In addition to the public health threat posed by Covid-19, many small business owners were faced with a difficult decision during the pandemic: reduce staff, take on debt or close their doors for good. Through the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Paycheck Protection Program (PPP) offered business owners a lifeline in the form of forgivable loans to cover payroll and ride out Covid’s economic storm.
And while the PPP ended on May 31, 2021, many small businesses and lenders are still feeling its impacts two years later. Many business owners credit the PPP for keeping their doors open, but the program was rife with fraud and the Department of Justice (DOJ) is still working through a backlog of potential fraud cases resulting from the program’s hasty execution. What’s more, slow loan forgiveness has resulted in around $28 billion of lingering debt. Still, many lenders laud the PPP as a success.
What the PPP Accomplished
Overall, businesses received more than $800 billion in PPP funds over the course of three funding rounds, with borrowers hailing from all 50 states and U.S. territories. The majority of 2021 funds were extended to small businesses with fewer than 10 employees, with around 90% of approved loans being for $50,000 or less. A working paper published by Harvard Business School concluded that PPP loans resulted in a 14% to 30% increase in a business’ likelihood of survival.
Lenders involved in the program generally agree that the PPP provided much-needed funds to small businesses at a time when fear and anxiety were high. Chris Hurn is the founder and CEO of Fountainhead Commercial Capital, the nation’s sixth most active PPP lender. Fountainhead funded more than 287,700 loans—totaling $4.72 billion and saving an estimated 430,000 American jobs.
Hurn—like many business lenders—believes the program had an impressive and meaningful impact on small business owners and the economy in spite of issues with fraud. “It was the proverbial building the airplane after you jump off the cliff in many ways,” Hurn shared. “I do think the program was successful. It’s unfortunate that so many headlines concern fraud and misuse.”
How PPP Funds Were Used
The PPP is estimated to have saved millions of American jobs—though the exact number varies widely depending on methodology. Likewise, there has been speculation over whether PPP loans actually kept employees on payroll—or merely subsidized businesses that could have stayed open absent the loans.
It’s estimated that only around a quarter of the $800 billion in PPP funds protected paychecks that would have otherwise been lost. Furthermore, data from the Federal Reserve reveals that almost half of the 77% of businesses that received all of the money they requested still reduced the number of employees on payroll.
Some experts like John Friedman of Brown University estimate that only 1.5 million jobs were saved in the PPP’s first four months; in contrast, Michael Faulkender of the Trump administration says the program saved over 18 million jobs during its first months.
PPP Loan Forgiveness
Beyond providing immediate financial support, the PPP aimed to help struggling businesses by offering loan forgiveness for borrowers that used at least 75% or 60% of funds on payroll, depending on the funding round. According to U.S Small Business Administration (SBA) data, about 94% of PPP loans that were approved in 2020 had been forgiven as of December 2021. Overall, around $28 billion of all PPP loans remain unforgiven as of February 2022, a Bloomberg News analysis suggests.
However, Miami Herald reporting revealed that fintech company Kabbage (now owned by American Express) had only forgiven around 54% of PPP loans it approved in 2020. Loan forgiveness data from the U.S. Census Bureau and SBA also reveal a pattern of lower forgiveness rates in majority-Black and majority-Hispanic areas of the country.
To apply for forgiveness, borrowers must first determine whether their lender is participating in direct forgiveness. Borrowers with participating lenders can apply for forgiveness online through the SBA’s PPP Direct Forgiveness Portal; all other borrowers must apply for forgiveness through their lenders.
Hurn reported that extensive outreach by his company has so far resulted in about 80% of the PPP loans it facilitated being forgiven. He believes the SBA’s online forgiveness portal is fast and easy to use, but that many PPP borrowers are overwhelmed, short on time and may be intimidated by the forgiveness process; others may not be eligible based on how funds were used. It’s also possible, he said, that some lenders have not been as vigorous in their outreach efforts due to a lack of incentive to forgive loans.
PPP Loan Fraud
Fraudulent loan applications also have been a lingering concern since the inception of the PPP. Because the program was larger than traditional SBA loan offerings, administration was difficult and the need to finance loans quickly put even more strain on lenders and the SBA. As a result, over two million loans were ultimately flagged for potential fraud issues ranging from false statements and loan stacking during the application process to improper use of funds and false certification for forgiveness.
The DOJ has responded to these issues by bringing hundreds of criminal cases against alleged fraudsters, totaling as much as $80 billion—or 10% of PPP funds. While it’s too late to change the initial administration and application requirements of the PPP, overall success of the program may ultimately depend on the DOJ’s ability to convict fraudsters and recover funds.
The size of the PPP and the speed with which it was administered reduced the level of applicant verification. “A lot of this salacious fraud would not have happened had they done one thing at the very beginning,” Hurn said—fraud could have been limited by requiring verification of tax documents. According to Hurn, this process “would have knocked out 98% or 99% of fraud where information was doctored or the loan amount was incorrect.”
While doing so was too time-consuming to be feasible under the PPP, these issues point to a need for more streamlined verification processes between the IRS and SBA moving forward.
What’s Next for the PPP
As the PPP forgiveness period ends, many lenders are left with loans to borrowers who did not apply or qualify for forgiveness. Beginning in July of 2021, these lenders were given the opportunity to apply for the SBA’s guaranty purchase program to offset loans that did not qualify. The next wave of the guaranty purchase program is set to begin this summer for newer PPP loans not forgiven this spring.
In this phase of the program, lenders request payment on the SBA guaranty and must demonstrate they complied with the SBA loan authorization, SBA requirements and prudent lending practices.
Given the volume of yet-to-be forgiven loans, Hurn suspects this will be the next shoe to drop, with each application taking around 15 or 20 minutes for lenders to submit and the same amount of time for the SBA to process. Though this may not seem like a lengthy processing time, it may cause substantial pressure on SBA resources when extrapolated across the billions of dollars of PPP loans yet to be forgiven.
In some ways, the guaranty purchase program signals the beginning of the end of PPP loan administration for lenders—allowing them to get back to business as usual.
Was the PPP a Success?
Two years later, many believe the PPP was a success. Despite issues with fraud and ongoing challenges posed by loan forgiveness, the program helped millions of small business owners stay in business and prevented further panic at an already anxious time.
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