Magic Johnson Steps-up To Address Deficiencies In PPP’s Small Business Aid Program

Former Laker is looking for ways to help hard-hit minority communities during the coronavirus crisis. Magic Johnson Steps-up To Address Deficiencies In PPP’s Small Business Aid Program

Magic Johnson Steps-up To Address Deficiencies In PPP's Small Business Aid Program

Citing concerns that minority-owned businesses are being overlooked, Earvin “Magic” Johnson said his EquiTrust Life Insurance Co. will provide $100 million in capital to fund loans through the Small Business Administration’s Paycheck Protection Program.

EquiTrust, which is majority owned by Magic Johnson Enterprises, will partner with MBE Capital Partners, a Fort Lee, N.J., based nonbank lender that specializes in financing minority- and women-owned companies, to offer Paycheck Protection Program loans.

“What we’re launching here now is so important because we’re going to save a lot of small, minority businesses because they can’t just walk into the bank and get that loan,” Mr. Johnson said in an interview.

Mr. Johnson said he became aware, thanks to news reports, of the struggle many small borrowers faced in applying for loans after the Paycheck Protection Program launched on April 3. It was part of the federal government’s initial roughly $2 trillion stimulus package to combat the economic fallout of the coronavirus pandemic.

Rafael Martinez, chief executive at MBE Capital, was also hearing complaints from clients who couldn’t get in on the first $350 billion round of funding before the money dried up April 16. Some lenders had prioritized applications from customers with existing relationships.

“We started getting a flood of calls saying, ‘Hey Rafael, can you help?’” Mr. Martinez said.

Meanwhile, several large and well-known companies—including Mr. Johnson’s former team, the Los Angeles Lakers—were able to snag loans easily in the first round, having met the terms, such as having fewer than 500 employees. The Lakers and several others ultimately returned the funds after public criticism.

Mr. Johnson said large and well-funded companies receiving the money highlighted the problem that smaller companies with limited financing options faced in competing for the loans.

“We knew why the money was gone and couldn’t trickle down to small businesses, especially small minority businesses, because they didn’t have those great relationships with the banks. So this was easy for us to understand,” Mr. Johnson said.

With both Mr. Johnson and Mr. Martinez seeking ways to better help minorities access the program after Congress provided a $310 billion replenishment, partnering seemed like a natural fit. The two, with EquiTrust Chief Executive Eric Holoman, hammered out the terms of their deal earlier this month, after being connected through the National Action Network, the civil rights organization founded by the Rev. Al Sharpton.

Mr. Sharpton said ensuring minorities can access federal stimulus aid is crucial since black communities have suffered disproportionate deaths from Covid-19, the illness caused by the new coronavirus.

“We need more stimulation than anybody,” Mr. Sharpton said.

Mr. Johnson’s $100 million investment will immediately be put toward funding the roughly 5,000 Paycheck Protection Program loans MBE Capital has had approved by the Small Business Administration so far, according to Mr. Martinez.

He said of MBE Capital’s approved PPP loans, about 80% have been for minority-owned businesses, which have requested an average of $25,000, reflecting the small size of the firms.

“We’ve been picking up the people that nobody else wants,” Mr. Martinez said.

Congress set aside $60 billion of its Paycheck Protection Program replenishment for small, midsize and community lenders in an effort to address concerns that the loans weren’t flowing to underserved, rural and minority communities.

Still, the SBA may encounter challenges tracking how well the funds reached those borrowers, according to a recent report from the agency’s inspector general.

The report noted that Congress, in creating the Paycheck Protection Protection Program, instructed the SBA to give guidance to lenders about prioritizing small businesses in underserved and rural markets, but the agency failed to do so.

Meanwhile, Mr. Johnson is looking toward additional ways to help minority communities during the coronavirus crisis, including raising money to provide meals in inner cities and potentially expanding the partnership with MBE Capital.

“We will always first and foremost be about the minority community, and when you get picked as leaders of that community, you got to step up in tough times,” Mr. Johnson said. “This is, when you think about it, life and death for so many business owners. They have nowhere else to turn.”

Updated: 6-28-2020

Small Businesses Tackle New PPP Puzzle: Forgiveness

Repeated changes to program complicate process of getting loans forgiven, raise prospect of costly errors; ‘looks like the bar exam’.

Small businesses that received government-backed loans to ease the pain of the coronavirus pandemic are beginning to turn to a process some say is as complex as getting the money: figuring out whether they have to pay it back.

Some small-business owners have spent dozens of hours wading through the 11-page forgiveness application for Paycheck Protection Program loans. Others are trying to determine how or whether legislation President Trump signed earlier this month changes the math.

Some lenders say the government is putting them in a difficult spot by making them responsible for determining forgiveness, and they fear being saddled with unprofitable loans.

“This is not an easy thing to figure out without help,” said Tyler Coates, vice president of sales at Ultimate Sales & Services, a 32-person convenience-store food broker and sales-and-marketing agency based in Savannah, Ga., that received a $420,000 loan. Mr. Coates said he has spent at least 25 hours on an application that estimates it takes 180 minutes to complete. “There are too many question marks and too many errors you can make.”

The Treasury Department and the Small Business Administration have issued 18 “interim final rules” and 48 pieces of guidance in the form of “frequently asked questions” for the program. The government has approved $512 billion in loans to nearly 4.6 million businesses since the program’s April rollout.

The new law lengthens from eight weeks to 24 the time that borrowers have to use PPP funds and qualify for forgiveness. It also lets them spend 40% of the loan on rent and certain other expenses, up from 25%.

The changes came in response to requests for more flexibility from small businesses that remain closed, were slow to reopen or spend more on rent and other overhead.

For many small-business owners, the program’s biggest selling point was that the loans would essentially turn into government grants. “Until you see how the forgiveness goes, I don’t think we can call it a success or failure,” said Wesley Veach, chief executive of Bankcda, a lender based in Coeur d’Alene, Idaho, that has funded roughly $23 million in PPP loans for nearly 300 businesses.

Nearly one-third of businesses that received PPP loans will have passed the original eight-week deadline by June 14, according to a recent survey from the National Federation of Independent Business. That means a large share of loan recipients had already spent much of the money before the extension was granted.

Efforts to add flexibility have created new complications. Small-business owners worry that accepting the extension locks them into maintaining staffing at pre-pandemic levels for another four months—even if business doesn’t fully recover, another bout of Covid-19 hurts sales or they simply don’t need as many employees, said Bethany Novis, a partner with the Lancaster, Pa., accounting firm RKL LLP.

The Treasury Department and SBA still need to release a new forgiveness application form reflecting the new law; the agencies previously veered from congressional mandates when setting up the program, the SBA’s inspector general said last month.

They haven’t yet said how lenders should submit forgiveness applications to the SBA, what happens if borrowers can’t repay loans in the allotted time and how businesses can appeal if their loan isn’t forgiven.

Treasury and the SBA have tightened oversight requirements. In an interim final rule issued May 22, the SBA instructed applicants for forgiveness to hold on to records for six years and said they could be subject to a review at any time.

Senate Democrats in a letter Friday urged the SBA and Treasury to streamline the forgiveness process, recommending several changes including a simpler application for low-dollar loans.

Some business owners say they are concerned about how the SBA would treat good-faith efforts that fall short. Bonnie Kallenberg, co-owner of three Finders Keepers consignment shops in the Atlanta area, tried to put her $172,000 PPP loan to work as soon as she got it in late April. She hired graduating high-school seniors to replace employees who were afraid to return to work. She paid her husband, another co-owner, for his work setting up an online store.

Ms. Kallenberg now worries she could run afoul of a cap on how much PPP money could go to owner-employees, a provision in the forgiveness application released in May.

“If I have to pay that back, too, on top of everything else that’s happening, forget it,” she said. “We’re done.”

An SBA spokesman said additional guidance would be forthcoming. “The SBA will conduct ongoing due diligence to ensure taxpayer funds are being used appropriately,” he added.

The new law has eased some small-business owners’ concerns about frequent program changes and heightened scrutiny. Polly Bart said she “celebrated all day” when she heard the new legislation had passed because it gives her more time to figure out how to spend a roughly $17,000 PPP loan for Greenbuilders Inc., a remodeling contractor in Sparks, Md., that she owns.

“My business has no debt, and discovering after we have spent the money that it is a loan instead of a grant would kill me,” Ms. Bart said.

The process is particularly daunting for small companies such as Reddell’s Glass & Metal Inc., a provider of commercial storefronts, windows and mirrors in Paris, Texas, that received a roughly $45,000 PPP loan. “If you have a 100-person company, most likely you will have a CFO, a controller, people that deal with this,” said Reddell owner Guy England, who writes payroll checks manually each week for his six full-time employees.

Mr. England’s banker, H. Gregory Wilson, CEO of Paris-based Lamar National Bank, which has about $260 million in assets, worries that he doesn’t have enough resources to help the bank’s roughly 300 PPP customers with the forgiveness process.

Mr. Wilson said the application seems more complicated than the spreadsheet he used to manage a derivatives portfolio when he worked for a hedge fund. “I have people who want their forgiveness now and have got what looks like the bar exam or a CPA exam.”

With the new, longer time frame for forgiveness, he added, banks will be fielding even more questions from borrowers and “choking on these SBA loans for the rest of the year or even longer.”

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