6 min read
The opinions expressed by the entrepreneur's contributors are their own.
Millions of businesses across the country are struggling, but many are missing the latest version of government aid: a second round of Paycheck Protection Program (PPP) loans. This is not happening because companies are doing better than they were last year. This is because the PPP still contains structural blockers that are preventing companies from getting the much-needed help.
A recent survey by the Federal Reserve Bank found that 30% of US small businesses – 9 million total – fear they won't make it by 2021 without further government support. Yet many do not apply for help. The Small Business Administration (SBA) reports that seven weeks after the start of the second round of PPP, nearly half of the funds remain and so far only 31% of the 2020 PPP loans have been granted.
New data shed light on PPP barriers
Gusto, which has more than 100,000 small business customers in the US, recently conducted a study that analyzed the choices made by business owners. The data uncovered two major barriers to access to grants: the 25% reduction in revenue and the slow lending rate for the first round of PPPs – especially for paint business owners.
Recent structural updates to the PPP have made it more accessible to the smallest of businesses and those who were previously left out. However, there are two remaining changes needed to ensure that the remaining US dollars – approximately 64% of the US $ 284 billion available in this funding round – are distributed fairly. Congress, working with the SBA, must address these issues quickly in order to deliver on the PPP's promise to provide help to the businesses that need it most.
Related: Has There Been $ 1 Billion in PPP Scam?
The revenue reduction requirements do not take into account increasing business costs
To be eligible for the new round of PPPs, companies will need to demonstrate that their revenues fell 25% or more in 2020, comparing gross revenues for one quarter with those of the same quarter in 2019. This “25% rule” was put in place to ensure that funds are only directed to those companies that have been hardest hit and most in need of assistance from the pandemic.
Despite the good intentions of policymakers, the revenue reduction rule prevents many companies from the vital relief they need to continue doing business. It does not take into account the additional costs of running a business during Covid-19. Small businesses have installed protective barriers and provided employees with PPE, obtained permits to operate outdoors, and purchased equipment such as heat lamps and tents to house customers outside in cold weather. Many business owners are also being forced to spend significantly more capital making necessary changes to their supply chains and delivering critical services to employees.
In 2019, Brett Robison and Christian Layke opened the Silver Branch Brewing Company in Silver Spring, Maryland. Just weeks after her first anniversary, Covid-19 forced her to close her taproom. Using PPP and EIDL loans, they quickly invested in the sale and self-distribution of canned beer to stores, and developed delivery and e-commerce to keep as much retail business going as possible. However, since canning beer is more expensive than serving it on tap, they have continued to be in the red despite increasing total sales. Their situation was exacerbated by rising aluminum costs for enclosures, which increased by more than 25% due to delivery restrictions. They would have asked for a second PPP loan to avoid staff being on leave for the duration of the winter, but they don't meet the revenue reduction threshold.
Related Topics: How to Get and Have an SBA Coronavirus PPP Loan Granted
Gusto's data found that 44% of small businesses were unable to apply for a PPP for the second drawing due to revenue reduction requirements, including 42% of businesses in particularly hard-hit industries such as retail, food and beverage, tourism, and arts and entertainment.
Congress needs to change this eligibility requirement to recognize the higher operating costs and new costs caused by the pandemic. Eligibility should be determined by changes in net sales rather than gross receipts. For example, if a company experienced a 15% decrease in sales and a 10% increase in operating costs, it should be eligible for aid.
Lending is a big blocker, especially for small business owners of color
Many companies that received loans in the first round of PPPs were not granted credit, so both banks and business owners are reluctant to borrow in the second round.
Gusto's study found that 56% of small businesses have not yet received first-round lending for PPP loans. Almost one in four entrepreneurs who did not apply for the second round has major lending concerns. One of the main reasons small businesses cite for not applying for a PPP on the second drawing is that they have not received forgiveness on their first PPP loan and are concerned about not getting forgiveness on a second loan. Paying back both loans would be a significant hardship for most of these companies, if not an impossibility for many.
The large differences in the rate of forgiveness by race and ethnicity are likely to result in a much worse outcome for black entrepreneurs on PPP second-draw loans. Fifty-six percent of white business owners failed to get their PPP loan, compared to 75 percent of black or African American business owners, 63 percent of Asian or Pacific islanders, and 54 percent of Hispanic or Latin American 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 they are granted the first. The accounting firm's clients need immediate help, but are cautious about new PPP loans because of the low lending for the first round of PPPs and the many ambiguous rule changes for eligibility.
To solve this problem, financial institutions must prioritize lending in addition to processing new PPP loan applications. However, banks are given financial incentives to make new loans instead of extending existing ones. Some banks are also reluctant to lend to business owners who have not received forgiveness for first-round PPP.
Congress needs to act quickly to stimulate banks and lenders to approve lending, and urge lenders to approve forgiveness requests within the next six weeks. In addition, color business lending needs to be accelerated. These steps make it clear to business owners and lenders alike that they can trust the award process and don't have to act on it.
Small businesses deserve to get rid of these roadblocks quickly
American small business owners – and the nearly 59 million people who employ them – continue to need economic support while the country awaits major vaccination. While the accessibility of PPP funds has improved since the first round in 2020, barriers and inequalities remain. It is important that Congress and the SBA change the revenue reduction requirements and prioritize lending. These changes will go a long way in bringing help to the small businesses that need it most and ensuring equal access to PPP help.
Related: 5 Strategies for Avoiding PPP Legal Error