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We keep hearing stories of how these large businesses are successfully sneaking into the small business paycheck protection program with the intentions of picking up a several million dollar forgivable loan
We saw this with Shake Shack who was offered a $10 million dollar loan And with Harvard who was made part of the CARES Act and given millions of dollars despite its 41 billion dollar endowment.
And here’s the issue.Those two are the good guys. They both returned their aid (after criticism) but returned it nonetheless.
According to CNBC at least 75 publicly traded companies have received Paycheck Protection Loans. Several of which have market capitalizations in the hundreds of million and assets in the millions.
Again according to CNBC (and I’m reporting this as factually as I can so I don’t get sued) 15 of those companies have market caps over 100 million dollars.
The behemoth of the group being DMC Global with a whopping 405 million dollar market cap receiving a 6.7 million dollar PPP loan.
DMC Global is a metalworking business with 277 million dollars in assets.
So how does a company like this get a PPP loan?
Well let's look at who can qualifiers:
You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States,
And you were in operation on February 15, 2020
As we can see it doesn’t take much, especially when the SBA allows businesses with less than 500 employees per location to apply
Back to DMC, does it qualify under these guidelines?
Well, DMC has 428 employees and has been in business since 1965
So boom, you pass the test.
However, there is one thing I find strange:
There is a rule against this, as I was writing this I remembered hey didn’t I talk about a size standard for these loans? And I did!
The SBA put out these guidelines. An entity can qualify for the PPP if:
Employer’s maximum tangible net worth on March 27, 2020, is not more than $15 million; and
Employer’s average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the date of application is not more than $5 million.
DMC global’s net income in 2018 was 30.5 million
So I did even more digging and found that there’s an exception - if the employer’s average revenues over the previous three years is less than the revenue based size standard for the primary NAICS code of the company that company can qualify for a loan.
DMC Globals NAICS code is 332999 for “All Other Miscellaneous Fabricated Metal Product Manufacturing”
And the size standard is 750 employees, making DMC considered a “small” business in this category.
Now this is just one of the 75 companies on the list that I did research on however I assume most on the list qualify under some kind of similar circumstances.
Now I’d like to point out I don’t even blame DMC or any of the businesses on that list for taking a loan or even applying. The boards of these companies have a fiduciary duty to their companies to earn profits for the shareholders. They are simply using the system as it is.
However the part that bothers me is these businesses are taking away from the mom and pop shops that don’t have the capitol to get to next week.
Why weren't there some more rigid safeguards built into this? This wouldn’t be nearly the issue if there was enough funding to go around but there simply isn’t.
All that was needed to be done is for the SBA to take those size limits and not allow anyone outside of them to qualify. It’s that simple.
There are programs as a part of the CARES Act for mid and large size businesses (over 500 employees) with favorable terms like loans with under a 3% interest rate, however they aren’t forgivable like the small business loans are.
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Disclaimer
This presentation does not constitute legal or tax advice. It is provided solely for informational and educational purposes and does not fully address the complexity of the issues or all the steps businesses must take under applicable laws. You should consult your professional advisers regarding your individual situation. Max Maher undertakes no obligation to update the information in this presentation, and no representations are made that the content is error-free.
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