Billions of dollars in PPP loans could expire soon, setting up a stress test for CT’s return to ‘normal’

HBJ Photo | Matt Pilon Jonathan Metcalf of Integrity Martial Arts, or Sensei Jon, as his students call him, demonstrates a kick during a recent virtual martial arts lesson.

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By Matt Pilon

Jonathan Metcalf is a fifth-degree black belt who has taught martial arts for nearly 25 years, but the small business owner has never faced an opponent quite like COVID-19.

Metcalf’s Integrity Martial Arts, based on Hazard Avenue in Enfield, was among the many gyms and athletic facilities forced to close in March as the virus hit Connecticut like an unexpected assailant.

Metcalf quickly applied for federal stimulus funds, and after several tries, was successful in receiving a Paycheck Protection Program loan from the U.S. Small Business Administration that has been covering his payroll since early May. He also secured a $157,000 economic injury disaster loan.

In the meantime, he and his 10 employees have been teaching classes remotely using Zoom, which to Metcalf’s relief has kept income flowing.

“We’ve been open, we’ve been making revenue, a little bit less but not a lot less,” Metcalf said. “We haven’t had the cash concerns that had a lot of businesses afraid.”

Integrity’s PPP funds will be fully spent as of early July. Given how quickly students have taken to remote instruction, Metcalf says he’s not worried about losing his government-backed safety net. Online instruction has allowed him to build up a revenue cushion, and though he’s not excited about taking on the injury disaster loan debt, that money could pay the bills for months.

“I really do think I can make this all work,” Metcalf said.

Though exact numbers aren’t available, there could be upwards of 18,000 Connecticut businesses depleting their PPP loans around the same time as Metcalf, and it’s unclear how many firms will be as well positioned as Integrity Martial Arts when the day comes.

Congress intended PPP as a bridge over an immediate and steep, but hopefully brief, downturn. If Connecticut companies find that customer demand remains diminished when their eight weeks of financing is up, the state could see another wave of layoffs and business closings, dealing an additional blow to an already fragile economy. (Originally borrowers had to spend their money within eight weeks of receiving funding in order to qualify for full loan forgiveness.)

“As it expires, [the question is] ‘what’s going to come back?’ ” said Geoffrey Buswick, a managing director and analyst at S&P Global Ratings. “If businesses are coming back at a restricted level because of social distancing, how many people will be supported at the same pay level?”

Despite its forecasting acumen, S&P doesn’t have an answer for that yet, said Timothy Little, an S&P municipal credit analyst who covers Connecticut’s ratings.

“It’s sort of difficult to know what ‘normal’ is on the other side of the curve,” Little said.

Glendowlyn Thames, Deputy Commissioner of the Department of Economic and Community Development

The impact of Connecticut businesses depleting their PPP funds over the coming months will likely vary by sector, said Glendowlyn Thames, deputy commissioner of the Department of Economic and Community Development, who said she is most concerned about food-service, arts and entertainment businesses as vulnerable industries.

“Nobody has a crystal ball at this point,” Thames said. “This is a global humanitarian challenge we have not experienced at this scale in modern times.”

“Once we get through phase three of the reopening going into the fall, there will be a clearer picture on where we are,” she added.

DECD has already started discussing how the state might help re-skill workers whose jobs don’t return, though Thames said it’s too early to give specifics. For any major program, much will likely hinge on federal recovery aid.

So far, 565,000 Connecticut residents have filed for unemployment benefits during the pandemic.

Timing tough to assess

Though 18,000 Connecticut employers received PPP funds during the first application period in April, it’s unknown how many of those loans will be completely spent in the coming weeks.

There’s an incomplete picture for several reasons. First, the SBA, which didn’t respond to a request for comment for this story, isn’t making that information publicly available.

While the initial rules required companies to start spending their money virtually right away and within an eight-week period in order to qualify for full loan forgiveness, some employers decided to sit on their cash and save it for later, especially if they’ve been temporarily closed as a result of Gov. Ned Lamont’s shutdown orders.

Other businesses have been waiting to spend their money with the hopes that Congress would clarify and relax PPP loan forgiveness rules, which has now happened.

A law signed by President Donald Trump this month allows employers, if they so choose, to spend their PPP funds over a longer period of time (24 weeks) in order to qualify for loan forgiveness. It also allows businesses to spend a smaller portion of the money (60% instead of 75%) on payroll vs. certain other expenses like rent and utilities.

As a result of the changes, the timing of loan expirations will be staggered over the rest of the year; previously, PPP funds were expected to be mostly gone before fall.

Paul S. Young, CFO, Liberty Bank

Paul S. Young, chief financial officer at Middletown-based Liberty Bank, which processed more than 3,000 PPP loans worth a combined $300 million, said it’s been more common than not to see companies sitting on their funds, though he expects the new loan forgiveness guidelines, as well as the continued reopening of the state’s economy, to spur spending.

“Word was out there that there could be extensions and things like that,” Young said. “By the end of June, I think we will see a lot more money starting to flow out.”

Regardless, Young said he suspects some businesses are going to need additional financing or other assistance when their money runs out.

“Whether it’s eight weeks or 24 weeks, it’s still only two months of payroll-related expenses,” he said. “That’s fine, but they’ve got to be up and running and generating revenues again. That may take some time.”

Drew Andrews, CEO and Managing Partner, Whittlesey

Drew Andrews, CEO and managing partner of Hartford-based CPA firm Whittlesey, agrees PPP recipients should base their financial projections on normal business levels not returning right away.

“There are a lot of unknowns out there with what is going to happen,” Andrews said during a late May PPP webinar hosted by Hartford Business Journal and New Haven Biz. “Where’s it going to be in a few months? I think we have some encouragement as things start opening up, but until we get some more activity, I think businesses are going to have to look at their operations,” and control costs.

Jonathan Metcalf of Integrity Martial Arts in Enfield.

Martial arts studio preps for reopening

Zoom has been a lifesaver for Integrity Martial Arts during the pandemic, enabling Metcalf to keep about 70% of his 200 students enrolled, but it isn’t exactly ideal.

“There’s a lot of stuff we can’t do, obviously,” Metcalf said. “There’s really no substitute for practicing throwing without throwing a person.”

With students unable to pair off with a partner to practice techniques, they have made do by making mannequins out of pool noodles, t-shirts, pillows and other materials.

For the younger students, it can sometimes be hard to keep their attention over Zoom, Metcalf said.

The state will allow gyms to begin reopening on June 17, with limited capacity and increased safety protocols.

Metcalf said he’s in no rush to bring group classes back indoors. He and his staff will continue to conduct remote lessons, and soon, they will add outdoor practice to the mix.

In late July or early August, the studio will offer private or semi-private indoor instruction, and Metcalf is targeting several weeks after that to bring full groups back inside.

Masks will not be required, under the state’s guidance, as long as the studio can keep students 12 feet apart. Metcalf has mapped out his space and determined he can host a class of 13 under those restrictions.

Key changes to PPP loan forgiveness rules

Congress recently passed changes to the federal Paycheck Protection Program that will give borrowers more flexibility in how and when they spend their money in order to qualify for loan forgiveness. The changes:

• Extend the covered period for loan forgiveness from eight weeks after the date of loan disbursement to 24 weeks.

• Lower the requirement that 75% of a borrower’s loan must be used for payroll costs to 60%. If a borrower uses less than 60% of the loan for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness.

• Increase to five years the maturity of PPP loans that are approved by SBA on or after June 5, 2020.

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