The Paycheck Protection Program (PPP) was designed to be a stimulus that would help small businesses with less than 500 employees preserve jobs whilst the pandemic raged. Over $500 billion was drawn down during the application period, with loans being processed through financial institutions across the nation.
Unfortunately, the hastily built program has been plagued with errors resulting in conditions ripe for fraud, inequality, and plenty of confusion.
So, what went wrong with PPP?
PPP was operating on a first-come, first-served basis. That meant that time was of the essence when it came to submitting applications because once the money was gone, that was it. But with the program being pulled together in less than a few weeks, the terms and requirements that needed to be met in order for small businesses to access the loans would change.
This meant that applications were being rejected because of missing information or incorrect information. Ordinarily, that would be fine, but in this case, many small businesses missed out on getting some of the help they desperately needed because of simple errors on their application. By the time they were rectified, it was too late and the money had run out.
While it is admirable that the program was pulled together in such a short space of time, the truth is that major aspects of PPP were poorly executed.
Firstly, financial institutions that were not already approved to process SBA loans had to wait to get their approval. That approval did not arrive until after the money had already been drawn down and distributed.
This meant that small business owners whose banks were not already SBA-licensed had to apply through different banks and financial institutions. The banks, who were already swamped with applications, often ended up prioritizing the applications of existing customers.
Larger businesses were likely to draw down bigger loans and the banks responsible for processing would be able to charge higher fees. As a result, their applications were often prioritized above smaller businesses.
In addition to this, flaws in the system that directly disadvantage businesses owned by people of color continued to be a problem. As PPP was designed to operate within the existing lending framework rather than a custom system that funneled funds from the state straight to the businesses, many people of color found that they were frozen out of receiving a loan. Those that did receive a loan often found that they received much less than they asked for. As a result, many businesses owned by people of color are now facing closure.
Protecting salaries would have been a great help for many small businesses. But with other overhead expenses to take care of, just covering the salaries for a couple of months would not have been enough to keep the business afloat. With strict stipulations on what the loans could be used for, the program lacked flexibility. The money couldn't be used for other costs associated with running a business. The result is that some loans were drawn down to protect salaries but the business ended up having to close anyway.
The program was over subscribed, and $349 billion dollars was drawn down within 13 days. But in that mad dash, there has been no hurry to properly disclose where that money has gone. In the beginning, the government did resist releasing who had gained access to the funding. Later on, some data was released into the public domain which revealed larger companies were receiving millions of dollars. Some of those loans ended up being returned in the face of public outcry, but there were many cases like this.
As an added note, the IRS is now having to investigate large cases of fraud, where millions of dollars were drawn down illegally. What will happen in those cases remains to be seen.
After the initial $349 billion stimulus ran out, another $310 billion was added to the pot to help small businesses. But now, despite there still being $130 billion that has not been drawn down, people were a little more reluctant to apply for help. This is partially because business owners are now wary of the whole scheme. Will the loans be completely forgivable, or partially forgivable? Will the set timelines to spend the money shift or change at all?
Some businesses were still forced to close their doors regardless.
According to some of the later news reports, it looks as though the government is going to continue to review PPP so that fewer small businesses fall through the cracks. To date, 5.2 million loan applications were approved according to the SBA. There's still some money in the pot and the coronavirus infection rate is on the increase as we head towards the end of the year. It's highly likely that small businesses will continue to need assistance to keep trading.
We'll have to keep an eye out for any changes, extensions, and clarity around how PPP will look moving forward.
We hope that whatever they devise will reach small business owners in time so that they can continue trading and supporting local communities.
About Bob Mason, CPA
Santa Cruz based Bob Mason, CPA (Coast Financial Services) has been providing the people of Santa Cruz with years of expertise in the tax and accounting industry. He provides a broad range of accounting, bookkeeping and small business services to help your business succeed. Using their expertise in technology they have built an intuitive website with useful tools and calculators and a monthly blog which they post to on a frequent basis. Check back weekly for their next tax or accounting topic.
