How to fix the failed small business loan program

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  • The Paycheck Protection Program (PPP), Congress’ aid program for small businesses, needs work.
  • Some ways to fix the program include increasing the amount of funds for especially small businesses, requiring banks to lend to businesses they don’t have a previous relationship with, and getting more money out to individuals.
  • Lexi Reese is the COO of Gusto. Megan Niedermeyer is Head of Legal & Compliance at Gusto. Jeanette Quick is Gusto’s Lead Counsel for Financial Services.

  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider’s homepage for more stories.

So far, the Paycheck Protection Program (PPP) — the small business lending program created by Congress’ coronavirus aid package — has left behind the businesses it set out to save. 

The program is failing to support the small businesses that power our economy and are most vulnerable to failing as a result of COVID-19. Unless changes are made to the way these loans are disbursed, the next round of funding will fail the hardest-hit businesses yet again.

Small businesses are getting squeezed and PPP isn’t helping

At Gusto, we’ve heard firsthand accounts from the small business owners we work with about how COVID-19 has impacted their companies and the difficulty of getting a PPP loan.

Right now, 53 restaurants in San Francisco are dishing up free meals for laid-off workers citywide. Each of them applied for a PPP loan, yet only three of them received funding. Among those that did not receive funds is Three Babes Bakeshop, which was ranked one of the top pie makers in the country. It is run by Lenore Estrada, who is now spearheading the free meals initiative, via the SF New Deal, while trying to keep her own business afloat by selling frozen pies. She has already had to lay off the majority of her staff and only has enough inventory to last her two more months. 

Catherine Wright and Anna Rogers are behavioral therapists based in Kitsap County, WA. Laid off due to coronavirus-related cutbacks, the two banded together to form their own company—North Star Behavioral Consulting—so that the children on the autism spectrum they served wouldn’t go without the care they need, especially with schools currently closed. They are still waiting for word on their PPP loan, and are running the company on donated time and on their own dime.

Before the $350 billion set aside for the PPP ran out, many of the 1.6 million loans approved by the Small Business Administration went to companies at the larger end of the 500-employee maximum, including publicly traded companies.

Large hotel and restaurant chains reported receiving millions in loans, including Ruth’s Chris Steak House and Potbelly sandwich shops, which are valued at $250 million and $89 million, respectively.

Many smaller companies weren’t approved for aid even if they applied in time. There are more than 30 million small businesses (defined as those employing fewer than 500 people) in the country — meaning that a mere 5% of businesses were able to get relief before PPP ran out. 

The 95% that were left out included the majority of micro-businesses, or those that employ fewer than 15 people. This inequitable distribution of small business loans is why Shake Shack chose to give back the $10 million PPP loan it received, with company founder Danny Meyer and chief executive Randy Garutti calling for equal access to PPP funds for all restaurants that need it. 

How to fix PPP

The White House has reached a deal that would add another $320 billion to the PPP. But if the structural issues uniquely impacting micro-businesses aren’t addressed before the funds are distributed, PPP will continue to perpetuate unequal access to capital that favors big business over the small businesses that employ 58.9 million Americans.

The federal government, the SBA and lenders have optimized the disbursement of additional funding for speed, which is vital, but it’s not the only important factor. The next round of small business funding must be optimized to serve the businesses that need it most.

We are urging the following four actions to make this happen.

Prioritize the hardest hit businesses and industries 

Not all small businesses have the same needs, yet the PPP is accessible by businesses of up to 500 employees, which includes real estate investment trusts (REITs), companies with access to venture funding and private capital, and other businesses with more stable funding and revenue. 

Data from our company, Gusto, which provides payroll, benefits, compliance, and HR software to 100,000 small businesses, shows that businesses with between 5-49 employees have been hit particularly hard. 

Layoffs among these businesses increased by more than 1000% in March 2020 compared to the previous month. And layoffs aren’t just happening at bars and restaurants. Salons and spas, sports and fitness centers, and arts and entertainment organizations have all been decimated by the pandemic. All of these small businesses depend on foot traffic, and every day that funding is delayed endangers their business and their employees.

Require banks and approved lenders to make loans to non-customers, and strengthen the government guarantee 

Many small businesses that have been most impacted don’t have an existing relationship at a major bank. We know that half of our Gusto customers don’t work with one of the four biggest banks. During the first round of PPP funding, many major banks only extended loans to existing customers, effectively shutting out millions of eligible businesses from the $350 billion pool. Research shows that African American and black-owned businesses are 20% less likely to receive loans from large banks.

Banks have been hesitant about the extent of the government’s guarantee to buy back loans, and millions of small businesses have struggled to find banks that would accept their loan requests. And we’ve heard repeatedly from smaller banks that they are unwilling to lend to small businesses because of concerns about liability and the potential for fraud. We call upon policymakers to commit to purchasing loans immediately from lenders and to require lenders to make loans to non-customers.

Make direct grants to small businesses

In the 2019 fiscal year, the SBA guaranteed $28 billion in loans. Over a two-week period in April, it was tasked with handling nearly $400 billion in PPP funding. What’s more, the SBA is a relatively small agency: it employs approximately 3,300 people to serve 59 million small business employees. 

We need a “whole of government” approach to small business relief, and for the Treasury to play a bigger role in providing direct relief to small businesses through grants and stimulus.

We urge the Treasury to make direct grants to small businesses and enlist payroll companies to ensure that the money intended for employment goes to employees. Payroll companies like ours are built to send out paychecks—we can quickly facilitate payment at no cost to business owners. We are also equipped to validate small business documentation, such as payroll history and whether workers continue to be employed, that otherwise stand in the way of businesses accessing relief. 

Additionally, many small businesses have other fixed expenses that are essential to their operations, but are ineligible under PPP forgiveness rules. We believe that to save small businesses, the aid provided must include payroll and employees’ livelihoods first and foremost, but also extend beyond payroll needs and include coverage for other critical business costs.

Use payroll companies for direct stimulus and unemployment compensation

Finally, more direct stimulus is needed immediately. Though the PPP funding will be replenished soon, the loans will arrive much too late to have the impact that many companies need. Payroll providers that include ADP, Paychex and Gusto alone send payments to approximately half of the adults in this country. We can send stimulus checks to individuals more quickly and effectively than government agencies. 

The private sector has a duty to work with our government to pull small businesses back from the brink of collapse. We encourage other businesses to think creatively about how they can best contribute. Banks and the federal government must also do their part by improving current implementation of the PPP and sending more direct aid to the small businesses that need it most.

These business owners and the millions of people they employ are fighting to access vital aid, but have yet to receive a fair shot.

Lexi Reese is the COO of Gusto, the people platform that provides modern payroll, benefits, compliance, and expert HR to more than 100,000 small businesses across the U.S. She has spent her career advocating for small businesses at American Express, Google, and Accion International.

Megan Niedermeyer is Head of Legal & Compliance at Gusto. She has over a decade of experience helping organizations effect positive change and has provided legal counsel to companies large and small. 

Jeanette Quick is Gusto’s Lead Counsel for Financial Services. She is a widely recognized expert in fintech and financial services, and previously was Senior Counsel to the Senate Banking Committee, where she was the lead advisor on consumer finance, and Senior Attorney at the Office of the Comptroller of the Currency.

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