtaining a specially issued new ID. “Each one of these applications had to be filled out precisely as instructed or it wouldn’t be accepted, complete with an approved digital signature,” says Sussman.
The SBA itself has pointed out that it processed as many loans in the 14 days the PPP was in effect as it had in the previous 14 years.
Perseverance proved the key determinant of success. “We just didn’t leave any aspect of it that came up. For every question, we found an answer,” says Beef ‘O’ Brady’s Elliott.
If there was any inside track, it was having a long-standing relationship with the lender fielding the application. “Your banking relationship had everything to do with whether you got approved, how quickly your paperwork got into the queue and where you were in the queue,” Elliott says.
“We’ve been a 20-year client of our bank,” says Cameron Mitchell, founder and chief of multiconcept group Cameron Mitchell Restaurants in Columbus, Ohio. The company secured a $10 million loan from the PPP in short order. “Those banks are going to take care of those clients first. If you don’t have a great relationship, you’re screwed.”
“This is not a case where the big guys got the money and the little guys did not. It’s more a matter of the sophisticated companies getting the money, and the unsophisticated not getting it. It needs to be simplified.” —Cameron Mitchell, Cameron Mitchell Restaurants
Many in the industry have noted that PPP loans aren’t necessarily going to small businesses as the CARES Act intended. The recipients have included the parent of Ruth’s Chris Steakhouse, which landed $20 million by applying through two subsidiaries for the maximum amount of $10 million in each instance. The 156-unit chain had sales of $761 million last year.
The franchisor of Potbelly Sandwich Shop received a $10 million loan. The franchisor had revenues last year of nearly $410 million.
The PPP regulations define a small business as one with fewer than 500 employees at each physical location. The per-location standard was included as a last-minute change at the urging of the restaurant industry, which wanted to protect individual units of chains.
The SBA and Treasury Department say the PPP worked as intended, channeling money to small businesses rather than big corporations. “The vast majority of these loans—74% of them—were for under $150,000, demonstrating the accessibility of this program to even the smallest of small businesses,” Treasury Secretary Steve Mnuchin and SBA Administrator Jovita Carranza said in a joint statement issued Friday.
Still, restaurants proved not to be the prime recipients of the loans, according to the Texas Restaurant Association (TRA). It found that only 4.5% of the $349 billion PPP pool was channeled to the industry.
“This is not a case where the big guys got the money and the little guys did not,” says Mitchell, whose company’s revenues topped $325 million annually before it was shut down in four days. “It’s more a matter of the sophisticated companies getting the money, and the unsophisticated not getting it. It needs to be simplified.”
Mitchell, who views his company as a medium-sized business, says he has no problem with the size of the companies that obtained loans. “Whether you’re a big company or a little company, your issues are the same,” he says.
But, he and others stress, restaurants are facing peculiar business realities that were not reflected in the PPP’s structure. Recipients were required to spend their loan amounts within eight weeks of the funds being received, and 75% of the money needs to be spent on payroll if the borrower wants to have the loan forgiven when it comes due in six months.
Yet most restaurants are either totally closed or offering only takeout and delivery, which require a skeleton staff. To hit the 75% payroll threshold, those places would essentially have to pay people for doing nothing in the near term. At the same time, the restaurants are facing other significant costs, such as debt service.
What would make more sense, says Mitchell, is tweaking the guidelines. Instead of requiring restaurants to spend 75% of the loan amounts on labor, drop the requirement down to 50%. And give the borrowers 90 or 120 days to spend it, so they can use the loans to restaff when social distancing is eased and restaurants can fully reopen.
“I just think America needs these businesses, it needs its restaurants. America needs to take ownership to get them the resources they need to survive.” —Cameron Mitchell
If the rules aren’t changed, Mitchell says, he figures he might have $2 million of his $10 million loan forgiven. Come October, when the loan is due, he’s looking at a monthly debt payment in of about $500,000, at a time when sales are still likely to fall below pre-COVID levels.
Those tweaks have the support of the National Restaurant Association and the TRA, along with individual restaurant executives such as Elliott.
The industry will have a shot at pushing through those changes when more money is appropriated for the next phase of the PPP or whatever loan program succeeds it. Republicans in Congress have already proposed a $250 billion reallocation. Democrats are pushing for a $500 billion re-up, with more of the money being channeled to states and healthcare facilities.
“I’m not asking for bailouts or handouts,” says Mitchell. “I just think America needs these businesses, it needs its restaurants. America needs to take ownership to get them the resources they need to survive.”