Some big restaurant chains have obtained loans from the government under a small-business relief program, leading business groups to call for changes to the program before Congress provides it with new funding.
The Paycheck Protection Program exhausted its $350 billion in funding last week and many small businesses were unable to obtain loans they desperately need to stay afloat. Congress and the White House say they're close to an agreement on that would give the program about $300 billion in fresh funds.
Restaurant chains Shake Shack, Ruth’s Hospitality Group and Potbelly’s each announced last week they’d obtained loans worth a combined $40 million under the program. Although the loans are within the guidelines of the PPP, Shake Shack said Monday it will return its loan to give smaller restaurants a chance to get government money. The New York burger chain, which employs nearly 8,000 workers across 189 outlets, said it secured alternate funding.
The government program, which is overseen by the Treasury and administered by the Small Business Administration, limits loan recipients to businesses with fewer than 500 employees and revenue of less than $2.5 billion. But it makes an exception for restaurants and other food service businesses that employ fewer than 500 people per location, meaning that restaurant chains are as eligible for the loans as a neighborhood restaurant or bar.
Karen Kerrigan, president of the advocacy group Small Business & Entrepreneurship Council, said the program is flawed and has obsolete rules.
“Some of these rules and provisions disproportionately hurt the chances of the smallest of businesses accessing this capital, or not getting sufficient and proportionate relief to help salvage their businesses,” she said.
The Trump administration and Congress expect to reach agreement Monday on an aid package that could include up to $300 billion to boost the loan program.
The small business lending program is part of the $2.2 trillion rescue package approved by Congress last month. The intent of the law may have been to encourage restaurants of all sizes to reopen and bring back their laid-off workers — the larger companies are likely looking at their locations with an eye to closing underperforming ones. When restaurants do reopen, it will also restore revenue for small businesses that supply food, liquor and services to restaurants in their area.
Small business advocacy groups say changes are needed before the next round of funding is doled out. The National Federation of Independent Business says a portion of the money should be set aside for companies with 20 or fewer employees. While the NFIB did not mention small restaurants specifically, they would be among the beneficiaries under the NFIB plan.
Many restaurants are scrambling to shore up their finances as customers obey stay-at-home orders. U.S. restaurant sales were down 43% the week ending April 12, according to NPD Group, a data and consulting firm. The drop-off has been sharpest for sit-down restaurants that have closed their dining rooms.
Potbelly Sandwich Works, which which has 474 restaurants and 7,000 employees, said last week it received a $10 million loan. Ruth’s Chris Steakhouse, which has 150 restaurants and more than 5,700 employees, received two loans of $10 million each.
Restaurant chains are also tapping other sources for cash to weather the crisis. Ruth's Chris recently announced it drew down $120 million available under an existing credit line, suspended its dividend and had top level executives agree to reduce their salaries. Darden Restaurants — which owns the Olive Garden chain — took out a $270 million loan earlier this month. McDonald's took out a $1 billion loan and has cut executives' pay.
In a statement, Shake Shack CEO Randy Garutti and its founder Danny Meyer said, “It’s inexcusable to leave restaurants out (of the PPP) because no one told them to get in line by the time the funding dried up. That unfairly pits restaurants against restaurants.”
Many small firms that flooded banks with applications are livid that they were left out in the cold. One of them is Florida business owner Edgar Comellas, owner of Aces Wild Entertainment, which supplies “Vegas-style” activities and staffing for birthday parties, fundraisers and corporate events. He said he tried to get $10,000 from Bank of America Corp., but was unsuccessful.
Comellas said he’s upset that money went to larger businesses like Ruth’s Hospitality Group Inc.
Ruth’s Hospitality has the individuals “work the papers and lobby and get things to what they need to get $20 million,” Comellas said. “We don’t.”
Lawrence Summers, the former U.S. Treasury secretary, said on Saturday that eligibility for the PPP should be tightened to “open the window for the smallest businesses, florists, pizza shops, etc.”
In the next round “we need to cut out hedge funds and reinforce the smallest businesses that hold communities together,” Summers said in a tweet summarizing a CNN interview. “We also ought to give money to those who aren’t in life for a profit but are here to help others.”
Some business owners like Lupe Rose found the process disheartening. The co-founder and chief executive officer of SHE Beverage Co., a Lancaster, California, beverage manufacturer and distributor, unsuccessfully applied for a loan through Wells Fargo & Co. as well as online companies PayPal Holdings Inc. and Kabbage Inc. Rose said she and her team “jumped on a conference call and literally cried with each other” when they heard the money had run out.
“It’s just pretty disgusting that you hear about all of these other businesses who have been funded and who are able to pay for their employees,” Rose said. “While you have businesses like mine that are being buried, small businesses being buried because we believed what we heard.”
The rescue financing is intended to help companies that employ up to 500 people, pay workers and certain expenses such as rent for two months. Loans convert to grants if a company maintains its payroll and salaries.
But because the 500-employee cap refers to a single location operated by hotel and restaurant companies, chains like Shake Shack could apply.
Shake Shack is one of the fastest-growing restaurant companies in America, with $595 million in annual sales. While the burger chain has fewer than 500 workers at each site, it had about 7,600 employees spread across numerous locations as of the end of last year. It received the maximum $10 million under the program.
The U.S. Small Business Administration program, working with almost 5,000 lenders that disburse the loans, approved applications for $342.3 billion in just 13 days, with the rest of the $349 billion going for fees and processing. There’s no accounting of how much money small businesses have received so far.
A statement from the SBA and the Treasury Department said, “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.”
But an SBA report showed that about 2% of the firms approved for loans accounted for almost 30% of the funding. The National Federation of Independent Business, the largest group representing small businesses in the country, is calling on Congress to approve $400 billion more for the program -- with not less than $200 billion going to firms that have 20 or fewer employees.
Nine percent of the pot went to companies, such as Fiesta Restaurant Group Inc. that got loans of at least $5 million. Fiesta, which owns and franchises Pollo Tropical and Taco Cabana restaurants, said in a regulatory filing that it got $10 million. The company’s annual sales totaled $661 million and it had about 10,500 employees at the end of last year.
Sandwich chain Potbelly Corp., which had sales last year of $410 million and employed 6,000 people, also received $10 million.
Other companies that reported getting small-business funding are Zagg Inc., which makes protective coverings for smart phones and had $522 million in sales last year; Hallador Energy Co., a coal-mining company with $323 million in 2019 revenue; adventure-travel and cruise company Lindblad Expeditions Holdings Inc., which reported $343 million in sales last year; and data storage company Quantum Corp., with $403 million in sales.
A Potbelly spokesman said Congress allowed funding for restaurants because their workers are “vital to our economy.” Representatives for the other companies didn’t respond to requests for comment.
John Arensmeyer of Small Business Majority, an advocacy group for small firms, said he has been disappointed that larger companies have been able to take advantage of the loan program over smaller ones.
“Most of the money has gone to much larger entities and the very small entities for the most part have been left behind,” he said. “We’re dealing with finite dollars,” Arensmeyer added. “Even if more money is put into the system, we really need to prioritize very small businesses over publicly traded companies.”
When asked early in the rollout about concerns from small-business owners that they wouldn’t get funding, Trump praised the program. “It’s been flawless so far, far beyond our expectations,” he told reporters April 4. “These are great loans. These are loans that get immediately paid off. These are loans that get businesses back.”
The Associated Press and Bloomberg News contributed.
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