Paycheck protection program could leave many small businesses more in debt

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A new report from the Inspector General of the Small Business Administration finds that government-sponsored forgiveness loans – designed to help small businesses overcome current economic spinoffs – could ultimately add to the debt burden.

The report, released on Friday, concluded that the rules created by SBA, which dictate how repayable loans offered by the Paycheck Protection Program (PPP) can be spent, go against the way Congress expected the program be administered – and could limit ‘utility’ loans.

PPP, a new effort established in CARES, provides up to $ 10 million in repayable loans to small businesses and non-profit organizations trying to overcome the economic uncertainty that emerged during the coronavirus pandemic . Congress allocated $ 349 billion to the program in the initial stimulus package, and lawmakers then added another $ 310 billion in late April. To date, more than 4.1 million PPP loans have been approved.

The law has entrusted the SBA with implementing the program, and the agency has created fairly strict rules governing how PPP loans can be spent: a large part of them – 75% – must be used for cover salary costs, not other expenses such as rent, so that the loan is fully canceled.

But the new Inspector General’s report finds that these rules are not in accordance with the way the program was defined in law, and that they could desperately harm businesses that desperately need money for business expenses. operating in addition to the payroll.

The Inspector General determined that “tens of thousands of borrowers” who participated in the first round of financing used more than 25% of the money allocated to them to cover costs such as rent and services public, which means they are likely to be stuck with new debt. And this debt – “the amount of non-wage costs over 25 percent,” according to the IG – is expected to be repaid within two years. If companies do not repay within this time, they would likely need to find additional terms with their lender.

Essentially, a program to ease the financial burden currently facing small businesses could ultimately add to it.

This concern could reduce demand for the latest round of PPP funding, according to the New York Times, which cites new data from the Small Business Administration that shows that about 40% of the additional funding approved by Congress has not yet been distributed.

This IG report also documents other areas in which PPP has failed – notably in its ability to ensure that underrepresented people in business ownership, including people of color and women, have access to loans.

Access to PPP loans has been uneven, especially for businesses owned by women and minorities

Since its launch in April, PPP has faced problems such as technology snafus, access problems and loopholes for restaurant chains and hotels, which has led some of the smaller businesses to stop receiving support. Many large banks providing loans, such as Bank of America, for example, would only accept requests from existing customers.

Owners of under-represented businesses are more likely to miss out. According to CBS News, up to 90% of women and minority business owners were unable to participate in the first round of loans, in part because they were less likely to have existing relationships with these banks.

The IG report finds that the Small Business Administration’s lack of focus on prioritizing underserved communities may have contributed to these companies being excluded from the first round of funding. “Because SBA did not provide advice to lenders on prioritizing borrowers in underserved and rural markets, these borrowers, including rural, minority and female-owned businesses, may not have received loans as planned, “the report said.

He also notes that the SBA did not include standard demographic questions in the P3 request, making it more difficult for the agency to have a clear picture of the types of business owners who were able to receive loans.

This recent report is the latest of several that have highlighted major shortcomings in the PfP – but unlike some other critics of the program, the IG report offers recommendations on how the SBA can improve its implementation at to come up. Suggestions include: collecting demographics when companies complete the loan forgiveness documents and considering updating the requirements for the proportion of the loan that must be used on payroll.


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