Jeremy Walls*

 

From just February to April of 2020, the COVID-19 pandemic wiped out 3.3 million small businesses, or 22% of the small businesses in America. The Paycheck Protection Program, (PPP loan program), initiated by the Small Business Association (SBA), is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll and relieve some financial stress on these businesses.^[1] The loans had borrower-friendly terms, and even had a possibility for loan forgiveness,^[2] making them very desirable for businesses going through struggles due to the pandemic.

While made with good intentions and with a strong potential to help struggling small businesses across America during the COVID-19 pandemic, the program’s initial wave has since faced scrutiny on the types of businesses that received the funding, and, just as importantly, the people apparently left behind. The lack of protection for small businesses and minority-owned businesses could cause a narrowing of markets, as big businesses take over in the wake of small businesses folding, hurting consumers and entrepreneurs alike.

 

Why did big businesses get money from the “Small Business” Association?

As a program that was meant to help small businesses, it of course did help a lot of them, but also a large percentage of the money did not go to intended audiences, and instead lined the pockets of those less needy. The SBA revealed the names of every business that received a PPP loan, and a majority of the forgivable funds went to bigger businesses. 4.5 million recipients borrowed less than $150,000. These smaller borrowers accounted for 28% of the $525 billion distributed between April and August. Loans for more than $1 million accounted for about 4% of applications but nearly 45% of approved dollars under the program. More than half of the roughly $525 billion in loans doled out through November went to just 5% of the more than 5 million recipients.^[3] That suggests larger companies received a disproportionate share of aid.^[4] At least 51 companies that are backed by 18 billionaires received loans designed to help small businesses stay afloat during the pandemic.^[5]

As a lending program, it skipped the typical lender due-diligence, and the consequences are palpable The PPP loan program was largely open to any business with 500 or fewer employees per location, making the loans available to low- and moderate-income business owners as well as billionaires, and public data shows that businesses took full advantage of the weak barriers to entry for the PPP loans.

432 firms laid off workers after getting approved for nearly $1 billion in loans, despite the loans being meant to keep workers on the payroll.^[6] Nearly 1,500 companies with troubled backgrounds, facing allegations of violating civil or criminal law, received loans worth an average of $526,000 to support an average of 36 jobs. Nearly 400 of those companies borrowed at least $1.5 million.^[7] 609 companies received the program’s maximum loan amount of $10 million. Borrowers weren’t required to provide information on their applications about the number of jobs supported or retained, but borrowers generally received funding equal to 2.5x their pre-pandemic average monthly payroll, so these numbers suggest they were larger businesses.^[8]

The SBA’s inspector general said in October that there were “strong indicators of widespread potential abuse and fraud in the PPP,” and they counted tens of thousands of companies that received PPP loans for which they appear to have been ineligible, such as corporations created after the pandemic began.^[9] More than 100 loans were made to businesses that listed no name or “showed potential data entry errors, such as names that appeared to be dates or phone numbers.”^[10] Companies were not required to report how many jobs they retained in order to take the loans, but they needed to do so within 24 weeks to qualify for the loan to become a free grant. Nearly 50,000 other companies had zero jobs retained in the dataset.^[11]

 

Struggles for minority-owned small businesses

Studies have shown that minority-owned businesses faced a particular struggle with getting funding. Smaller companies that didn’t have established relationships with banks struggled to access the program when it first opened, and research suggests that minority-owned businesses were less likely to have pre-established relationships. Lawmakers have said community lenders, such as community development financial institutions, are a key pipeline for PPP loans in minority and rural communities as well as businesses that may not have ties to traditional lenders, and those have been decreasing over the years.^[12]

While an analysis by the SBA stated that “low- and moderate-income areas received PPP loans approximately proportionate to their percentage of the population,” another study showed that the fallout of the pandemic was felt disproportionately by communities of color. Black small businesses were hit the hardest, with 41% closing, whereas 32% of Hispanic business owners had to shut down their businesses.^[13]

An SBA report suggests that areas with high numbers of minority-owned companies may have received fewer PPP loans because of weaker ties to financial institutions.^[14] The loans were made through banks and other lenders, and backed by the SBA. When the program launched in early April, many large banks prioritized customers that had existing relationships in an effort to manage overwhelming demand. However, minority-owned firms are less likely to have a recent borrowing relationship with a bank, Federal Reserve research shows.^[15] The access to capital problem for small businesses has not been addressed, and therefore the PPP loan program is not being utilized to its full potential. In the past decade, loans to bigger businesses have more than doubled, while loans to small businesses, which in 2017 employed around 47% of the private sector, have decreased.^[16]

Studies have shown that companies with existing loans at big banks or with SBA ties fared well in the pandemic relief efforts.^[17] Bigger, more sophisticated businesses got in line sooner and got more aid. Because of the way banks processed applications early on, larger customers had a better chance of getting approved than smaller ones. When the federal government rolled out the program, more than 80 publicly traded companies were among the first in line, and they secured a total of more than $330 million from the loan program.^[18] Congress allowed banks to choose the PPP recipients, and so those who had connections were able to take advantage, but those without continued to struggle. The question of who receives pandemic aid should come to who is in need, not the location they bank or the neighborhood where they operate. With fewer options, new credit was and is not being extended to smaller firms, pandemic or not. However, it is precisely the less sophisticated businesses that need more help in times like this.

 

Moving forward

The newest pandemic aid package signed into law by President Trump at the end of 2020 included $325 billion allotted to help small businesses. Within that, $284 billion was allocated for first and second forgivable PPP loans.^[19] Existing borrowers may apply for a second PPP loan, provided they have 300 or fewer employees, and can demonstrate they experienced revenue reduction of at least 25% in gross receipts due to the pandemic. These loans will also be capped lower, at $2 million instead of $10 million. First-time PPP borrowers will be subject to the program’s original eligibility rules, being open to larger businesses and not needing to show revenue loss.^[20] The bill also earmarks a portion of the PPP funding for both first- and second-time borrowers with 10 or fewer employees and loans of less than $250,000 in low-income areas.^[21] While some improvements have been made, the SBA needs a better way to address fraud and other problems within the program, especially since first-time PPP borrowers will still be subject to the same rules as what caused these initial problems.

On January 15, 2021, the second wave of PPP loans opened up.  Data of recipients will likely not be available for a while, but let’s hope this time the money goes to businesses that actually need it. However, if this new program does not do more to address the problems that occurred with the first PPP Loan Program, then this is unfortunately unlikely. The PPP loan program has undoubtedly helped businesses across America. However, in times of global panic, this country needs to come together and help those most in need, and that is not what the PPP loan program is doing today.

 

*Jeremy Walls, University of Minnesota Law School Class of 2021, Lead Note and Comment Editor of JLI

 

[1] Paycheck Protection Program, U.S. Small Business Administration, https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.

[2] Id.

[3] Jonathan Ponciano, New PPP Loan Data Reveals Most Of The $525 Billion Given Out Went To Larger Businesses—And A Few With Trump, Kushner Ties, Forbes (Dec. 2, 2020), https://www.forbes.com/sites/jonathanponciano/2020/12/02/new-ppp-loan-data-reveals-most-of-the-525-billion-given-out-went-to-larger-businesses-some-with-trump-kushner-ties/?sh=4b46dd3a5a43.

[4] Ruth Simon & Peter Rudegeair, In Race for Small-Business Loans, Winning Hinged on Where Firms Bank, Wall St. J. (Apr. 20, 2020), https://www.wsj.com/articles/in-race-for-small-business-loans-winning-hinged-on-where-firms-bank-11587410421?mod=article_inline.

[5] Deniz Çam, Kanye West, West Virginia’s Governor Jim Justice And 16 Other Billionaires’ Businesses Got PPP Loans,

Forbes (Jul. 6, 2020), https://www.forbes.com/sites/denizcam/2020/07/06/kanye-west-west-virginias-governor-jim-justice-and-13-other-billionaires-businesses-got-ppp-loans/?sh=7866de764f0d.

[6] Shane Shifflett, New Small-Business Stimulus Plan Fails to Address Fraud Risks, Wall St. J. (Dec. 30, 2020), https://www.wsj.com/articles/new-small-business-stimulus-plan-fails-to-address-fraud-risks-11609333200?mod=searchresults_pos5&page=1.

[7] Id.

[8] Amare Omeokwe & Anthony DeBarros, New PPP Data Show Coronavirus Aid Flowed to Large and Small Firms Alike, Wall St. J. (Dec. 2, 2020), https://www.wsj.com/articles/new-ppp-data-show-coronavirus-aid-flowed-to-large-and-small-firms-alike-11606938131?mod=searchresults_pos14&page=2.

[9] Id.

[10] Panciano, supra note 3.

[11] Ben Popken, Here are some of the billionaires who got PPP loans while small businesses went bankrupt, NBC News (Jul. 7, 2020), https://www.nbcnews.com/business/business-news/here-are-some-billionaires-who-got-ppp-loans-while-small-n1233041.

[12] Amara Omeokwe, PPP Loans: Everything We Know About Latest Small Business Protection, Wall St. J. (Jan. 11, 2021), https://www.wsj.com/articles/ppp-is-reopening-whats-different-this-time-11608645691?mod=searchresults_pos10&page=1.

[13] Çam, supra note 5.

[14] Amara Omeokwe, Black-Owned Businesses Hit Especially Hard by Coronavirus Pandemic, Study Finds, Wall St. J. (Aug. 4, 2020), https://www.wsj.com/articles/black-owned-businesses-hit-especially-hard-by-coronavirus-pandemic-study-finds-11596558754?mod=article_inline.

[15] Id.

[16] Peter Rudegeair, Small Businesses, Hit Hard by Pandemic, Are Being Starved of Credit, Wall St. J. (Dec. 20, 2020), https://www.wsj.com/articles/small-businesses-hit-hard-by-pandemic-are-being-starved-of-credit-11608476400?mod=searchresults_pos16&page=1.

[17] Simon, supra note 4.

[18] Id.

[19] What’s in the $900 Billion Covid-19 Relief Bill, Wall St. J. (Dec. 27, 2020), https://www.wsj.com/articles/what-is-in-the-900-billion-covid-19-aid-bill-11608557531?mod=searchresults_pos7&page=1.

[20] Omeokwe, supra note 12.

[21] Id.