There is plenty of Paycheck Protection Program (PPP) money still available after Congress passed the second iteration of the stimulus plan last December. But in a report issued by the Small Business Administration, the money set aside to rescue small business has barely been touched – a glaring indictment on the program and the way it has been administered to devastated businesses.
After three weeks of PPP being open (Jan. 11-31), less than $73 billion of the available $285 billion had been approved for small business across the nation – an embarrassing 25 percent. That’s in stark contrast to the first round of PPP in 2020 when, after 14 days, businesses snatched up $349 billion and Congress was forced to allocate another $310 billion to the program.
Why the demand is lower, especially when there is PPP money still available, has many answers, and some of them are not the fault of government or businesses. For starters, the criteria for receiving the potentially forgiven loans changed.
In the first round, businesses with less than 500 employees were allowed to apply; that has changed to businesses with under 300 employees now.
Another major change required businesses to show a 25-percent decrease in revenue in any one quarter of 2020 compared to 2019. Many businesses had steep declines, but maybe not that steep.
The Interim Final Rule released by the SBA can offer all the changes in the qualifications for this round of PPP, but none can answer why needy businesses have shunned this second round of stimulus.
In fact, there are a number of problems, and the most glaring is the way Congress attempted to help minority-owned business have better access to capital.
With PPP money still available, minority loans lag
Congress said and did all the right things when negotiating the second round of PPP. From data after the first round, politicians and their advisors realized they needed to do more to get money in the hands of minority-owned businesses that missed out on the first round.
In large part, the conversation centered around a report from the New York Fed citing 41 percent of Black-owned businesses that closed during the early months of the pandemic.
But as is the case with many well-intentioned programs, those who developed the second PPP completely missed the mark on helping minority-owned businesses. Consider what government did:
• Set aside the first two days of funding for small lenders like community development financial institutions and fintechs, which were more likely to have minority customers
• Set aside $15 billion for minority-owned businesses.
Here’s why the second round of the PPP has been wholly inadequate:
1. It made absolutely no sense to segregate the money for minority businesses. Why would Congress create two pots of money except to throw lip-service at the issue?
2. The period when minority businesses were allowed to “go ahead” of all potential borrowers was the first two days of the program. Problem is, most businesses (and banks) didn’t know what information they needed to get the loan (that was rolled out slowly, again). So in those two days, most businesses were scrambling for organizational documents or missing tax returns, and they couldn’t take advantage of it, even if they wanted to.
3. The reason minority-owned businesses did not get money in the first round of PPP had nothing to do with available cash. (Why hasn’t anyone mentioned that the SBA didn’t even loan out the full amount of the first PPP? One month after the first PPP was re-funded, there was still $120 billion that had gone unclaimed.) No, the reason is because many minority-owned businesses had numerous issues with banks and the requirements needed for the loans. Whether it was an institutional distrust, not enough resources to have all the proper documentation, a fear of debt, or incomplete tax returns, Congress and its financial advisors completely overlooked some of the most important issues keeping minority-owned businesses from getting the money.
Here are the hard facts, as presented by the SBA: Of the first $73 billion claimed in the second round of PPP, only $165 million had been loaned by microlenders, CDFIs and fintechs. That is what the SBA numbers say, and it means, literally, just 1 percent of the $15 billion has currently gone to lenders specifically designed to help minority-owned businesses. It doesn’t mean other lenders didn’t help these business owners, but it shows how poorly this was developed.
Congress should have set aside money to help minority-owned businesses skip some of the hard demands, an issue that will be addressed in a future McElvy Partners article.
The SBA fix was broken
Along with the largest issue of not helping minorities, there have been other problems with this second round. Even though there is PPP money still available, the SBA’s new system of approving loans had a major glitch that was supposed to be fixed weeks ago.
For some businesses that received the first round of PPP, if that first loan had not been forgiven, then SBA denied the second application, even though Congress was clear that the first PPP forgiveness should not matter, so long as businesses agreed to use up that money.
The paperwork is too much
Many businesses that received the first round of PPP were met with enormous applications for forgiveness from their banks, sending them scrambling for documents they didn’t have at hand.
What Congress, the SBA and banks may have missed is that small businesses (the ones designed to benefit from PPP because they were so devastated by the shut-down) do not have full-time accounting staffs. Many of them use their banks and credit card receipts to create financials. Their payroll records aren’t that of Fortune 500 companies with entire floors designed to keep perfect records for stock holders.
No, when the good souls in D.C. began requiring enormous document dumps to get forgiveness, a number of small businesses decided going through this again wasn’t worth the trouble. The smallest business owners would rather take unemployment and hope to find something new once the pandemic ends.
While there is hope the SBA and banks figure out how to get more money to desperate small businesses, the reality is the encumbrances of the first round, the mound of forgiveness documents (sometimes spanning 20 pages) and the utter lack of understanding for the reasons minority-owned businesses did not get loans the first time has led to a failure of this second stimulus plan.
And that’s too bad, because many small businesses will close and, once the world reopens, there won’t be offices for the unemployed to fill.