Paycheck Protection Program (PPP) – Helping Small Businesses or Free Money for the Bigs?
The COVID-19 pandemic took its toll on the nation and small businesses faced an existential threat as they were forced to shut their doors and lay off workers. As an industry that employs more than half of the private sector workforce, the survival of these businesses was crucial to the economy.
In an attempt to help small businesses during this turbulent period, Congress signed one of the largest stimulus bills in its history. Through the Paycheck Protection Program (PPP) that was designed to help small businesses, a $2 trillion bill was signed to provide millions of Americans with financial relief.
However, the stimulus bill that was expected to serve as a lifeline soon revealed cracks in a bureaucratic system that increasingly favored powerful companies over smaller ones. A large percentage of the loans in the PPP were claimed by businesses that already had millions in the bank leaving many small businesses in the dust.
Where did the PPP loans go?
The PPP issued hundreds of millions of dollars as part of the stimulus package in an effort to help small businesses weather the Covid-19 storm. However, research showed that nearly $243 million out of the total $349 billion loan was allocated to publicly traded companies with a high net worth.
A program that was intended to help the small mom-and-pop shops across the U.S, left its intended beneficiaries with little to no financial aid. Many businesses were forced to lay-off workers or shut their doors permanently. The controversy surrounding the PPP left many to wonder what went wrong.
A delay in payments
One of the major reasons for the disproportionate distribution of funds was because banks were slow to lend out the money when the program was first initiated. A day before the launch of the PPP, many banks and lending institutions did not have much of the information that was required to participate in the program.
The bureaucratic delays put a lot of pressure on banks that were burdened with an overwhelming response in loan requests by small businesses. According to the chief loan officer at United Midwest Savings Bank, the requests were nearly 10 times the regular monthly loan volume.
In an effort to limit the gravity of the response while failing to access the information required to start making loans, many banks imposed rules that would effectively prevent many businesses from applying for a loan. Large banks only accounted for 20% of the total loans made to small businesses. This number was 41% prior to the pandemic.
Using payroll as a metric
The PPP was specifically designed to enable businesses to keep employees on payroll. However, using this element as a key metric for lending money was a major reason why the money did not reach its intended beneficiaries.
In a survey conducted among small business owners, many said that the two main goals of the financial relief were to pay employees on time and also keep the business afloat. Unfortunately, the PPP focused on one more than the other (payroll), but many sole business owners did not have the liberty of doing the same.
Statistically speaking, larger companies have a higher payroll number, meaning a larger loan amount. The focus on payroll as the main indicator is one possible reason why large organizations like Shake Shack and The Lakers got a large slice of the finance pie. Both companies returned the money after facing public backlash.
Adding to the existing controversy, the original parameters of the loan stated that companies should use 75% of the loan amount on payroll but the rules were soon changed and required businesses to spend only 60% on payroll.
But the timing of the rule change, which came six to seven weeks after the initial loan, was too little, too late for many small businesses who had already spent a majority of the money. Many mom-and-pop stores had used the money to meet debt obligations outside monthly payroll.
A flawed economic system
The PPP was designed to operate in a system that already had the odds stacked against minorities and small businesses. These flaws only replicated themselves when the stimulus package was initiated.
When the PPP was first announced, many minority-owned businesses were unable to apply for the loans and those who were approved for a loan received a much smaller amount than they asked for. This only added to the turmoil caused by the health crisis where the cases were skewed towards minority groups. One study stated that four out of ten black-owned businesses would not be able to survive the financial crisis.
To add fuel to the fire, banks had the added incentive to charge higher fees on the loans. An expense that many small businesses were not able to bear. This led banks to prioritize larger corporations over smaller ones, once again leaving many mom-and-pop shops with little to no financial aid.
While the PPP was created with the purpose of helping small businesses, a healthy amount of bureaucracy coupled with a flawed and biased economic system prevented the intended beneficiaries from receiving the money.
Congress is still in talks of modifying the PPP to better serve small businesses. Some have called for the government to issue the loans to businesses directly, rather than using private sector banks as middlemen. Others have lobbied for converting the loans into grants and placing more restrictions on who can apply for them.
However, all hope is not lost as the Congress proposed new changes to the next round of funding in the PPP. The loans sanctioned would go to businesses that either has fewer than 300 employees or could prove that they lost a significant amount of revenue this past year. If the proposal is approved, it would be a step in the right direction for a program that was designed to help small businesses.