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What Congress got right with PPP, and what it should do next for small businesses

Karen Mills
·7 min read

These days, you hear a lot about the Paycheck Protection Program (PPP), and not in a good way.

The historic program was designed to rapidly distribute up to $659 billion in forgivable loans to small businesses across the country, helping them stay afloat and keep employees paid during the pandemic.

It’s difficult to overstate how unprecedented that number is. For context, the Small Business Administration (SBA), which runs PPP, provided a total of $28 billion in loans in 2019.

Rolling out so much money in just two months has come with complications. Banks often prioritized existing customers and their most profitable borrowers when distributing funds, leaving the smallest businesses behind. Bad actors took advantage of the program to get money they didn’t need. And as the forgiveness stage nears, there’s widespread concern over the government’s exposure to fraud.

But is that the real story of the PPP?

At this very moment, Congress is gearing up to pass another stimulus package that is likely to include more PPP funding, so it deserves a closer look to see what worked and what didn’t. Forgivable loans or grants is exactly the kind of help that small businesses need in this crisis, but we need to make sure that the money is reaching the smallest and most vulnerable businesses.

Lockdown measures like quarantine and social distancing — though absolutely necessary for public health — can be a death sentence for small businesses. Independent entrepreneurs lack many sources of funding available to larger firms, and often have difficulty accessing credit from banks. This makes them extremely dependent on cash flow.

Yet the typical small business only has enough cash to last 27 days, which is especially troubling given that the US’s 30 million small businesses employ half of our nation’s private sector workers.

A timeline of key events in the Paycheck Protection Program
A timeline of key events in the Paycheck Protection Program

What worked, and what didn’t

When the PPP’s second round closed on June 30th, about $521 billion in loans had reached nearly 5 million small businesses — providing a desperately needed lifeline for many of them. In this sense, the PPP did exactly what it needed to do: Get cash into the hands of small business owners and their employees, fast.

The average loan size through Round II was about $107,000, and almost 87% of all loans were for less than $150,000. A preliminary analysis of ADP payroll data suggests that PPP boosted employment at eligible firms between 2 and 4.5% through the end of May.

But what about the 25 million businesses who haven’t received a loan? Many small businesses that didn’t apply for PPP thought they weren’t eligible or feared it would increase their debt. Some were deterred by a complex and confusing application process.

In other cases, the condition that 75% of the loan be used to cover payroll costs was prohibitive. Congress lowered this to 60% and extended the time frame for using PPP funds from 8 to 24 weeks with the Flexibility Act. According to a National Federation of Independent Business (NFIB) survey, this was popular among small businesses who heard of the change. But a poll from Alignable, a network of 5 million small businesses, shows that the majority of them never did. This helps explain why there was over $130 billion left in PPP coffers when Round II closed.

According to a second poll from Alignable, 73% of small businesses want more federal funding. If we can get the message out about forgiveness, make it easier to apply, and relax loan conditions, there’s a good chance many small businesses who were initially reluctant will be glad to get a PPP lifeline.

Bad actors and large businesses, did crowd out smaller ones — especially in Round I, when average loan size was $206,000. This explains the sentiment reflected in a June survey conducted by Small Business for America’s Future, where 84% of respondents said “our leaders favor big business over small business.”

More money reached smaller businesses in Round II. This is a seemingly intuitive, yet crucial insight for Congress’s next move: The smallest and most vulnerable businesses need to be directly targeted and given priority over larger businesses.

This includes minority- and women-owned businesses. According to a survey from Color of Change, “51% of Black and Latinx small business owners surveyed report applying for less than $20,000, but only 12% say they received the full amount of assistance requested.”

Alignable found that minority-owned small businesses were rejected at nearly double the rate of non-minority owned businesses. Clearly, there’s a huge unmet demand for PPP dollars among these businesses, who face additional barriers to accessing capital even in the best of times.

One thing Congress got right was looping in fintech lenders. Fintechs made smaller loans than big banks and did a better job of reaching the most vulnerable businesses. Kabbage, an Atlanta-based fintech, processed $5.8 billion worth of loans with an average loan size of $28,100. Twenty-seven percent of these loans went to businesses in zip codes with an average household income under $50,000. For Square, that number was 47%: Its average loan size was $11,000, and they facilitated over $820 million in PPP loans.

What was different about the fintechs’ approach? They processed loans very quickly—Kabbage’s median time from application to approval was about four hours. Fintechs also applied their technological know-how to build better loan application and processing systems, often working together to do this. Ocrolus, a fintech specialized in gathering data and information from financial documents, offered lenders the infrastructure to rapidly cull information from PPP applications.

From the fintechs’ success, we know that small-dollar loans, simple applications, and fast turnaround are desperately needed, especially among underserved borrowers.

Donica Johns poses for a portrait in her home office in New Orleans, Louisiana, U.S., on June 13, 2020. Johns hasn’t benefited much from the aid offered to small business owners during the crisis, and she isn't alone. Many other black owned businesses that didn’t have existing banking relationships before the crisis hit are having similar experiences.  At the beginning of the year she was in the process of rebranding her skincare business and shopping for an official workspace that would allow her to expand her company. She was forced to put the expansion plans on hold when the coronavirus pandemic hit, and has been struggling to replenish her inventory because of shipping delays caused by the virus. Johns applied for a loan from the Paycheck Protection Program but hasn’t heard back. REUTERS/Kathleen Flynn
Donica Johns poses for a portrait in her home office in New Orleans, Louisiana, U.S., on June 13, 2020. Johns hasn’t benefited much from the aid offered to small business owners during the crisis, and she isn't alone. Many other black owned businesses that didn’t have existing banking relationships before the crisis hit are having similar experiences. REUTERS/Kathleen Flynn

Keep it simple

With all this in mind, what should Congress fix about PPP? It’s clear now that this is no eight-week crisis. Another NFIB survey found that 71% of businesses who received PPP loans have already spent all of the money, with 46% believing they will need “additional financial support in the next six months.”

The important thing is to keep PPP simple, accessible, and focused on those who need it most. Applications for new loans, and for forgiveness when the funds are all properly used, should be easy and available online. Relaxing loan conditions so that small businesses can pay more towards expenses like rent will help keep them afloat.

Expanding the range of legitimate expenses for which loans can be used is also key, since the diverse range of small businesses have vastly different needs. Those who have already received a loan but are now struggling should be able to reapply. And Congress shouldn’t restrict loans to specific industries, since small businesses everywhere are hurting.

Congress should exclude public companies to help focus on the smallest businesses. It would be ideal to designate a portion of PPP for minority- and women-owned businesses, but the government lacks the demographic data to do so. One solution would be to reserve a large portion for the smallest-dollar loans, while increasing outreach to minority- and women-owned businesses through local organizations and government.

The PPP did a lot of good, distributing loans on a massive and unprecedented scale in a very short time. But it needs to do better. Without action from Congress, we still stand to lose 20-30% of our nation’s small businesses.

Think about that. One-third of the small businesses in your town — your local cafes and bookstores —would vanish, along with those jobs. We won’t know what we had until it’s gone.

Karen Gordon Mills is a Senior Fellow at the Harvard Business School and a leading authority on U.S. competitiveness, entrepreneurship and innovation. She was a member of President Barack Obama’s Cabinet, serving as the Administrator of the U.S. Small Business Administration from 2009 to 2013, and is an expert on the economic health and well-being of the nation’s small businesses.

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