$134 Bln Goes Untapped After PPP Deters Small Businesses

Design and Rollout Hinder Loan Relief Program

African American business owner paying bills at cafe counter.
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 Sarah Casillas/Getty Images

Even with more than 16 million people still out of work, and stores and restaurants shuttering across the country because of the COVID-19 pandemic, the federal government’s loan relief program for small businesses expired with $134 billion untapped. 

Despite extending the application deadline from June 30 to Aug. 8, the Paycheck Protection Program didn’t wind up using nearly all the funds allocated by Congress. About $525 billion of the $659 billion appropriated was actually loaned out, according to data provided by the U.S. Small Business Administration, which operated the program. In fact, in the additional 5 ½ weeks, total approved loans grew by just $3.5 billion.

While the SBA says the untapped funds show the program worked, small business advocates and advisors say the PPP’s flawed design, chaotic start, and changing rules were deterrents for many potential applicants. Studies by the Brookings Institution and Federal Reserve Bank of New York indicate loans didn’t always go to the areas with the most need. 

Key Takeaways

  • $134 billion of the $659 billion appropriated for the Paycheck Protection Program was never used
  • The Small Business Administration says the untapped funding shows the program worked, but small business advocates say there were several deterrents for applicants
  • Small business advocates point to a chaotic rollout and flawed design as studies show some areas were underserved 
  • An NCRC audit indicates banks discriminated against prospective applicants who were Black or female 

A rushed rollout in April led to widespread media reports of overloaded systems, processing delays and confusion. Plus, some business owners—at least before certain criteria were relaxed—deemed it too tough to qualify for loan forgiveness in such an uncertain time. Still others weren’t even eligible or were discouraged by the lack of a banking relationship. Perhaps most disturbingly, some were dissuaded from applying because they were Black, an audit by the National Community Reinvestment Coalition showed.

 “We just think there were systemic problems with the rollout,'' said Anneliese Lederer, director of fair lending and consumer protection for the NCRC. “Once you’re discouraged, it’s hard to get over that.”

Qualifying for Loan Forgiveness Gets Tricky 

Born as part of the $2 trillion-plus CARES Act aid package triggered by the crippling pandemic, the PPP required employers to either maintain staff or quickly rehire them in order to qualify for loan forgiveness, so there wasn’t as much incentive to apply if owners weren’t confident about the future of their business or had relatively low payroll costs. 

In a nutshell, eligible employers (typically with fewer than 500 employees) could get a loan with a 1% interest rate, and if 60% of the loan amount was spent on payroll over as many as 24 weeks, it didn’t have to be repaid. 

“There is a key difference between what the program is designed to do and what people hoped it would do,’’ explained John Pitts, head of policy for financial technology firm Plaid, which designed a platform to facilitate PPP loans. “It’s designed to protect the paychecks of the employees of the business, not the business itself.”

Indeed, some small businesses weren’t sure they would either qualify for loan forgiveness or be able to repay the loan, Pitts said. A 1% loan is only a great interest rate if you have certainty that your business is going to survive this crisis,’’ he said.

What’s more, when it first rolled out, the loans were only forgivable if businesses spent 75% of the loan on payroll, not 60%, and the time period was eight rather than 24 weeks. 

The additional flexibility didn’t come until the PPP Flexibility Act was passed on June 5, and by then negative publicity about technical problems, favoritism from lenders, and other access issues were rampant. Media reports about large companies receiving loans even prompted some large borrowers to return funds. 

“Had the program rolled out with clarity that it would be more flexible and longer, probably more people would have applied and would have applied for more money,’’ said Amanda Ballantyne, executive director of The Main Street Alliance, a coalition of small business owners. 

Jobs Were Saved, But Was It Enough?

Carol Wilkerson, a spokesperson for the SBA, said the fact that such funds remain demonstrates “the PPP’s success in meeting the critical economic needs of American small businesses and their workers.” The program has been an “overwhelming” success, she wrote in an email, and the SBA “is fully committed to supporting American workers and small businesses as we safely reopen our economy.”

Indeed, the PPP program did assist millions of businesses. The SBA’s final report shows that 5.2 million loans were made averaging about $101,000. And an earlier report, reflecting program data through June 30, said the PPP “supported” 51.1 million jobs, or as much as 84% of all small business employees. According to one estimate from researchers at the Massachusetts Institute of Technology, the Federal Reserve, and payroll processing firm ADP, the PPP saved 1.4 million to 3.2 million jobs through the first week of June. 

But an analysis by The Balance showed hotels and restaurants, which had experienced the biggest chunk of the country’s job losses, received a surprisingly small share of PPP loans as of June 20, likely because they often have relatively low payroll expenses compared to other business sectors.

What’s more, studies show some of the hardest-hit areas of the country didn’t receive proportionate aid from the PPP. In some of the cities with larger shares of small businesses experiencing revenue loss—including New York and San Francisco—the percentage of small businesses receiving PPP loans was disproportionately low, according to one analysis by the Brookings Institution.  

Another report found counties with the highest concentration of Black-owned businesses—in many cases also the ones with the highest penetration of COVID-19—had stark PPP coverage gaps. For instance, in the county of Bronx, New York, only 7% of eligible businesses got PPP loans, compared to 17.7% on average nationwide, the study by the New York Fed showed. 

One factor is likely the lack of established banking relationships among many Black-owned businesses, the New York Fed report said, citing data from earlier Fed research showing Black employer firms in 2019 were about three times as likely to report not applying for financing because they believed they would be turned down . 

Indeed, PPP loans were offered through banks and lenders that partner with the SBA, so prospective borrowers couldn’t just go to the SBA’s website to apply. That put many traditionally underserved communities—particularly Black- and Latino-owned businesses—in a tough position, Main Street Alliance’s Ballantyne said.

“You have a really big segment of business owners,’’ she said, “who have never had access to credit through commercial lending institutions. They just didn’t apply because they’ve been so frustrated getting bank loans for so long.”

Indications of Discrimination

Worse still, a so-called “matched-pair” audit test of PPP lenders in Washington, D.C., indicated discrimination against Black people and females in the pre-application process, according to a July report on the NCRC audit.  

In 27—or 43%—of the 63 tests conducted in April and May, the NCRC found that the financial institutions gave white testers favorable treatment relative to Black testers who called them looking for loans to help keep their small businesses open during the COVID-19 crisis. (Tester profiles were controlled with racially identifiable names and voice panel tests that showed their perceived race could be determined over the phone.)

There was a clear difference in levels of encouragement to apply for PPP or other loans, how often other products and information were offered, and the amount of information requested from the applicant, the report said.

In one case, when a Black tester who was asked where he banked said he normally banked elsewhere and didn’t have an account, the bank representative apologized and said without an account, they wouldn’t be able to assist. In contrast, the white tester was told he would need to open a business checking account to establish a relationship and promised information about both PPP loans and other loans would be sent in an email. 

“There is a level of discrimination that goes on in the banking industry,’’ said NCRC’s Lederer. (The SBA hasn’t broken down PPP recipients by demographic group.)

Eligibility Hurdles

Apollo Woods, an African-American man who owns a marketing company for Black-owned restaurants in Oklahoma City, Oklahoma, said his application for a PPP loan was rejected. He didn’t blame his bank but said the SBA’s rules for the self-employed were confusing. 

Woods said he applied through a bank website and didn’t learn until later that he didn’t qualify for the loan because his business didn’t make a profit last year—the year he opened up shop. The SBA clarified the rules for self-employed applicants more than two weeks after the program opened: Those with a 2019 net loss on Schedule C of the IRS’s Form 1040 aren’t eligible.

“That was the most frustrating part of this,’’ he said. “They never said what the criteria was.” 

Meanwhile, coronavirus cases are climbing in many states, government mandates limit capacity at many businesses such as restaurants and bars, and the unemployment rate is still in the double digits despite some improvement in recent months. 

The business finder website Yelp found that 91,120 “local” business locations in the U.S. had closed between March 1 and July 30 and that 62,653, or 69%, were permanent, according to a spokeswoman. (Yelp defines a local business as one with fewer than five locations.) 

While Congress may come up with different relief for small businesses, it remains divided about a second wave of coronavirus relief now that many of the provisions of the CARES Act have ended.

Woods said he’s hopeful about his discussions with fellow small business owners, who have been considering ways they can support each other in the Oklahoma City area. 

“I think the conversations are shifting away from what Congress is doing to what we can do for ourselves,’’ he said.

Article Sources

  1. U.S. Small Business Administration. "Paycheck Protection Program (PPP) Report Approvals Through 8/8/2020." Page 9. Accessed Aug. 14, 2020.

  2. U.S. Small Business Administration. "Paycheck Protection Program (PPP) Report. Approvals Through 6/30/2020." Page 2. Accessed Aug. 14, 2020.

  3. Brookings Institution. "Across Metro Areas, COVID-19 Relief Loans are Helping Some Places More Than Others." Accessed Aug. 14, 2020.

  4. Federal Reserve Bank of New York. "Double Jeopardy: COVID-19’s Concentrated Health and Wealth Effects in Black Communities." Page 5. Accessed Aug. 14, 2020.

  5. National Community Reinvestment Coalition. "Lending Discrimination Within the Paycheck Protection Program." Accessed Aug. 14, 2020.

  6. U.S. Small Business Administration. "Paycheck Protection Program." Accessed Aug. 14, 2020.

  7. U.S. Small Business Administration. "Joint Statement by SBA Administrator Jovita Carranza and U.S. Treasury Secretary Steven T. Mnuchin Regarding Enactment of the Paycheck Protection Program Flexibility Act." Accessed Aug. 14, 2020.

  8. U.S. Small Business Administration. "Paycheck Protection Program (PPP) Report. Approvals Through 6/30/2020." Page 4. Accessed Aug. 14, 2020.

  9. MIT Department of Economics. "An Evaluation of the Paycheck Protection Program Using Administrative Payroll Microdata." Accessed Aug. 14, 2020.

  10. Federal Reserve Bank of New York. "Double Jeopardy: COVID-19’s Concentrated Health and Wealth Effects in Black Communities." Page 6. Accessed Aug. 14, 2020.

  11. U.S. Department of the Treasury. "Interim Final Rule: Additional Eligibility Criteria and Requirements for Certain Pledges of Loans." Page 21749. Accessed Aug. 14, 2020.