Andrew Wimer
Andrew Wimer · May 18, 2020

CHICAGO— The Institute for Justice Clinic on Entrepreneurship at the University of Chicago submitted comments to the Small Business Administration asking it to eliminate red tape that prevents many low-income and minority-owned businesses from accessing emergency loans. The Payroll Protection Program (PPP) is intended to provide loans to small businesses whose operations have been affected by the COVID-19 pandemic and who do not have access to other sources of capital. Unfortunately, the SBA placed additional burdens on applicants that have no basis in the law, requiring that recipients not have interacted with the criminal justice system recently and denying loan forgiveness to employers who fail to use at least 75% of funds for payroll purposes.

“Red tape created by the Small Business Administration is making it impossible for many worthy businesses to get access to the emergency loans created by Congress,” said IJ Clinic Associate Director Amy Hermalik. “These regulatory hurdles, not written in the law, fall especially hard on minority and low-income business owners. IJ Clinic clients show that there are worthy businesses that would be excluded if the SBA doesn’t rethink its restrictions on who can apply and who can take advantage of loan forgiveness.”

The IJ Clinic submitted a detailed comment to the SBA on its final interim rule for the PPP. The letter calls into question two sections of the rule. The first makes a business ineligible for PPP loans if an individual who owns 20% or more of the company is currently indicted on any criminal charges—felony or misdemeanor—or has been convicted of a felony in the last five years. The prohibitions are likely to fall heavier on black and Latino populations because of existing racial disparities within the criminal justice system. The letter points out that while the SBA has authority to limit its regular loan programs in this manner, the emergency loan law does not list this as an allowed consideration for banks that are making PPP loans.

The IJ Clinic has worked with individuals who had previous interactions with the criminal justice system but who turned their lives around and started businesses. For instance, Jimmie Williams was in and out of prison in his younger years. When he was released and struggled to get hired, he founded Urban Roots and built it into a successful landscaping company. Jimmie has run his business for over a decade and hires and mentors other formerly incarcerated people.

“Having stable employment is critical to keeping people from ending up back in prison, and entrepreneurship is important path for individuals who have been incarcerated,” said Hermalik. “Now is a terrible time to exclude these entrepreneurs. Even worse, the rules also exclude people who have only been charged with a crime and may be innocent.”

Second, the IJ Clinic asks the SBA to reconsider provisions that limit the availability of loan forgiveness to businesses who used 75% of the loan for payroll. While the regulation was written with the intention of encouraging businesses to keep employees on the payroll, it does not take into account worthy small businesses with high costs for rent and utilities that may rival payroll costs. Again, this provision was not written in the law and likely works counter to the intentions of Congress.

Typical Main Street businesses are perhaps the most affected by this provision since the cost of renting retail space is often more than 25%. This is the case for IJ Clinic clients Mayra Hernandez and Jesse Iniguez, who operate Back of the Yards Coffeehouse. When the long-time friends failed to attract a big-name coffee company to their neighborhood, they launched a café and roastery themselves. Although they have six employees, their other costs equal the business’s payroll.

“When lawmakers created the emergency loan program, they were certainly thinking of the small shops and restaurants that give our neighborhoods their character,” said Hermalik. “The SBA’s 75% rule is misguided and not allowed under the law. We can’t help workers by closing off loan forgiveness for their employers.”

IJ Clinic employees and clients are available to speak about the SBA’s rules and about the struggles of running small businesses at this time. Contact Andrew Wimer, IJ Assistant Communications Director, at [email protected] or (703) 298-5938 to arrange.