I spent time working as a Credit Analyst for an Economic Development Firm (AKA we made SBA 504 loans). I would like to note I am no longer in the industry, however I do have contacts still. I've spent some time on the phone discussing the program with current lenders.
The SBA does not just hand out money with no strings attached. The actual 504 loan program (general small business loans) have strict requirements that are adhered too. There are size constraints, business type constraints etc. and (some of) these constraints extend to the PPP. I can't say for certain but it is entirely possible this firm doesn't qualify.
As for the PPP, I believe the max loan amount is 2.5x monthly payroll. I can imagine that 200M burn rate is not purely salary. But safe to say they can apply for a maximum 500M. Is that an exorbitant amount of money for a firm with no revenue? Probably.
But in talks with those in the industry, the main concern is Construction Companies. In the markets I'm in, construction is still underway, so these companies are applying for PPP while still maintaining a constant revenue stream. They are essentially getting free employees for 2.5 months, while still being relatively unaffected. That will most likely change if the economy enters a larger downturn as construction is usually the first to go.
I worked in the commercial department of a state financial institution and I loathed SBA loans. They were such a pain. Everybody hated them. Lenders, processors, underwriters...but not the VP!
I mean I get but ffs why? Let the big companies do it. They're just a hassle.
They're a hassle, but less risk for the primary lender. We worked with primarily smaller Banks, it makes sense for a small bank to work with the program.
Yeah but most small banks don't have any understanding of what it all requires. It's not like an inhouse loan where if the borrower misses a payment they just show up on a report. You gotta jump though hoops and notify tons of stuff to the SBA about it. Not to mention everything needing to be perfect.
The PPP program is a loan at favorable interest rates (1%) and a fixed term (2 years). The loan can be entirely forgiven as well, provided certain requirements are met. There is no collateral requirement but you do have to affirm that you are affected by the pandemic, so it sounds like the startup mentioned by OP possibly committed fraud.
Just a thought: when the government starts giving out lots of money with strings attached, you get a lot more jobs doing administrative compliance tasks. I'm thinking of, for instance, universities and the growing numbers of administrators who exist to chase funding. More strings attached means money will go towards meeting all requirements. Maybe this isn't strictly bad, but it might be less efficient than just letting some undeserving companies get away with extra cash. I'd rather startups consist of employees focused on building their product than focused on qualifying for government grants.
Just as an aside, compliance (at least in the case of the SBA ) is done at loan approval time. Compliance for the SBA mirrors what most traditional lenders require: insurance, permits, etc.
It's also hard to extend what the government is doing now (payroll protection) to a university or some other large firm. Funding for those type of entities has been around for a long time and is set in stone.
Compliance in this case won't be that big of a deal. The fact of the matter is it will be relatively simple for a small business to show that the money from the program has been a benefit to them. The way the SBA program works is the intermediary lender is required to gather all the necessary documents for submission to the SBA.
The sheer quantity of loans is the only bottleneck. Even that would probably be add minor stress to their system. A regular loan can take a week to two weeks to process when things are running smoothly. Most of that time is the loan sitting in a queue waiting to be processed. The actual enforcement requirements will be relatively unchanged compared to regular loans.
From my understanding the actual compliance of whether the loan will be forgiven or not is straightforward and probably wont need to be enforced until a few months down the road. If it does not comply, the company will pay back in full.
The point was to get money out fast. Everyone knew it would get into some wrong hands, but the window is small here. Any hope of coming out of this in a few months hinges on getting people support quickly.
And besides, all these small-business loans are exactly that; loans. You can get them forgiven later if you can show that you used it directly for salary. But later is the key word. Get the money out now, worry about forgiveness paperwork later.
Stimulus payments, like tax codes, are usually best kept broad and simple. Doing otherwise usually just rewards those who are best at gaming the system.
I spent time working as a Credit Analyst for an Economic Development Firm (AKA we made SBA 504 loans). I would like to note I am no longer in the industry, however I do have contacts still. I've spent some time on the phone discussing the program with current lenders.
The SBA does not just hand out money with no strings attached. The actual 504 loan program (general small business loans) have strict requirements that are adhered too. There are size constraints, business type constraints etc. and (some of) these constraints extend to the PPP. I can't say for certain but it is entirely possible this firm doesn't qualify.
As for the PPP, I believe the max loan amount is 2.5x monthly payroll. I can imagine that 200M burn rate is not purely salary. But safe to say they can apply for a maximum 500M. Is that an exorbitant amount of money for a firm with no revenue? Probably.
But in talks with those in the industry, the main concern is Construction Companies. In the markets I'm in, construction is still underway, so these companies are applying for PPP while still maintaining a constant revenue stream. They are essentially getting free employees for 2.5 months, while still being relatively unaffected. That will most likely change if the economy enters a larger downturn as construction is usually the first to go.