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PPP Loan Forgiveness: A Vital Resource for Child Care Providers

“Child Care is a tough business in normal times.”

This insight was shared by Rep. Andy Kim (D-NJ) at the closure of the House Committee on Small Business’ latest hearing to review the loan forgiveness component of the Paycheck Protection Program. This program has been crucial for many child care providers, the majority of which are small businesses, who have faced months of uncertainty about the future of their business. Now, as recipients enter the forgiveness period, additional uncertainty and complications must be addressed in order to fully support these businesses through the remainder of the pandemic.

According to an August survey of parents by the Bipartisan Policy Center and Morning Consult, 70% of child care businesses are still closed or operating under reduced capacity or limited hours due to current COVID-19 concerns. Those that have reopened or stayed open must absorb new and increased operating costs to meet health and safety requirements from the Centers for Disease Control and Prevention, while the lower capacity, operating hours, and attendance reduce their budgets. The child care business model is a precarious one in healthy economic times, and margins have only gotten thinner during the pandemic.

The PPP was established in the CARES Act to help small businesses meet payroll costs and other fixed expenses such as utilities and rent while the coronavirus pandemic kept their doors closed through no fault of their own. The program officially stopped accepting applications on August 8 with $134 billion left out of the $659 billion total funding that was appropriated to the program.

The PPP was a lifeline for the child care providers who were able to access the program, along with the supplemental CCDBG funding provided in the CARES Act. BPC spoke with Deidre Anderson, executive director of the United Inner City Services St. Mark Child and Family Development Center in Kansas City, Missouri, whose program received both PPP and CCDBG funding as well as funding from private donors which allowed her organization to stay open and survive the challenges of the pandemic. Anderson stated that without that variety of supplemental funding, “we would have been on our own and doomed.” She expressed significant concern that the federal funds would dwindle this fall and that child care businesses would not survive without additional and ongoing support.

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Unfortunately, however, due to the complicated nature of the loan application process, Anderson was one of the few providers able to receive PPP loans. As BPC reported in July, l6% of the over 670,000 child care businesses in operation prior to the pandemic received a PPP loan, which represented less than 5% of total funds loaned through the program. This is shockingly low participation for such an important industry: As of October, 72 percent of small businesses reported receiving PPP assistance, according to the Census Bureau’s Small Business Pulse Survey.

Cassandra Brooks, owner of the Little Believers Academy in Clayton, North Carolina, spoke with BPC about her difficult application experience. Brooks did not initially receive a loan, despite having correctly applied early in the process, because of what she described as bureaucratic confusion and poor communication from her bank. Once Congress opened another round of awards, Brooks was able to apply through a different bank, and ultimately received a loan.

This confusing and stressful process has prevented many providers from accessing these critical loans during the program, missing out on a necessary source of income during these turbulent months. In fact, in August, our survey found that more than 1 in 10 child care centers had already closed permanently, and the Bureau of Labor Statistics shows that, while jobs are starting to come back, still about 1 in 5 workers in the child care industry are out of a job compared to pre-pandemic levels.

For those that were fortunate enough to receive a PPP loan, a centerpiece of the program is the prospect of loan forgiveness. Under the program, borrowers can have their loans forgiven—effectively turned into grants—for the amounts spent on authorized expenses over the 24-week benefit period if they comply with program requirements. Specifically, the entire amount of the loan may be forgiven if at least 60% is spent on payroll and the rest on permitted expenses (mortgage, rent, and so on), if the number of full-time employees does not decline from average monthly levels during 2019 or during the past 12 months, and if the employer does not cut salaries or wages. If wages or the number of employees are reduced, businesses may not be eligible for forgiveness. Exceptions to these requirements may be made if employers cannot return to their pre-pandemic level of business activity due to social distancing and other coronavirus-related restrictions.

Despite forgiveness prospects, borrowers remain fearful that they will not be able to turn their loans into the grants as easily as they believed, and will instead be saddled with burdensome debt. This is in large part due to the confusing, time-consuming, and lengthy loan forgiveness application process, not for fear of noncompliance with the program’s requirements. In fact, the requirement to spend 60% of the loan on payroll is an attractive component of the program for child care providers, whose payroll and labor costs are a high percentage of their budget.

At the Small Business Committee hearing, Amy Bonfig, a child care provider in Minnesota, discussed her concerns with the forgiveness application and process. Bonfig had the foresight to create a network of child care providers to support and help each other navigate the PPP process, but expressed frustration and inconsistencies that she and fellow providers are experiencing in the forgiveness application progress, such as new or contradictory terms or calculations. “The child care directors and owners that I represent today have expressed similar fear of failure regarding receiving PPP loan forgiveness,” Bonfig said. “I am worried for many who simply do not understand the complicated rules and cryptic stipulations of the loan forgiveness rulings.” Bonfig asked Congress for guidance so that she and her colleagues would be able to keep their doors open well into the future, as was the intended purpose of the program.

As of September 8, the Small Business Administration had received only 56,000 forgiveness decisions from lenders, representing just 1% of the 5.2 million PPP loans and indicating widespread confusion regarding the loan forgiveness application process. Child care providers such as Bonfig are concerned that they will be forced to pay off their loans despite receiving one for the clear purpose of attempting to remain open and pay their staff—which, ironically, would force many to permanently close and terminate their staff. Furthermore, no clear appeals process has been planned for forgiveness decisions made in error which leaves providers in an even more challenging position.

Despite an attempt to simplify the application form by releasing an “EZ form” on June 16th, in the above-cited hearing, witnesses testified to observing no material differences between the two applications. In response to this concern, on October 9, the SBA announced a simplified loan forgiveness application for loans of $50,000 or less, which represent 68% of the total PPP loans issued. According to Treasury Secretary Steven Mnuchin, this action is intended to reduce burdens on borrowers and lenders alike and allow loans to be forgiven more quickly. However, the new application continues to place the burden of verification of borrowers’ documents on lenders, without providing much additional guidance about how to do so. This could create administrative strain on borrowers to provide additional documentation to meet the lenders’ demands. With too much discretion left to lenders, borrowers could find themselves in situations similar to Cassandra Brooks in North Carolina, when she was applying for her initial PPP loan. Without a defined appeals process, borrowers are left worrying that if they make an error in their loan forgiveness calculation application, they will not have a chance to rectify it, and will be stuck with a large outstanding loan.

Child care businesses are typically very small, and do not have extra time or staff to dedicate to a confusing and difficult application process, the business acumen or relationships with banks to access guidance and support, nor the capital to contract outside help with applying. This was apparent during the initial application process, as evidenced by the small number of child care recipients compared to other fields, and will remain the case during the forgiveness period. As Bonfig testified, “We run our daily businesses on tight budgets and our fingers crossed that we would make it financially another day, in the old normal as well as the new normal.”

Though many providers are rightly concerned about their ability to receive forgiveness, it is clear the pandemic is far from over and that the length of the loans and amounts provided were inadequate to fully support these businesses through such difficult times. As noted, 70% of programs are either closed or operating under less than full capacity or hours, while a staggering 14% of child care centers have already permanently closed their doors. Child care businesses are far from returning to a sense of normalcy and need additional financial support in order to stay in business.

Although Congress has not yet agreed upon plans for the use of the remaining funds, or improvements to the program to better support small businesses, one area where bipartisan agreement exists is around offering automatic forgiveness for loans under $150,000. This policy is the most efficient solution to the problems explained above, and would have tremendous benefits to the child care industry. Our analysis found that 89% of loans to child care providers were under $150,000. This is true for the PPP broadly—according to the Consumer Bankers’ Association and the Bank Policy Institute: “This threshold [of $150,000] would account for 85 percent of total PPP recipients, but less than 26 percent of PPP loan dollars.” Automatic forgiveness for these small loans would save child care providers countless hours and would help assuage their concerns about being left with debt they cannot afford, as well as concerns about miscommunication and trust with banking institutions. This policy has been proposed by both House Democrats and Senate Republicans in the HEROES Act and the Continuing Paycheck Protection Program Act, respectively.

Other improvements could be made by Congress to ensure the program successfully meets its goals to support our nation’s small businesses and their employees. Importantly, the remaining PPP funding already allocated by Congress could be repurposed for a second round of loans that allows for a “second draw” and prioritizes the smallest and most vulnerable businesses, such as child care businesses, who are struggling to keep their doors open, pay their employees, and provide their essential services. Again, both House Democrats and Senate Republicans have shown support for this approach in the above referenced legislation, indicating bipartisan recognition that this program is critical to our nation’s ongoing recovery efforts.

Additionally, while BPC commends SBA for releasing a simplified forgiveness application for loans under $50,000, more guidance must be provided to lenders on how to verify documentation and eligibility so that they may better assist all borrowers. As the congressional stalemate continues, the SBA needs to act to improve the forgiveness process and offer, at minimum, a streamlined and simplified loan forgiveness application for loans up to $150,000 along with a clear appeals process for those who are denied forgiveness. Importantly, this could be done without congressional action.

Without these changes, Congress will have failed its goals of keeping small businesses open and Americans employed through this crisis, into recovery, and beyond. Child care businesses have the unique ability to employ workers as well as help others stay employed. Congress should come together on existing areas of bipartisan agreement to enact smart reforms and improvements to the PPP, and ultimately support the child care industry and ensure they are not saddled with burdensome debt in a time of national crisis.

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