Shake Shack, Ruth’s Chris, Potbelly, and Others Might Need to Give Loans Back, Says SBA

While Shake Shake (NYSE: SHAK) already voluntarily gave back the $10 million loan it received from the Paycheck Protection Program (PPP) as part of the Trump administration's COVID-19 economic rescue bill, other companies may soon be forced to follow suit, according to the Small Business Administration (SBA). These include Potbelly (NASDAQ: PBPB), Ruth's Hospitality Group (NASDAQ: RUTH), and scores of others.

The PPP was earmarked to help small American businesses, not large, publicly traded companies with hundreds of millions or billions of dollars in value. However, the aid bill's wording created a massive loophole, already dubbed the "Shake Shack loophole" in the media because of its highest-profile user.

A pencil drawing a huge red line, as dollar bills with little legs rush through a hole in the line.

Image source: Getty Images.

The legislation was written to give emergency funding to small enterprises with 500 employees or less at a single location, including individual franchisees running restaurants independently. However, the bill specified 500 workers per "location" rather than per "business," enabling restaurant companies and others with many small branches to apply for and receive loans.

The PPP distributed $349 billion in loans, exhausting the allocated money last week. Average loan size started out at $240,000, falling to $206,000 toward the end. While many of these loans went to actual small businesses, an Associated Press investigation indicated that approximately 4,400 loans amounted to $5 million or greater. A minimum of 94 publicly traded enterprises obtained a haul totaling approximately $365 million among them.

Today, with $310 billion in additional PPP funds in the legislative works, the SBA and Treasury Department told big recipients to hand back the money by May 7 unless they can prove eligibility under new, stricter guidelines. Ruth's Hospitality Group, parent of Ruth's Chris Steak House, already complied by giving back last Thursday the $20 million it had previously obtained under the PPP.

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Rhian Hunt has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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