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American retailers staring down the economic crisis sparked by the coronavirus pandemic have few life rafts at the moment.

One of the more promising among them has seemed to be the Paycheck Protection Program, part of the $2 trillion Coronavirus Aid, Relief and Economic Security Act that the House of Representatives passed last month, and which is meant to stave off more widespread layoffs from small businesses by offering them forgivable loans. But for many retailers, PPP loans are just the start.

The idea is that the loans will be forgiven, and wind up being more of a grant or subsidy if a business keeps all its employees on the payroll for eight weeks, and the loans are used for payroll and certain essential operation costs. But the program was also devised early in March, at a time when administration officials operated with different calculations on the pandemic’s economic impact, attorneys said. 

“Three or four weeks ago, the thinking was that hopefully this would be a short-term thing,” said Phillip Stanton, a partner at Greensfelder Hemker & Gale P.C. “I think there’s less certainty now that will be the case.” 

The loans come from a pool of $349 billion under the CARES Act, although Treasury Secretary Steven Mnuchin said Tuesday he is in talks to secure an additional $250 billion for the program. But the loans apply mainly to companies with fewer than 500 employees, or those that meet some of the other small business tests used by the U.S. Small Business Administration, the federal agency overseeing the program. A number of franchise businesses may be excluded from the 500 employees requirement, in order to also qualify. 

The program provides loans of up to $10 million to small businesses hit by the pandemic, with the forgivable component dependent on how much of it is spent on payroll.

Some larger apparel brands have publicized their efforts to keep workers employed during the crisis, though it’s not clear they would be eligible for PPP loans, which are meant more for small businesses. Lululemon said this month that it would keep paying its employees until June 1 despite store closures.   

To a lesser degree, PPP loans are also meant to be used on selected operating expenses like rent, utilities and interest payments on existing secured debt, like a mortgage. 

The rationale is that it takes more time and resources to rehire and retrain new employees than it would to retain existing staff, and that any later rehiring efforts may only drag out the economic recovery, attorneys said. 

“The amount of the loans, the calculations, and repayment metrics are driven by an assumption that this will last for about eight weeks,” said Andrew Fadale, partner at Schulte Roth & Zabel LLP. “The thought process behind the program is that the economic situation driven by the crisis is easier solved if people remain employed through this eight-week period, rather than scattering to the wind.” 

Even without the forgiveness component, the loan is designed to be gentler than traditional options. Payments for PPP loans are deferred for a six-month period, both for the principal and the interest. It also doesn’t require collateral, and functions as an unsecured loan — in contrast, the SBA usually requires collateral, as well as personal guarantees from business owners for its regular financial assistance loans. 

“It’s a very friendly loan, if you don’t qualify to have it all forgiven,” said Stanton. “Unfortunately, there will be businesses where it’s not enough to help them.”

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