The Paycheck Protection Program (PPP) has been one of the most critical components of federal coronavirus relief legislation. Although full of flaws, the program has been a vital pipeline for both small businesses and nonprofits. To date, $525 billion has been distributed through the program.
The federal coronavirus relief legislation, passed in late December, creates a new $284 billion pool of money to support small businesses and nonprofits. The new funds allow a second chance for a “first draw” for firms (under the same rules as before) that have not yet received a PPP forgivable loan. It also allows for a “second draw” of PPP forgivable loan funds, up to a maximum of $2 million, for qualifying firms. The main rules for beneficiaries to follow to qualify for the second draw include the following:
- Have fewer than 300 employees.
- Previously received a PPP loan that’s already spent or on track to be.
- Can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020.
- As before, at least 60 percent of proceeds must cover payroll costs (what counts as payroll is looser; for instance, personal protective equipment counts).
There are other key tweaks. Some groups, like 501c6 organizations, that were previously ineligible are now eligible. If your loan is for $150,000 or less, the form to apply for forgiveness is a single page. Nonprofits like theaters and museums that receive grants under the Save Our Stages program are ineligible to also apply for a second draw of PPP. The rules are also more generous for restaurants and hospitality firms, which can borrow 3.5 times their average monthly payroll costs instead of 2.5 times the average—a response to how severely COVID-19 has harmed these sectors.
The new funding is very much welcome and needed. But while hundreds of thousands of nonprofits and millions of small businesses have been assisted through PPP, that’s not to ignore many major problems. These began with a rollout which explicitly favored larger businesses with existing bank relationships. The first round of $349 billion in funding ran out in 13 days. Indeed, according to a congressional report, it was later revealed that “Treasury privately encouraged banks to limit their PPP lending to existing customers, excluding many minority and women-owned businesses.”
Writing in NPQ, Joe Neri, CEO of IFF, a Midwestern community development financial institution (CDFI), explained the dynamics:
Millions of small businesses and nonprofits, particularly those owned or led by people of color, applied to their local banks and heard, as many of us predicted, less than desirable responses.… I say “predictable” because businesses owned by people of color have historically had difficulties obtaining capital from traditional banking systems for myriad reasons similar to those above: too small, not enough collateral, not enough wealth, no co-signers with wealth, not “sophisticated” enough, etc.
These businesses will not be turned down because of race—that’s illegal. They will be turned down because they don’t have existing relationships, which they don’t have because of the persistent racial wealth and income gaps resulting from decades of racial inequalities.
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Some of these problems were mitigated in a second round of PPP funding, which set aside $10 billion for CDFIs. As the CDFI trade association Opportunity Finance Network noted, however, “By the time dedicated PPP resources were directed to CDFIs, demand for the program had fallen off. Sadly, some small businesses had already closed their doors, including 41 percent of Black-owned businesses.”
Now, in 2021, the US Small Business Administration (SBA) is implementing safeguards to promote businesses in communities of color. Among the key provisions:
- $15 billion for PPP loans for lending by CDFIs
- $15 billion for PPP by other small lenders with assets of less than $10 billion
- $15 billion and $25 billion for first draw and second draw PPP loans, respectively, for borrowers with a maximum of 10 employees or for loans less than $250,000 to borrowers in low-or moderate-income neighborhoods
And now, finally, the SBA has added a demographic reporting section on the PPP borrower application. The application states that, “PPP lenders should encourage borrowers to report the optional information that has been added to better inform lenders and SBA on the success of our efforts to reach underserved, [people of color]-owned, veteran-owned, and women-owned businesses.”
A nice symbolic change is that this time CDFI lenders got a head start, with PPP loan applications only accepted “from community financial institutions for at least the first two days when the PPP loan portal reopens.” That’s a sharp contrast from last April. It’s encouraging that evidence which shows that small banks outperformed large banks in getting money out to businesses has led to a change in policy.
But the SBA couldn’t help but sugarcoat its past shortfalls. “While the PPP has been an incredible success, there are still many more opportunities to provide assistance to businesses who have yet to access these forgivable loans,” Administrator Jovita Carranza writes.
Yep, an incredible success. That must be why the SBA only now is taking affirmative steps to increase access to capital for businesses owned by people of color.
There is ample precedent for this. Over 90 years ago, Pravda published an article titled “Dizzy with Success,” singing the praises of the disastrous Soviet collectivization of agriculture as it announced a pause in the program. Sometimes when an agency touts its own success, it’s a sign of the opposite. Amid COVID-19, the devastation suffered by businesses owned by people of color is hard to deny. Federal efforts that fell short did not help. The course correction now is very welcome. But it is also very late.—Steve Dubb