“Some of the hardest hit areas—such as New York, New Jersey, Michigan, and Pennsylvania—are getting fewer loans than some Mountain and Midwest states on a per-small-business basis.”
The Trump administration’s small business coronavirus bailout funds have disproportionately flowed to states that have had smaller outbreaks, while some of the hardest hit areas in the nation are getting far fewer loans on a per-small-business basis, according to a new analysis by the Federal Reserve Bank of New York.
Fed economists Haoyang Liu and Desi Volker found that “some of the hardest hit areas—such as New York, New Jersey, Michigan, and Pennsylvania—are getting fewer loans than some Mountain and Midwest states on a per-small-business basis.”
New York State is the site of the nation’s worst coronavirus outbreak, with more than 335,000 confirmed cases of COVID-19 and more than 21,000 deaths, according to the state department of health. While New York has been hammered by the virus, less than 20% of small businesses in the state have been approved to receive loans under the Small Business Administration’s Paycheck Protection Program. Meanwhile, in Nebraska, more than 55% of small businesses are expecting PPP funding, even though the state has fewer than 6,800 cases and only 86 deaths related to the coronavirus,
Michigan and Pennsylvania, two of the hardest-hit states in the nation, have also seen fewer than one-third of their small businesses receive PPP funding. Laurel Hess, the owner of Jungle Java, a children’s play center in Canton, Michigan, applied for the first round of PPP funding, which included $349 billion in forgivable, government-guaranteed loans. But she didn’t hear back and the program ran out of funds in less than two weeks, leaving more than 80% of applicants without funding.
“Not one single promise of ‘We’re going to help you out’ has materialized, even though we’ve been on top of every application from the minute they opened up,” Hess told COURIER in April.
Hess is one of countless small business owners who are struggling to survive during the coronavirus. In 2016, the most recent year in which the government has released estimates, there were about 31 million small businesses in the United States, employing nearly 60 million workers.
Since the coronavirus has upended their livelihoods, these business owners have been desperately trying to get help through the PPP, but the program has been far from equitable. Black and Latino business owners have been largely left out of the program, and as the Fed analysis shows, many business owners who have not received PPP loans disproportionately reside in the hardest hit states.
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In their report, Liu and Volker found that there’s actually a “negative relationship between COVID-19 cases per capita and the share of small firms getting PPP funding, suggesting that credit is misallocated,” meaning businesses in states with smaller outbreaks were actually more likely to get loans approved. They did note, however, that this state-level relationship is not statistically significant if New York and New Jersey are excluded.
The analysis also found no “statistically significant” relationship between states whose economies have been hit the hardest and have the highest percentage of unemployment claims and the likelihood of businesses getting a PPP loan. In both Michigan and Pennsylvania, for example, more than one-fourth of the state’s workforces have filed for unemployment, yet that hasn’t correlated to more loans.
Liu and Volker cited several factors for these discrepancies, including banks prioritizing relationships with existing clients as well as the PPP’s reliance on community banks and regional institutions over larger banks, which led to businesses in smaller states with more community banks getting more funds.
Economists at the University of Chicago and M.I.T. economists came to a similar conclusion, finding that the 20 largest banks—which accounted for 41% of the nation’s small business loans prior to the coronavirus—issued only 20% of loans in the PPP’s first round. They also found that the four largest banks in the U.S. (JPMorgan Chase, Bank of America, Wells Fargo, and Citibank), alone accounted for 36% of the nation’s total small business loans, but only 3% of PPP loans.
The reluctance of big banks to provide loans was driven in part by technical issues, bureaucratic delays, questions about what costs the loan would cover, and confusing bank guidelines about who can apply. The lack of clear rules and a smooth rollout contributed to capital flowing to states that needed it less.
“These banks were disproportionately located in areas that received less PPP funding,” they wrote, articulating the discrepancy.
The Trump administration’s failure to implement strong and clear rules for the program also meant funds frequently flowed to large corporations, as nearly 400 publicly traded companies received almost $1.3 billion in loans, according to an independent analysis of financial record filings. The Washington Post found that several companies who received loans had more than 500 workers—the limit allowed by the program—while others were wealthy enough to pay executives $2 million a year or more.
In fact, one of the largest beneficiaries of the PPP program was a group of hotel companies chaired by Monty Bennett, a Dallas-based Republican donor, that received more than $70 million in loans. Ashford Inc., which oversees a group of hotels and resorts, used more than 100 filings to request $126 million in loans. They ultimately received $76 million.
Faced with a wave of backlash from the general public, at least 40 publicly traded companies, including Ashford, have returned PPP loans so far, and many others are being pressured to do so by lawmakers and government officials. The Trump administration has since changed the program’s rules and Treasury Secretary Steven Mnuchin has threatened publicly traded companies with criminal penalties if they don’t return funds they received.
Congress has also since approved a second round of $310 billion in loans, but those funds are drying up quickly, too. Between April 27—when lending resumed—and May 1, more than $175 billion in loans were approved, according to the U.S. Treasury Department.
Things have begun to equalize in the second round as well, as big banks have ramped up their lending and harder-hit states like California and New York have received a larger share of funds in the second round, according to data from the Treasury Department. But discrepancies still remain. A New York Times analysis found that in North Dakota, the total value of loans per small business employee in the state is $8,120. In Pennsylvania, it’s only $6,120.
Other issues remain, too. PPP was intended to help small businesses keep workers on payroll, and for the loans to be forgivable, 75% of the funds have to be spent on payroll for an eight-week period in April, May, or June. But these strict rules have also made it harder for many businesses to utilize the loan effectively.
Many of the businesses suffering the most—such as restaurants and service providers—have already laid off workers and don’t know if or when their sales will return. This has forced them to either spend 75% of the loan on payroll, even if they’re not open or open at a limited capacity—effectively wasting the money—or preserve the funds and fail to qualify for loan forgiveness.
Hess, who did receive a $25,000 PPP loan in the second round, or about two months of payroll, is in this position. Her business mostly employs high school students part-time and spending 75% of her loan on payroll when her business is still closed doesn’t make sense to her.
“In our situation, we have a desperate need to pay rent,” she said. “We would like to spend it all on rent, not just 25% and would like for it then to be forgiven.” Under the current rules of the PPP, if Hess spends it on rent, the loan is no longer forgivable.
Hess and other business owners want the Trump administration to change the terms of the program to make it more flexible and make forgiveness easier to attain, lest they be stuck with mountains of debt. In fact, Paul Merski, a lobbyist for the Independent Community Bankers of America, told the New York Times that he believes many borrowers could be stuck repaying the loans because of the PPP’s complexity.
“Virtually every small business borrower believes that this will be forgiven,” Merski told the Times. “They took it out assuming that it would be a grant but it’s not—you have to abide by very complex rules and regulations on how this is spent.”
If they don’t, the PPP could become more of an anchor than a lifeline.
The economists at the University of Chicago and MIT cited this rule as a factor in which types of businesses benefited most from the loans. “Because PPP support is more generous for firms that maintain their payroll, the program likely appealed more to firms with smaller reductions in their business,” they wrote.
They also concluded that the PPP, which was intended to serve as a form of “social insurance to support the hardest hit areas” instead served as a cash grab for “less affected firms.”