The Paycheck Protection Program (PPP) was intended to extend forgivable loans to businesses struggling to pay workers and stay afloat amid the coronavirus pandemic. Instead, small businesses in areas less affected by the crisis — like the midwest — are getting a disproportionately higher number of loans, according to a study by New York Federal Reserve economists.
Less than 20 percent of small businesses located in New York — the epicenter of the U.S. pandemic — were approved for loans. Conversely, more than half of the small businesses in Nebraska are anticipating PPP loans.
The the study, by New York Federal Reserve economists Desi Volker and Haoyang Liu, found “... there is no statistically significant relationship between the severity of the economic impact of COVID-19 — measured both in terms of cases and unemployment claims — and the share of small businesses getting PPP loans, after excluding New York and New Jersey.”
In fact, the economists said, there is “a negative relationship” between the number of coronavirus cases per capita and the number of small and medium-sized businesses (SMBs) that got PPP loans. Further, using unemployment figures, the study showed there is no “statistically significant relationship” between financial setbacks caused by the pandemic and the odds of a business being awarded a PPP loan.
Loans were supposed to be extended by the Small Business Administration (SBA) based on a first-come, first-served basis. However, the first applications lenders received were not necessarily the first ones submitted to the SBA due to banks’ varying requirements. Banks were also inclined to award loans to companies they already did business with.
On the plus side, the majority of loans were processed by smaller banks and were awarded to industries particularly hard hit, such as retail, hotels and restaurants. The economists point out, however, that the construction sector, which is considered an essential business in most regions, received more PPP funding. Businesses in the professional, scientific, and technical services sectors also received a disproportionately high number of PPP loans even though many were likely to continue operations online.
The economists said that the variations by location are likely due to banks’ prioritizing current clients and the high number of community banks extending PPP loans.
The federal CARES Act allotted $349 billion for the PPP in its first round of funding in early April. Another bill was passed at the end of last month earmarking $310 billion for PPP loans.
The National Restaurant Association said on April 29 that the PPP loans extended to many restaurants largely didn’t meet their needs since many were closed. The loan money has to be used within eight weeks for payroll, rent and/or utilities.