Did Changes to the Paycheck Protection Program Improve Access for Underserved Firms?

Nathan Kaplan, Claire Kramer Mills, and Asani Sarkar

Prior analysis has proven that many small and minority-owned companies did not obtain Paycheck Protection Program (PPP) loans in 2020. To extend program uptake to underserved companies, a number of adjustments have been made to the PPP in 2021. Utilizing information from the Federal Reserve Banks’ 2021 Small Business Credit Survey, we argue that these adjustments have been efficient in bettering program entry for nonemployer companies (that’s, companies with no staff apart from the proprietor(s)). The adjustments may additionally have inspired extra purposes from minority-owned companies, however they don’t seem to have decreased disparities in approval charges between white- and minority-owned companies.

Modifications within the Paycheck Safety Program in 2021

Critics have cited numerous causes for underserved companies’ lack of entry to PPP funds. Some have faulted the intermediated nature of this system, and the ensuing incentives for banks to prioritize present debtors in addition to bigger companies of their approval processes. Others have argued that certain program rules—particularly the requirement that nonemployer companies calculate eligible mortgage quantities utilizing web revenue (relatively than gross revenue)—have been particularly disadvantageous to the smallest companies. Nonemployer companies additionally had delayed entry to PPP on the onset of this system. For nonemployers and different small companies, a lack of program awareness and concerns about eligibility for the mortgage and subsequent forgiveness doubtless acted as boundaries to program take-up. Lastly, racial discrimination confronted by some candidates for PPP loans may additionally have performed a component.

In response to proof of underserved companies’ lack of entry to PPP, Congress and the Small Enterprise Administration (SBA) carried out a number of necessary adjustments previous to the 2021 spherical of PPP. As a part of the Economic Aid Act of 2020, Congress pre-allocated giant quantities of PPP funds for companies situated in low- and moderate-income communities, these with at most ten staff, and first-time PPP debtors. The invoice additionally put aside funds for lenders who usually present credit score to underserved debtors, akin to Neighborhood Improvement Monetary Establishments (CDFIs), Minority Depository Establishments (MDIs), small banks, and credit score unions. To successfully implement these and different adjustments, the SBA instituted a two-day exclusivity window on the very begin of the 2021 program throughout which solely Neighborhood Monetary Establishments (CFIs) have been permitted to submit purposes to the SBA.

To additional improve entry to PPP funds, the SBA and the Biden administration announced additional changes in late February. Crucial of those have been: (i) an unique, fourteen-day borrowing window for companies with at most twenty staff; and (ii) permitting nonemployer companies to base mortgage quantity calculations on gross revenue.

PPP Utility Take-up in 2021

Had been these initiatives efficient in growing utility take-up by nonemployer companies and small employer companies? The SBA’s PPP reports point out a transparent improve in funding for smaller companies within the 2021 part of the PPP. Nevertheless, it stays unclear whether or not this elevated take-up is pushed primarily by adjustments in utility habits or by adjustments in approval charges. Moreover, virtually 71 % of PPP debtors selected to not report race/ethnicity data on their PPP purposes, making it troublesome to attract conclusions about PPP entry for minority-owned companies. To resolve these points, we flip to information from the Federal Reserve’s 2021 Small Business Credit Survey, which incorporates detailed demographic details about the house owners of small companies.

Within the chart beneath, we look at nonemployer utility charges from 2020 and 2021, relative to the analogous charges for companies with staff on payroll. Utility charges have been decrease throughout the board in 2021 than in 2020, however there was a a lot smaller drop for nonemployer companies than for some other measurement class of companies. Furthermore, 36 % of 2021 nonemployer candidates have been first-time PPP candidates, in comparison with simply 12 % of 2021 employer candidates. Thus, this system adjustments seem to have elevated utility take-up by nonemployer companies, with the caveat that employer companies might have had a bigger drop in demand for PPP funds between 2020 and 2021 than did nonemployer companies.

PPP Utility Charges by Agency Measurement

The chart additionally means that initiatives focused towards small employer companies had combined results. We don’t observe a transparent impact of the fourteen-day exclusivity interval for companies with at most 20 staff, as utility charges for companies with 1-19 staff and with at the least 20 staff function related declines. Nevertheless, the pre-allocated funding for companies with at most 10 staff might have inspired companies to use: 19 % and eight % of companies with 1-4 and 5-9 staff, respectively, have been first-time candidates in 2021, in comparison with simply 6 % and a pair of % for companies with 10-19 and at the least 20 staff, respectively.

PPP Utility Take-up by Race and Ethnicity

We subsequent examine adjustments in PPP utility charges by proprietor race/ethnicity from 2020 to 2021. Within the following chart, we observe noticeably smaller decreases in utility charges for Black- and Hispanic-owned companies than for white-owned companies. Certainly, the applying price for Black-owned companies exceeded that of white-owned companies in 2021. Moreover, we discover that 33 % and 30 % of Black- and Hispanic-owned employer companies making use of in 2021, respectively, have been first-time debtors, relative to simply 11 % of white-owned employer companies.

PPP Utility Charges by Race/Ethnicity

PPP Approvals in 2021

Did the 2021 initiatives alleviate gaps in approval charges documented for the 2020 part of this system? Within the chart beneath, we plot the fraction of PPP candidates in every measurement class that efficiently obtained at the least some PPP funding. Nonemployer companies are the one class for which the 2021 approval price was increased than the 2020 approval price. In distinction, approval charges throughout all different teams have been barely decrease in 2021 than in 2020. This means that, at the least for employer companies, adjustments made to the PPP in 2021 didn’t enhance the success of purposes.

PPP Approval Charges by Agency Measurement

Which adjustments might have had uniquely optimistic, albeit small, results on approval outcomes for nonemployer companies? The steerage permitting nonemployer companies to calculate mortgage quantities utilizing gross revenue relatively than web revenue likely played a large role in increasing approval rates. Moreover, nonemployer companies making use of for PPP in 2021 have been extra doubtless than employer companies to be making use of for first-draw loans, which didn’t require attestation and supporting documentation of at the least a 25 % drop in revenues in at the least one quarter of 2020 (relative to the identical quarter in 2019). News articles have documented further obstacles to getting second-draw loans (for instance, purposes stalled when first-draw loans have been flagged by the SBA’s inner assessment of the 2020 program) that will have disproportionately impacted employer companies.

PPP Approvals in 2021 by Race and Ethnicity

Our last chart plots 2020 and 2021 approval charges by proprietor race/ethnicity. Inside-group approval charges are usually related between 2020 and 2021, additional supporting the concept that determinants of PPP approval outcomes have been largely unaffected by the 2021 adjustments to the PPP. An necessary exception is an virtually 9 % drop (from 74.1 % to 65.4 %) in approval charges for Black-owned employer companies from 2020 to 2021. This exception is according to the comparatively sturdy take-up of PPP purposes by Black-owned employer companies in that extra underserved companies might have been much less prone to apply efficiently for PPP funds.

PPP Approval Charges by Race/Ethnicity

Ultimate Phrases

Our findings counsel that adjustments made to the PPP in 2021 succeeded in growing credit score entry for nonemployer companies. For minority-owned companies, these initiatives seem to have improved utility take-up, significantly for Black-owned employer companies. Nevertheless, approval price gaps between white-owned and Black-/Hispanic-owned companies weren’t attenuated. Understanding the causes of persistent gaps in PPP approvals between employer and nonemployer companies, in addition to between white- and minority-owned companies, stays an necessary avenue for future analysis.

Nathan Kaplan is a analysis analyst in Cash and Fee Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Claire Kramer Mills is a supervisor and director of group growth evaluation within the Financial institution’s Communications and Outreach Group.

Asani Sarkar is a monetary analysis advisor in Non-Financial institution Monetary Establishment Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Tips on how to cite this publish:
Nathan Kaplan, Claire Kramer Mills, and Asani Sarkar, “Did Modifications to the Paycheck Safety Program Enhance Entry for Underserved Corporations?,” Federal Reserve Financial institution of New York Liberty Avenue Economics, July 6, 2022, https://libertystreeteconomics.newyorkfed.org/2022/07/did-changes-to-the-paycheck-protection-program-improve-access-for-underserved-firms/.

Associated studying:
Who Benefited from PPP Loans by Fintech Lenders? (Might 27, 2021)
Who Received PPP Loans by Fintech Lenders? (Might 27, 2021)
Small Business Credit Survey: 2021 Report on Employer Firms