If McDonald’s had applied for a paycheck protection program loan there would be nothing legally stopping the largest fast-food chain in America from getting millions of dollars meant for struggling small businesses.
McDonald’s realized in late March it fell within the qualifications for the program, meant to help struggling small businesses. An internal COVID-19 related document of frequently asked questions obtained by Business Insider says that “from our reading of the bill,” nothing would prevent McDonald’s from applying to the PPP program.
McDonald’s ultimately did not apply for a PPP loan. The $135 billion company has many resources it can turn to for funding — options small, independent businesses lack.
“Across the restaurant industry, there are several questions regarding levels of support being provided to companies, by companies, and from various government entities and programs in the US,” a McDonald’s representative told Business Insider. “McDonald’s Corporation has not, and will not, ask for assistance from any government entity, nor seek any deferral of our tax payments.”
The representative said that while McDonald’s is “not immune” to the impact of the virus, the company entered the pandemic with a strong balance sheet, credit rating, and the ability to raise capital. Analysts have named McDonald’s as one of the chains best positioned to weather the pandemic.
“To preserve liquidity, we suspended our share repurchase program in March and have reduced planned capital expenditures spend by $1 billion,” the representative said. “We’ve been transparent about the impact and our decisions and put the majority of information in a filing last week, which includes securing $6.5 billion of new financing in the first quarter 2020. “
Other chains that did apply for loans quickly realized they came with significant baggage. Ruth’s Chris, Potbelly Sandwiches, and Taco Cabana faced backlash last week after receiving more than $80 million in loans.
Shake Shack returned $10 million in PPP loans following criticism,when the $350 billion allotted for loans ran out before many small businesses were able to receive funding. The six other chains that received PPP loans did not respond to Business Insider’s request for comment or declined to comment on if they would return loans.
How mega chains qualified for loans meant for small businesses
The PPP program was designed to assist small businesses that meet Small Business Administration’s qualifications across industries. However, the restaurant and hotel industries successfully lobbied for an exception that allowed any company with less than 500 employees per location to apply for a PPP loan.
Restaurant industry groups argued they had been uniquely impacted by the coronavirus pandemic, as shelter-in-place orders forced customers to stay home.
8 million restaurant workers have been laid off or furloughed due to the coronavirus pandemic, with roughly two out of three employees out of a job, the National Restaurant Association said on Monday. In early April, UBS said that up to one in five restaurants in the US could close due to the coronavirus pandemic.
“This pandemic, and the consequential shut-down of an entire industry that relies upon the gathering of people — at a moment when people cannot gather — had already shown that no restaurant is unsinkable,” Shake Shack’s chairman, Danny Meyer, and CEO Randy Garutti wrote in their LinkedIn post announcing the company would return its PPP loan.
“With slim margins in our industry to begin with, restaurants of all sizes and flavors were vulnerable and laying off people by the hundreds,” they continued.
Independent restaurants and franchisees desperately need support
Restaurant sales are plummeting, with sales dropping by up to 90% in fine dining. Chains including Olive Garden parent company Darden Restaurants, Cheesecake Factory, and Shake Shack have furloughed thousands of workers. (Shake Shack said that it had planned to use its PPP loan to hire back furloughed workers.)
While almost every company is struggling with sales, experts who spoke with Business Insider said that major restaurant chains are in the best position to weather the coronavirus pandemic.
Many franchisees — businesses that independently own and operate many chains’ locations across the US — are in a more dangerous position. Chains’ corporate offices encouraged franchisees to seek out PPP loans, with McDonald’s sending out guidance on how to apply. Pacific Management Consulting Group founder John Gordon said that while larger franchisees without significant debt are likely safe, many smaller franchisees will struggle to survive the pandemic.
“There will be a crush for trying to find financing solutions,” Gordon said. “If there are no solutions found, then restaurants will close. … The industry is in chaos right now.”
Experts say small, independent restaurants are in even worse shape. Independent restaurants are less likely to have drive-thrus or prior investments in delivery or curbside pickup than chains. They also lack assistance from corporate franchisors, which work with franchisees to reduce costs, such as rent, and provide financial support. Instead, many small businesses pinned their hope on PPP loans.
“There is going to be obviously closures that never come back. I continually say my heart goes out to these independents,” Raising Cane’s CEO Todd Graves told recently told Business Insider. “These are restaurants that have soul; they have character, their crew members are incredible. … And some of them aren’t going to be able to reemerge.”
Few found the support they needed through PPP.
A chaotic, flawed rollout
PPP had a chaotic launch in early April, as many small business owners battled banks’ inconsistent protocols. Big banks initially focused on existing customers, potentially hurting smaller and minority-owned businesses’ chances of getting loans. The $350 billion program ran out of money for loans in just two weeks.
“If you look at PPP, which I think was good intent but flawed in terms of the execution, the vast majority of restaurants did not qualify, did not participate, do not have a banking relationship, and did not have any engagement with PPP,” former Starbucks CEO Howard Schultz said in a CNBC interview on Tuesday.
PPP loan limits were calculated based on companies’ payroll, meaning larger businesses got bigger loans. According to SBA data, almost half of the allotted $350 billion was paid out in loans of $1 million or more, even though these larger loans made up just 4% of accepted applications.
The Wall Street Journal reported that some of these multi-million dollar loans went to companies with whom big banks had established previous relationships. For example, JPMorgan committed to giving Ruth’s Chris Steakhouse a $41.7 million loan on March 30, before granting two subsidiaries of the steakhouse $10 million each on April 7.
On Sunday, small business owners sued Bank of America, JPMorgan Chase, U.S. Bank, and Wells Fargo, alleging that the banks favored companies seeking larger PPP loans. (The banks denied the allegations.) As the SBA seeks further PPP funding, critics are asking that the program make changes to prevent major companies from cashing in during this round of funding.
“Community banks all over the country … they’re supposed to do it according to not only criteria, but according to what we think is right,” President Trump said when asked about the topic on Monday. “But if somebody’s got something that we think is inappropriate, we’ll get it back.”
Even without changes, fear of backlash may prevent chains from applying for PPP loans if the program receives more funding.
“Applying for a loan just because you were able to, doesn’t mean it is ethical,” said Chris Allieri, the founder of communications consulting firm Mulberry & Astor, “Companies need to act from a place of deep-seated ethics and responsibility, not if something is legal or not.”
“A lot of people love Shake Shake, Potbelly and Ruth’s Chris,” Allieri added. “But I think consumers will have to ask themselves, when this is over and done, what kind of brands do I want to support?”