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All businesses are small, but some are smaller than others

What is a “small” business? According to the CARES Act’s rules for the Paycheck Protection Program (PPP), it’s a business with fewer than 500 employees. Also according to the PPP, it’s sometimes a business with more than 500 employees if it’s part of a particular industry. Oh, and sometimes a small business can also be a relatively large business that operates franchises, like a restaurant or hotel chains whose individual locations have fewer than 500 employees. It can get pretty confusing!

What a small business is depends, of course, on who you talk to. I’m speculating here, but the average person probably imagines a small business to be a mom and pop outfit (even if mom and pop don’t have any kids). You know, a locally owned and operated business. We’re all familiar with these types of businesses, and I don’t think anyone would deny that they were intended recipients of PPP loans.

But, for the purposes of the PPP, a couple other types of businesses also qualify as “small”—like those that have a nationally recognized name but operate in communities just like a mom and pop shop. These businesses are often owned locally (even if it involves an elaborate entity structure) and employ dozens, maybe hundreds of people from that community.

And there’s a third example of small business: those businesses that are currently small (again, fewer than 500 employees) but have raised a lot of money from venture capitalists on the premise that they will eventually have a lot more than 500 employees. These businesses are usually clustered in and around cities on the coasts, but some of their employees can—and often do—work from wherever they like.

All three of these types of businesses: 1) the mom and pop; 2) the nationally recognized, locally run restaurant or hotel franchise; and 3) the venture-backed start-up, were eligible for and received PPP funds. Over the last few weeks, however, recipients that fall into buckets 2 and 3 have taken a lot of heat for taking money that was intended for the small businesses in bucket 1. The subtext being that, sure, businesses in buckets 2 and 3 are small businesses, just not real small businesses. That is, the kinds of small businesses that most people believe the Paycheck Protection Program was meant for.

So. Do those businesses deserve the heat they’re getting? Should they return the money? Should they apologize? They are small businesses in accordance with the law as it was written, after all.

Here’s a restaurant person:

Sean Kennedy, executive vice president for the National Restaurant Association, which lobbied for the restaurant-and-hotel exception, says size shouldn’t matter.

“The restaurant industry is uniquely affected by this pandemic,” he said. “It was the first industry shut down. We think we deserve a unique response from the federal government.”

And here’s a venture-backed start-up person:

Justin Field, the senior vice president of government affairs at the National Venture Capital Association, a lobbying group, said start-ups were justified in seeking the federal aid.

“These are potentially some of the most important companies for America’s future competitiveness,” he said.

I have a hard time disagreeing with either of these statements. Restaurants are uniquely affected by this pandemic. Most have been ordered closed (aside from take-out). That’s not their fault! If any industry is deserving of assistance, it’s difficult to argue against restaurants, even if they’re franchises.

As for venture-backed companies, yes, they do have a lot of potential! (Full disclosure: I work at a venture-backed company with lots of potential, and we weren’t eligible for PPP funds.) And yes, a few of them will wind up being important for American competitiveness in the future. They will employ thousands, maybe tens of thousands of people, creating new products, services, and innovations. But which ones? Certainly not all of them.

The main criticism
 of these companies is that they already have access to financial support, and the PPP was intended for businesses that don’t have that kind of access. This seems to be the argument that most people are sympathetic to, and with good reason. There are far more businesses in bucket 1 than the others, and collectively, they employ millions of people. Even a relatively small number of them closing will have a profoundly negative impact. Ideally, a policy like the PPP should be focused on helping as many of those businesses as possible.

All of this was more or less common knowledge when the PPP was written. Franchise restaurants and hotels and venture-backed companies have connections to lobbyists and access to lawmakers that mom and pop businesses don’t. If the mom and pop businesses really had influence, perhaps authors of the law would have defined a “small business” as one that “has a Main Street address,” or “employs hardworking people trying to put food on the table,” or simply excluded franchises and businesses that have accepted venture capital.

None of this happened, of course, because how bills get written is slightly more complicated than what we learned from Schoolhouse Rock. I said it earlier: How you define small business all depends on who you talk to. And franchises and venture-backed businesses talked to people who wrote the PPP, so they got to define “small businesses.”

COVID news you can use

This section features programs, assistance, and other coronavirus-related information from the past week. It is not meant to be a comprehensive list, so if you see something that we should include here, let us know, or check out our newly launched COVID-19 Small Business Relief Finder.

  • Baltimore County, Maryland has established a $10 million fund for local businesses impacted by COVID-19. Grants for up to $15,000 will be awarded to eligible businesses.
  • San Francisco is providing urgent economic relief grants of $1,000 to $10,000 for neighborhood-serving small businesses and women-owned businesses.
  • Local Initiatives Support Corporation (LISC) is providing relief grants for small businesses nationwide, with a focus on those in underserved communities, including entrepreneurs of color, and women- and veteran-owned businesses. The next round of applications will open on May 14.
  • Bank of North Dakota has a number of loan programs for businesses and self-employed folks that have been negatively impacted.

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Caleb Newquist Caleb is Editor-at-Large at Gusto. In 2009, he became the founding editor of Going Concern, the one-of-a-kind voice on the accounting profession, serving in the role for 9 years. Prior to Going Concern, Caleb worked as a CPA for nearly 6 years in New York and Denver. He lives in Denver with his wife, two daughters, and two cats.
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