Thanks to the way Congress structured a massive economic aid bill for the new coronavirus pandemic, a chain restaurant like Taco Cabana qualifies as a small business and competes with the family-owned dry cleaner for the same loans earmarked for small companies.
It is a scenario that is contributing to a deepened lack of faith in the fairness of the American government as lawmakers are set to infuse a small-business program with billions of more dollars Thursday.
“I can’t say I am angry because, truthfully, I almost expected it,” said Haywood Prejean, a Cedar Hill business owner who has three companies.
He submitted several applications for federal aid created by the Coronavirus Aid, Relief and Economic Security Act to support his frozen yogurt store, his corporate vending business and the workspace he leases to hairstylists. He awaits his fate as Congress is set to channel more funds into the program Thursday.
“I’m 63 years old, and I’ve seen a lot and politics and things tend to work by being in the right place at the right time or who you know and how you’re connected,” he added.
By the millions, small-business owners competed earlier this month for a finite pot of loans from the Paycheck Protection Program that the federal government will eventually forgive. That rush depleted the fund in less than two weeks, setting off terror among small-business owners in Texas.
But new disclosures reveal that publicly traded companies with thousands of employees swept up money that, in spirit, was intended for far smaller businesses.
At issue here is a simple question: “What is a small business?”
In other federal contexts, like Obamacare, a small business is a company with fewer than 50 employees. But in this legislation, Congress classified a small business as any company that has fewer than 500 employees at any one location.
By this logic, a company with multiple locations and thousands of employees qualifies for the small-business money. And, to the perception and ire of their smaller counterparts, these large companies are akin to big kids commandeering the kiddie pool.
In the initial law, known as the CARES Act, Congress allocated $500 billion into a fund for distressed businesses. These funds were intended for the conglomerates feeling the brunt of economic collapse, like the airlines.
Congress separately created a $350 billion fund known as the Paycheck Protection Program for small businesses. The aim of that section of the law was to keep small businesses afloat for several months and avoid layoffs. If the small-business owner plays ball and retains most of his or her staff, the loan will eventually be forgiven.
Legislators acknowledged at the time that the fund would need to be replenished, but the speed at which it ran out left all involved stunned.
To avoid creating a new federal bureaucracy to distribute these billions to small business owners, President Donald Trump's administration conceived of a process in which banks served as middle men. The problem for many small-business owners was that banks typically prioritize existing relationships and blue chip clients.
If businesses were valued customers, the banks were frequently proactive and reached out to offer help applying for the aid. But many small-business owners found themselves tied up in bureaucratic messes without expert help as they tried to translate disqualifying technicalities in the fine print. And often, their calls to banks were not returned.
At this point in the process, there is minimal transparency as to which companies are receiving federal money that will likely never be repaid.
The only window at this point is when a publicly traded company files disclosures with the Securities and Exchange Commission.
As such, the Associated Press reported earlier this week that seven publicly traded companies in Texas secured PPP loans, and The Dallas Morning News reported Tuesday that Dallas hotel magnate Monty Bennett secured $46 million from the PPP for his companies.
Fiesta Restaurant Group, the parent company of Pollo Tropical and Taco Cabana restaurants, has come under national fire, along with several other chain restaurants, for taking advantage of the program. Fiesta secured at $10 million PPP loan, per the Associated Press.
Critics argue that large-scale and publicly traded companies are capable of securing capital from other lines of credit or the big-business fund and should allow the smaller companies to go for the PPP money. But some in the industry note that restaurants are getting hit particularly hard in this crisis and the end game is the same: to avoid layoffs.
"No restaurant brand should be made a villain," said Anna Tauzin, the chief revenue and innovation officer at the Texas Restaurant Association. "The real enemy is the virus that [meant] we had to close restaurants."
Even within the Texas restaurant industry, the divide is sharp. Most chain restaurants operate under one of two business models. In the case of Fiesta, the parent company owns all of its branded restaurants.
But other restaurant corporations provide some business support — mainly in the form of national advertising — and they franchise out individual restaurants to small-business owners who handle the day-to-day functions, like making payroll.
Rave Restaurant Group, based in The Colony, is the parent company of Pie Five and Pizza Inn. It secured a much smaller PPP loan worth $657,000. That money would only support the leadership of the company, while the individual franchise owners would need to secure their own PPP loans.
One source with ties to the business world suggested to The Texas Tribune that they suspected large corporations submitted their applications in line with a fiduciary duty to investors to secure whatever money was available. But they likely had no sense of how limited the funds were against the scale of need, and in retrospect likely would not have applied for the money, if only to avoid the disastrous public relations consequences.
Now, though, there are public calls for the bigger companies to voluntarily stay away from the small-business money.
“This new funding should help those who need it most — small businesses and their employees,” said Matt Haller, a senior vice president of government relations and public affairs at the International Franchise Association, a trade group for restaurant franchises. “Only 11% of franchise owners have so far received funding. Most of them employ fewer than 50 people.
“It’s also likely that this second round of funding won’t be enough to satisfy small business needs,” he added. “IFA hopes that companies with access to other credit options refrain from using the PPP to preserve it for the small businesses, franchise or otherwise, who need it most.”
And not all of the publicly traded companies from Texas that secured PPP money have thousands of employees and a wealth of options.
Flotek is a Houston-based chemical supplier within the oil industry. The firm successfully secured $4.7 million as it contends with the economic blast of both social distancing and the collapse of the oil market.
“These combined circumstances, which have materially impacted market activity and our business, are anticipated to extend throughout 2020 and into next year," said Danielle Allen, Flotek's senior vice president of global communications and technology. "This outlook guided Flotek’s decision to apply for the Paycheck Protection Program loan, and we closely followed all of the guidelines set forth by the Small Business Administration through the application process."
She said Flotek’s executives and board of directors have reduced their salaries and fees through the rest of the year.
“Flotek is a small business and employs 118 men and women, with the majority based in Texas and Oklahoma — we are using the funds to protect our business and the livelihood of our employees as much as possible during this unprecedented, challenging period,” she added.
Mark Hess, chief financial officer of Houston-based ENGlobal, said his engineering company is in a similar situation.
With 300 employees, ENGlobal secured just under $5 million in PPP money and faces "the same financing challenges as a private company of a similar size."
"ENGlobal has been trying to secure financing for some time through several traditional financing channels," he said in a statement. "Recently we have had interest from a few lenders; however, these things take time and there can be no assurance that a financing transaction would be completed.
"ENGlobal has a duty to its employees, vendors and shareholders to remain solvent and could not afford to pass up the PPP option as soon as it was presented because that option may not be available at a later date."
Publicly traded companies must make periodic disclosures. What is not known is how many large private companies are securing PPP loans, and it remains unclear when — or if — the Trump administration will release that information.
Some policymakers who lived through the 2008 bailout suggest that even with the best intentions, any program that pushes so much government money out the door so quickly will be messy and look particularly ugly in hindsight.
And so Congress readies to pass a new tranche of small business money on Thursday. The new legislation will send another $320 billion into the small-business fund. But this time, $60 billion will be set aside for smaller lending institutions that serve less prestigious small-business owners.
Multiple Capitol Hill insiders tell the Tribune that many lawmakers are furious about the circumstances from the first wave of funds, and there is some hope that the next round will mitigate the disparity.
Even so, there are some estimates that this new infusion could only last a week, another illustration of the scale of economic collapse facing the economy.
Prejean, the Texas small business owner, watches it all in dismay from North Texas.
“I’m kind of numb, I guess, but I’m fully expected to come out of this not in the position I was in,” he said. “I am hoping to survive, basically.
Disclosure: The Texas Tribune, as a nonprofit local newsroom and a small business, applied for and received a loan through the Paycheck Protection Program in the amount of $800,000.