Why Aren't Struggling Small Businesses Taking More PPP?
Many small business owners are being shut out by misguided requirements in the program, and scared away by how long it's taking to get the first round of PPP loans forgiven.
Millions of businesses across the country are struggling, yet many are not taking the latest version of government aid: a second round of Paycheck Protection Program (PPP) loans. This isn't happening because businesses are better off than they were last year; it’s because the PPP still contains structural blockers that are stopping businesses from obtaining the aid they urgently need.
A recent survey by the Federal Reserve Bank found that 30% of U.S. small businesses — totaling 9 million — fear they will not make it through 2021 without more government assistance. And yet, many are not applying for aid. The Small Business Administration (SBA) reports that seven weeks after round two of PPP began, nearly half the funds remain, and only 31% of 2020 PPP loans have been forgiven to date.
New data sheds light on PPP barriers
Gusto, which has more than 100,000 small business customers in the U.S., recently conducted a study that analyzed the decisions of business owners. The data uncovered two big roadblocks to accessing aid: the 25% revenue reduction requirement, and slow loan forgiveness for the first round of PPP — particularly for business owners of color.
Recent structural updates to the PPP have made it more accessible to the smallest business and those that were previously left out. But two remaining changes are needed to ensure remaining dollars — about 64% of the $284 billion available in this round of funding — is equitably dispersed. Congress, working with the SBA, must quickly address these issues to fulfill the PPP’s promise of getting aid to the businesses that need it most.
Revenue reduction requirements don’t account for rising business costs
To be eligible for the new round of PPP, businesses must show that their revenue dropped by 25% or more during 2020, comparing any quarter’s gross receipts to the same quarter in 2019. This “25% rule” was implemented to ensure that funds go only to the businesses that were most adversely affected and most in need of support from the pandemic.
Despite the good intentions of policymakers, the revenue reduction rule blocks many businesses from the crucial relief that they need to continue operating. It fails to account for the additional costs of running a business during Covid-19. Small businesses have installed protective barriers and supplied employees with PPE, obtained permits to operate outdoors, and bought equipment like heat lamps and tents to accommodate customers outside in cold weather. Many business owners are also being forced to spend significantly more capital to make necessary changes to their supply chains and provide vital employee benefits.
In 2019, Brett Robison and Christian Layke opened Silver Branch Brewing Company in Silver Spring, Maryland. Just weeks after their first anniversary, Covid-19 forced them to close their taproom. Using PPP and EIDL loans, they quickly invested to focus on sales and self-distribution of canned beer to stores and developed delivery and e-commerce to maintain as much retail business as possible. However, since canning beer is more expensive than serving it on tap, they continued to operate in the red despite increasing overall sales. Their situation was exacerbated by rising costs of aluminum for cases, which increased by more than 25% due to supply limitations. They would have applied for a second PPP loan in order to avoid furloughing staff for the duration of winter, but they do not meet the revenue reduction threshold.
Gusto’s data found that the revenue reduction requirement prevented 44% of small businesses from applying for a second-draw PPP, including 42% of businesses in especially hard-hit industries like retail, food and beverage, tourism, and arts and entertainment.
Congress must amend this eligibility requirement to acknowledge the higher operating costs and new expenses brought on by the pandemic. Eligibility should be determined by changes in net revenue rather than gross revenue. For example, if a business saw a 15% decrease in revenue and a 10% increase in expenses to operate, they should be eligible for aid.
Loan forgiveness is a major blocker, particularly for small business owners of color
Many businesses that received loans in the first round of PPP have not had them forgiven, making both banks and business owners hesitant to pursue second-round loans.
Gusto’s study found that 56% of small businesses have yet to receive loan forgiveness for round-one PPP loans. Nearly one in four business owners who have not applied for round-two have huge concerns regarding loan forgiveness. A top reason cited by small businesses for not applying for second-draw PPP is that they have yet to receive forgiveness on the first PPP loan, and are concerned about not receiving forgiveness for a second loan. Repaying both loans would be a significant hardship for most of these businesses, if not an impossibility for many.
The wide variations in rates of forgiveness by race and ethnicity are likely to lead to a much worse outcome for business owners of color on second-draw PPP loans. Fifty-six percent of white business owners have not had their PPP loan forgiven, compared to 75% of Black or African American business owners, 63% of Asian or Pacific Islander business owners, and 54% of Hispanic or Latino business owners.
Dan Luthi, Chief Operating Officer at Ignite Spot Accounting, works with many small business owners who are reluctant to apply for a second loan before their first is forgiven. The accounting firm’s clients need aid immediately, but they are wary of taking new PPP loans because of the low levels of loan forgiveness for the first round of PPP and because of the many ambiguous rule changes for eligibility.
To alleviate this problem, financial institutions must prioritize loan forgiveness in addition to processing new PPP loan applications—but banks are financially incentivized to extend new loans rather than forgive existing ones. Some banks are also hesitant to lend to business owners who have not received forgiveness for round-one PPP.
Congress must act quickly to create new incentives for banks and lenders to approve loan forgiveness, and push lenders to approve forgiveness applications within the next six weeks. Further, loan forgiveness must be expedited for business owners of color. These steps will make it clear to business owners and lenders alike that they can trust the forgiveness process and won’t be left footing the bill.
Small businesses deserve quick removal of these roadblocks
U.S. small business owners—and the nearly 59 million people they employ—need continued economic support while the country waits for widespread vaccination. While the accessibility of PPP funding has improved since the first round in 2020, roadblocks and inequities remain. It is critical that Congress and the SBA amend the revenue reduction requirement and prioritize loan forgiveness. These changes will go a long way in getting aid to the small businesses that need it most and ensuring equal access to PPP aid.
Lexi Reese is the COO of Gusto, which provides payroll, benefits, compliance, and HR to more than 100,000 U.S. small businesses. She has spent her career advocating on behalf of small businesses. Before joining Gusto, she led small business initiatives at American Express and Google, and served as a policy advocate at Accion International.Karen Kerrigan is the president & CEO of the Small Business & Entrepreneurship Council and Chair of the Small Business Roundtable. She has testified numerous times before Congress during the COVID-19 crisis to improve capital access programs and secure relief for small businesses.