Repayment of PPP Business Loans Threatens Struggling Main Street SMBs

For Main Street SMBs, PPP business loans were once lifelines but now could become anchors.

This, as the loans that were offered as federal aid during the pandemic are emerging as unexpected liabilities that some of the most vulnerable businesses simply can’t cover.

As reported in the Wall Street Journal Wednesday (Dec. 14), as many as four million small businesses received PPP loans totaling about $390 billion. The problem is that now a deluge of monthly repayments is set to begin. While less than half a million PPP loans started repayment periods this past fall, more than a million loans will see their first payments come due this month, with another million starting payback in January.

On the face of it, the 30-year loans, with a 3.75% interest rate — those are the terms for small to midsized business (SMB) loans — might seem cheap, given today’s macro climate. And for a number of smaller firms that are still experiencing hardships and where business has not returned to pre-pandemic levels, there are options to defer repayment periods and to request extensions,  

But during those deferral periods, interest charges accrue and loan balances increase.

As for the potential fallout: PYMNTS data found that the clamor for PPP loans, at least among the Main Street SMBs we’ve tracked, had been significant among the companies that have, in fact, “survived” the pandemic.  

By the end of the year, just about 22% of SMBs had applied for the loans. 

Most of the others had not chosen to do so as they sought to cut operating costs and, in many cases, had laid off staff into the darkest days of the pandemic.  

Margin Pressures Loom

Though the “worst” may be over for the SMB community at large — as recently as last month, we found that the companies are 4.6% “healthier” than they were before the pandemic — inflation continues to be a challenge. As profiled as recently as this week, Inflation is the leading concern for businesses, with more than 39% saying it represented their greatest challenge for the year. More than three in four SMB owners think inflation will take over a year to return to normal.  

If roughly a quarter of SMBs we’ve profiled have PPP loans on the books, they’re facing monthly loan repayments and an additional operating cost right into a timeframe where other inputs (wages, inventory, etc.) are more onerous. Top-line pressures are mounting, too, as consumers reign in all but essential spending. The natural progression is that margins get squeezed, which makes the struggle all the tougher for SMBs saddled with 30-year loans — enough so that survival may become an issue. 

The shape of SMB lending itself might be altered, too, against a backdrop where PPP loan origination and disbursement was famously chaotic. As reported earlier this month, 

A U.S. House subcommittee said that several FinTech companies facilitated fraud in PPP. The report’s recommendations include further investigation and urging the Small Business Administration to reconsider whether FinTechs should be permitted to have a role in future federal lending programs.