For six months, small businesses have relied on PPP loans, operational pivots and no small measure of hope to keep their doors open during the pandemic.
They may be on borrowed time.
More than 225,000 Paycheck Protection Program loans worth nearly $23 billion were approved in Illinois alone. Without additional federal relief, some experts project a flood of small business bankruptcies this fall as the PPP money runs dry.
“The PPP money kept people out of bankruptcy this summer,” said Brian Shaw, a bankruptcy attorney and partner with Cozen O’Connor in Chicago. “You’re going to see a wave of closures after Labor Day. Businesses just are not going to be able to continue.”
The Small Business Administration wrapped up the PPP Aug. 8 after approving more than 5.2 million loans totaling $525 billion. The program, which was tweaked several times after its April launch, offered businesses with fewer than 500 employees forgivable loans of up to $10 million, if 60% of the money went toward payroll.
Part of a broader coronavirus relief package, the $659 billion paycheck program has been beset by problems. It initially came under fire after banks allegedly prioritized larger clients ahead of smaller businesses. Extended for a second round, demand for the loans fell off, leaving about $130 billion of funds on the table. A Sept. 1 House subcommittee report found that billions of dollars in PPP loans may have been diverted to “fraud, waste and abuse” through lack of oversight from the SBA and the Treasury.
The loans covered 24 weeks of payroll, but with no end in sight to the pandemic, the money is looking increasingly like a bridge loan to nowhere.
“Since the same troubles that started with the pandemic are still in play, a lot of these businesses are floundering,” Shaw said.
Nationwide, large commercial bankruptcies are up 55% this year, with 207 public and large private companies -- those with more than $50 million in assets -- filing through Sept. 1, according to BankruptcyData, which tracks commercial bankruptcies for the restructuring industry.
The largest bankruptcy filings since the pandemic hit include rental car giant Hertz, LATAM Airlines, Frontier Communications, Chesapeake Energy and Ascena Retail Group, which owns women’s clothing chains Ann Taylor, LOFT and Lane Bryant.
Experts say small businesses will soon follow suit.
While the evidence is largely anecdotal at this point, the pandemic appears to have outlasted the PPP funds for a growing number of small businesses, a trend that may fuel bankruptcy filings well into next year, said James Hammond, CEO of Boston-based New Generation Research, publisher of BankruptcyData.
“There’s certainly a lot of companies that despite their PPP success at getting some funding, haven’t been able to hold it together and already have shown up in bankruptcy courts,” Hammond said.
That’s the case in federal bankruptcy court in Chicago, where a handful of Chicago-area companies filed for bankruptcy after receiving PPP loans of at least $150,000, according to publicly available SBA data and court filings.
In April, Michael Marinov, a Sarpino’s Pizza franchisee, received about $210,000 in PPP loans through Fifth Third Bank to support payroll for 39 employees at four of his six suburban Chicago locations. Two months later, he filed for Chapter 11 bankruptcy.
The decision was driven both by the pandemic and an unrelated federal lawsuit brought by three former employees alleging labor law violations at the Countryside location, said Ben Schneider, a Skokie attorney representing Marinov in the bankruptcy case.
“He had spent considerable resources over the last couple of years defending himself, and it just got to the point where he couldn’t afford the cost of litigation anymore,” Schneider said.
Marinov declined to comment.
Tammy Coakley, owner of two suburban Chicago beauty salons, received PPP loans totaling more than $439,000 in April. In late May, she put the businesses into Chapter 11 bankruptcy.
The loans enabled her to hire back 70 furloughed employees and reopen her Spa Bleu salons June 1. The bankruptcy filing seeks to reorganize more than $1 million in debt, including loans for a failed cryotherapy business.
“For me, the PPP has been a blessing, and the reorganization is something that I needed to do based on one business that was weighing the other two businesses down,” Coakley said. “It was just all commingled and it ended up becoming a mess.”
Coakley opened her original Spa Bleu location in West Dundee in 2004. A second location in South Barrington opened in 2008. In 2017, she diversified her business empire, opening the Bleuroot restaurant in West Dundee and the Inspire Bleu wellness center in South Barrington.
Neither of the new ventures panned out. Last year, she sold the farm-to-table restaurant to the chefs, and converted Inspire Bleu to a cryotherapy center, a concept that never quite caught fire either.
When all of her businesses were initially shut down by the state’s stay-at-home order in March, Coakley consulted with her attorney to discuss options for the Inspire Bleu space, which she knew was “not going to reopen soon.”
In early April, Coakley secured a $215,000 PPP loan for the West Dundee salon and a $234,000 loan for the South Barrington store, plus a $30,000 loan for Inspire Bleu.
Coakley said she had not been planning to file for bankruptcy when she got the loans. The plan now is to reorganize her debt, cut her losses on the cryotherapy center and focus on her salons.
The basic strategy is a sound one, said Thomas Salerno, a bankruptcy attorney and partner at the Stinson law firm’s Phoenix office.
“I think you’re going to see the wave of bankruptcies in September for reasons totally separate from the PPP loan,” Salerno said. “You’re going to see it because they’ve got to right size their balance sheet anyway. They’ve got to renegotiate their leases. They’re going to want to take whatever long term debt they have and dig themselves out of this hole.”
For some small businesses, getting a PPP loan and then filing for bankruptcy may have been the plan all along.
The SBA barred bankrupt companies from applying for PPP loans, causing banks to deny applications and precipitating dozens of lawsuits by small businesses. The policy was ultimately upheld by the U.S. Court of Appeals in New Orleans.
While Congress is considering extending the PPP program and expanding it to include bankrupt companies, some have already employed a workaround: defer or in some cases dismiss the bankruptcy filings until after the PPP loans were approved and funded.
“The SBA didn’t have a problem with that -- as long as you didn’t have the “b” word attached to you at the time the loan was made,” Salerno said. “I called it the SBA tango.”
Filing for bankruptcy after getting a PPP loan will nonetheless complicate the reorganization process.
Beyond adding the government as an unsecured creditor, PPP borrowers are able to seek loan forgiveness, raising the question of whether or not it is actually a debt in the bankruptcy proceeding.
“You’ve got a significant debt that you believe you’re not going to have to pay, but you have to wait for the government six months from now to make that decision,” Shaw said.
A Chapter 11 reorganization plan is used by businesses to restructure debt and continue operations. Businesses can also file for Chapter 7 to liquidate assets, while Chapter 13 is a reorganization plan that can only be used by businesses owned by a sole proprietor.
Chapter 11 commercial filings are up 28% this year through August, according to data released Friday by legal services firm Epiq, which provides bankruptcy research.
While the PPP rules precluded bankrupt companies from participating, the government has actually encouraged businesses to file for bankruptcy through another facet of the Coronavirus Aid, Relief and Economic Security Act passed in March.
As part of the stimulus plan, Congress expanded access to a streamlined new version of Chapter 11 known as Subchapter V, which enables smaller companies to reorganize more quickly and retain control of the business at a lower cost.
The provision was approved by Congress in August 2019 and took effect in February -- one month before the pandemic shut down much of the retail economy. The CARES Act temporarily increased the debt limit from $2.7 million to $7.5 million to allow more companies to use the “fast track” Chapter 11 bankruptcy option.
Nationally, Subchapter V bankruptcy filings increased steadily from 82 cases in February to 140 last month, according to data from the American Bankruptcy Institute. There have been 32 such filings to date in the U.S. Bankruptcy Court for the Northern District of Illinois.
Shaw said he guided two Chicago companies through Subchapter V bankruptcy filings in May.
But bankruptcy is not the only measure of the economic disruption wrought by the pandemic on small businesses, Shaw said.
“These little restaurants and convenience stores and small family businesses, half of them that are going to go away won’t even file for bankruptcy,” Shaw said. “Some of these businesses will just shut their doors and go ’poof’.”
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