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PPP Loan Gone

A worldwide pandemic has struck causing small businesses of all natures to struggle keeping their open signs, up and lit. That is until the government created a loan for these businesses that is totally forgivable with requirements.

PPP Loan Gone

Using the number of coronavirus cases as a proxy for the economic impact of COVID-19 in a specific state, we can look at whether the geographical distribution of PPP loans approved per number of small businesses matches that of COVID-19 cases. The number of PPP loans per state translates one-to-one to the number of small businesses receiving loans, since PPP loans are capped at one per business.

Then, in the next chart, we use unemployment claims per capita in the four weeks starting March 15 as the measure and find no statistically significant relationship between economic hardship due to COVID-19 and the chance of getting a PPP loan.

In unreported regressions and charts, we show that these results are robust to adjusting for the share of employment by small businesses in a state, as well as to various other factors. But we also acknowledge that our analysis is preliminary and subject to caveats. For example, PPP loans could be viewed as a substitute for unemployment claims, since firms applying for PPP loans, and expecting relief, may refrain from reducing payroll or at least delay it. This would dampen the relationship between PPP loans and initial unemployment claims. Another caveat is that the number of COVID-19 cases per capita is an imperfect measure for the severity of the economic impact, since other variables could affect outcomes differently across states. For example, among states with few COVID-19 cases per capita, California could have suffered from strict social distancing rules and North Dakota could have benefited from low population density even with laxer restrictions in place.

Next, we explore other potential drivers for state-level variation in PPP loans. One commonly proposed theory is that the hardest hit states also have the strictest social distancing rules, which make it challenging for small business owners to visit local bank branches to apply for PPP loans. However, most lenders have set up online application systems and accept e-signatures and e-consents, so this is unlikely to be the full explanation.

We conjecture a second hypothesis, that the market share of community banks is a good predictor of PPP loans approved across states. Community banks have been reported to view PPP as a chance to expand their customer base. The four largest banks in the United States represent a significant share of the depository base but have (at most) a combined 12 percent share of the total amount lent through the PPP. Moreover, the fifteen largest banks originating PPP loans have just a combined 26 percent market share of the total dollar amount lent. It seems therefore that medium-sized and small banks, including community banks, are important in channeling PPP funding.

If your business lost money as a result of the pandemic, you may be eligible for a COVID-19 Economic Injury Disaster Loan. The SBA can issue these loans through Dec. 31 of this year, or until funds run out, whichever is sooner.

New changes to the program have increased the maximum available loan amount from $500,000 to $2 million, extended the payment deferment period to 24 months for all loans and expanded the use of funds to include payment of nonfederal and federal debt.

The SBA offers a Lender Match tool on its website to connect potential borrowers with lenders within two business days. You might also contact a local bank in your community or one with which you have an existing relationship to see if it offers SBA 7(a) loans.

A closed sign is posted at a restaurant along the River Walk in San Antonio on April 28. Banks are reporting a little more success in getting small business owners' applications for coronavirus relief loans into government processing systems. Eric Gay/AP hide caption

Over the weekend, the Small Business Administration gave another glimpse into this with a report on PPP activity through May 1. It showed that $175.7 billion in loans had been approved just five days into the program's second round of funding. That's on top of the $349 billion loaned out in just 13 days during the program's first round.

The data suggest that this time around, the loans may be going to smaller businesses, and that there is still high demand. However, there are still big questions about how well the loans are reaching the businesses that need them most.

And smaller lenders have tended to give out smaller loans. SBA data show that the average PPP loan at banks with over $50 billion in assets is just over $90,000 this round. At banks with less than $1 billion, that average is around $58,000.

Those largest loans will be getting extra scrutiny. The SBA has announced that it will be auditing all loan applications for over $2 million. There were more than 25,000 such loans in the first round, and just over 7,500 thus far in the second round.

And there's good reason to think that plenty of small businesses could be in need of funds after this round runs out. After the first round, a survey from the National Federation of Independent Business found that three-quarters of small businesses had applied for the first-round PPP loans, but only 20% had gotten the money.

This paper is just one early look at the program; further data on loan forgiveness, employment, and business survival, will better show PPP's effects. But it is an indication that the aid isn't targeting the places that need it most.

For example, leading into the second round of funding, Democratic lawmakers in particular voiced worries that women-owned businesses and businesses owned by people of color hadn't yet been able to easily access the PPP loans. The SBA hasn't yet put out any data broken out by owners' gender or race, so it's not clear to what degree these businesses have been shut out, and whether it is improving.

The SBA has launched its own PPP loan forgiveness portal. It is intended to simplify the forgiveness process and allow some borrowers to apply for forgiveness directly through the SBA portal. You can find that portal here. To qualify to use the portal, businesses must have borrowed $150,000 or less and, importantly, PPP lenders must opt in. Because not all lenders have opted in, businesses must first determine if theirs has. You can find a list of participating lenders here. If your PPP lender has not opted into the SBA direct forgiveness portal or you've borrowed more than $150,000, you will still need to apply for forgiveness through your lender. Here is a complete guide on PPP loan forgiveness from the U.S. Chamber of Commerce.

After its creation in March 2020, the program has been modified several times to ensure more businesses could participate, with the SBA approving more than 5 million loans worth more than $525 billion throughout 2020.

What made the program so popular was the ability for businesses to have their loans forgiven, effectively making them grants. However, the loans were issued with specific criteria that needed to be fulfilled to have them forgiven. Below we will outline requirements for loan forgiveness, how to get a forgiveness application and other important details for those businesses hoping to have their PPP loan forgiven, including the latest revisions issued by the federal government in July 2021.

The PPP program was further modified with major revisions in June 2020 and December 2020 to add more flexibility for how borrowers spend loan funds. The December bill also reopened the PPP program so more businesses could apply for a first-time loan and created the ability for businesses to potentially obtain a second PPP loan.

Generally speaking, PPP loans carry generous terms. All PPP loans have an interest rate of 1%, with loans issued prior to June 5 maturing after two years and loans issued after June 5 maturing after five years. Basically, PPP loans issued before June 5, 2020, must be paid back in two years, and loans issued after that must be paid back in five years. No collateral or personal guarantees were required for the loan and no fees were charged to small businesses by the banks or credit unions providing the loans. While the loan terms were generous, the best aspect of them was that they could be forgiven.

The December 2020 stimulus bill revised how Economic Injury Disaster Loan (EIDL) grants impact PPP loan forgiveness. Originally, PPP loan forgiveness would be reduced by the amount a business received in EIDL grants. That has been changed so that loan forgiveness will not be reduced regardless of whether a business received an EIDL grant.

As long as you have abided by the rules and requirements provided by the SBA, then businesses can submit a loan forgiveness application. Businesses will need to submit an application to the financial institution from which they received their PPP loan. (Small businesses with employees can use this standard PPP forgiveness application as a guide for what information they need to provide, while sole proprietors, independent contractors and self-employed people who have no employees can use this EZ version of the application as a guide.)

Once the loan forgiveness application has been submitted, then businesses wait to find out if it has been accepted. Notably, as long as a business submits a loan forgiveness application within 10 months of their loan being used, they are not required to make any payments on the loan. If the loan is then fully forgiven, then the business does not need to make any payments at all. If the loan is only partially forgiven or not forgiven at all, the loan must be paid off in full before its maturity date.

For more information on the new stimulus package, watch our Small Business Update with U.S. Chamber of Commerce Chief Policy Officer Neil Bradley, which breaks down how the new legislation impacts PPP loans, taxes and more. 041b061a72


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