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Did Modifications to the Paycheck Safety Program Enhance Entry for Underserved Companies?


Editors’ observe: When this put up was first revealed the x-axis labels on the ultimate chart had been incorrect. The chart has been corrected.  9:10 a.m. ET, July 6.

Prior analysis has proven that many small and minority-owned companies did not obtain Paycheck Safety Program (PPP) loans in 2020. To extend program uptake to underserved corporations, a number of modifications had been made to the PPP in 2021. Utilizing information from the Federal Reserve Banks’ 2021 Small Enterprise Credit score Survey, we argue that these modifications had been efficient in bettering program entry for nonemployer corporations (that’s, companies with no staff apart from the proprietor(s)). The modifications may additionally have inspired extra functions from minority-owned corporations, however they don’t seem to have diminished disparities in approval charges between white- and minority-owned corporations.

Modifications within the Paycheck Safety Program in 2021

Critics have cited varied causes for underserved corporations’ lack of entry to PPP funds. Some have faulted the intermediated nature of this system, and the ensuing incentives for banks to prioritize current debtors in addition to bigger corporations of their approval processes. Others have argued that sure program guidelines—particularly the requirement that nonemployer corporations calculate eligible mortgage quantities utilizing internet revenue (moderately than gross revenue)—had been particularly disadvantageous to the smallest corporations. Nonemployer corporations additionally had delayed entry to PPP on the onset of this system. For nonemployers and different small corporations, a lack of program consciousness and issues about eligibility for the mortgage and subsequent forgiveness doubtless acted as limitations to program take-up. Lastly, racial discrimination confronted by some candidates for PPP loans may additionally have performed a component.

In response to proof of underserved corporations’ lack of entry to PPP, Congress and the Small Enterprise Administration (SBA) applied a number of essential modifications previous to the 2021 spherical of PPP. As a part of the Financial Support Act of 2020, Congress pre-allocated giant quantities of PPP funds for companies situated in low- and moderate-income communities, these with at most ten staff, and first-time PPP debtors. The invoice additionally put aside funds for lenders who usually present credit score to underserved debtors, similar to Group Growth Monetary Establishments (CDFIs), Minority Depository Establishments (MDIs), small banks, and credit score unions. To successfully implement these and different modifications, the SBA instituted a two-day exclusivity window on the very begin of the 2021 program throughout which solely Group Monetary Establishments (CFIs) had been permitted to submit functions to the SBA.

To additional improve entry to PPP funds, the SBA and the Biden administration introduced extra modifications in late February. An important of those had been: (i) an unique, fourteen-day borrowing window for corporations with at most twenty staff; and (ii) permitting nonemployer corporations to base mortgage quantity calculations on gross revenue.

PPP Utility Take-up in 2021

Had been these initiatives efficient in rising software take-up by nonemployer corporations and small employer corporations? The SBA’s PPP reviews point out a transparent improve in funding for smaller companies within the 2021 section of the PPP. Nonetheless, it stays unclear whether or not this elevated take-up is pushed primarily by modifications in software conduct or by modifications in approval charges. Moreover, virtually 71 p.c of PPP debtors selected to not report race/ethnicity info on their PPP functions, making it troublesome to attract conclusions about PPP entry for minority-owned companies. To resolve these points, we flip to information from the Federal Reserve’s 2021 Small Enterprise Credit score Survey, which incorporates detailed demographic details about the homeowners of small companies.

Within the chart under, we study nonemployer software charges from 2020 and 2021, relative to the analogous charges for corporations with staff on payroll. Utility charges had been decrease throughout the board in 2021 than in 2020, however there was a a lot smaller drop for nonemployer corporations than for another measurement class of corporations. Furthermore, 36 p.c of 2021 nonemployer candidates had been first-time PPP candidates, in comparison with simply 12 p.c of 2021 employer candidates. Thus, this system modifications seem to have elevated software take-up by nonemployer corporations, with the caveat that employer corporations could have had a bigger drop in demand for PPP funds between 2020 and 2021 than did nonemployer corporations.

PPP Utility Charges by Agency Measurement

Supply: Federal Reserve Banks, 2021 Small Enterprise Credit score Survey.

Notes: Fielded September-November 2021. For respondents in every measurement group (the place measurement is set by variety of full- and part-time staff), the blue bars present the fraction of respondents who reported making use of for a PPP mortgage in 2020. Equally, the gold bars present the fraction of respondents who reported making use of for a PPP mortgage in 2021. Responses by nonemployer (employer) corporations are weighted on a wide range of agency traits as a way to match the nationwide inhabitants of nonemployer (employer) corporations. See the methodology part of the 2022 Report on Employer Companies for extra info.

The chart additionally means that initiatives focused towards small employer corporations had combined results. We don’t observe a transparent impact of the fourteen-day exclusivity interval for corporations with at most 20 staff, as software charges for corporations with 1-19 staff and with a minimum of 20 staff function related declines. Nonetheless, the pre-allocated funding for corporations with at most 10 staff could have inspired corporations to use: 19 p.c and eight p.c of corporations with 1-4 and 5-9 staff, respectively, had been first-time candidates in 2021, in comparison with simply 6 p.c and a couple of p.c for corporations with 10-19 and a minimum of 20 staff, respectively.

PPP Utility Take-up by Race and Ethnicity

We subsequent examine modifications in PPP software charges by proprietor race/ethnicity from 2020 to 2021. Within the following chart, we observe noticeably smaller decreases in software charges for Black- and Hispanic-owned companies than for white-owned companies. Certainly, the appliance charge for Black-owned companies exceeded that of white-owned corporations in 2021. Moreover, we discover that 33 p.c and 30 p.c of Black- and Hispanic-owned employer corporations making use of in 2021, respectively, had been first-time debtors, relative to simply 11 p.c of white-owned employer corporations.

PPP Utility Charges by Race/Ethnicity

Supply: Federal Reserve Banks, 2021 Small Enterprise Credit score Survey.

Notes: Fielded September-November 2021. For respondents in every Race/Ethnicity class, the blue bars present the fraction of respondents who reported making use of for a PPP mortgage in 2020. Equally, the gold bars present the fraction of respondents who reported making use of for a PPP mortgage in 2021. Race/ethnicity classes are mutually unique. Responses by nonemployer (employer) corporations are weighted on a wide range of agency traits as a way to match the nationwide inhabitants of nonemployer (employer) corporations. See the methodology part of the 2022 Report on Employer Companies for extra info.

PPP Approvals in 2021

Did the 2021 initiatives alleviate gaps in approval charges documented for the 2020 section of this system? Within the chart under, we plot the fraction of PPP candidates in every measurement class that efficiently obtained a minimum of some PPP funding. Nonemployer corporations are the one class for which the 2021 approval charge was increased than the 2020 approval charge. In distinction, approval charges throughout all different teams had been barely decrease in 2021 than in 2020. This means that, a minimum of for employer corporations, modifications made to the PPP in 2021 didn’t enhance the success of functions.

PPP Approval Charges by Agency Measurement

Sources: Federal Reserve Banks. 2021 Small Enterprise Credit score Survey.

Notes: Fielded September-November 2021. For respondents in every measurement group (the place measurement is set by variety of full- and part-time staff), the blue bars present the fraction of 2020 PPP candidates who reported receiving a PPP mortgage in 2020. Equally, the gold bars present the fraction of 2021 PPP candidates who reported receiving a PPP mortgage in 2021. Responses by nonemployer (employer) corporations are weighted on a wide range of agency traits as a way to match the nationwide inhabitants of nonemployer (employer) corporations. See the methodology part of the 2022 Report on Employer Companies for extra info.

Which modifications could have had uniquely optimistic, albeit small, results on approval outcomes for nonemployer corporations? The steerage permitting nonemployer corporations to calculate mortgage quantities utilizing gross revenue moderately than internet revenue doubtless performed a big position in rising approval charges. Moreover, nonemployer corporations making use of for PPP in 2021 had been extra doubtless than employer corporations to be making use of for first-draw loans, which didn’t require attestation and supporting documentation of a minimum of a 25 p.c drop in revenues in a minimum of one quarter of 2020 (relative to the identical quarter in 2019). Information articles have documented extra obstacles to getting second-draw loans (for instance, functions stalled when first-draw loans had been flagged by the SBA’s inner evaluation of the 2020 program) that will have disproportionately impacted employer corporations.

PPP Approvals in 2021 by Race and Ethnicity

Our remaining chart plots 2020 and 2021 approval charges by proprietor race/ethnicity. Inside-group approval charges are usually related between 2020 and 2021, additional supporting the concept that determinants of PPP approval outcomes had been largely unaffected by the 2021 modifications to the PPP. An essential exception is an virtually 9 p.c drop (from 74.1 p.c to 65.4 p.c) in approval charges for Black-owned employer corporations from 2020 to 2021. This exception is in line with the comparatively robust take-up of PPP functions by Black-owned employer corporations in that extra underserved corporations could have been much less prone to apply efficiently for PPP funds.

PPP Approval Charges by Race/Ethnicity

chart: ppp approved rates by race/ethnicity
Supply: Federal Reserve Banks, 2021 Small Enterprise Credit score Survey.

Notes: Fielded September-November 2021. For respondents in every race/ethnicity class, the blue bars present the fraction of 2020 PPP candidates who reported receiving a PPP mortgage in 2020. Equally, the gold bars present the fraction of 2021 PPP candidates who reported receiving a PPP mortgage in 2021. Race/ethnicity classes are mutually unique. Responses by nonemployer (employer) corporations weighted on a wide range of agency traits as a way to match the nationwide inhabitants of nonemployer (employer) corporations. See the methodology part of the 2022 Report on Employer Companies for extra info.

Closing Phrases

Our findings counsel that modifications made to the PPP in 2021 succeeded in rising credit score entry for nonemployer corporations. For minority-owned corporations, these initiatives seem to have improved software take-up, significantly for Black-owned employer corporations. Nonetheless, approval charge gaps between white-owned and Black-/Hispanic-owned corporations weren’t attenuated. Understanding the causes of persistent gaps in PPP approvals between employer and nonemployer corporations, in addition to between white- and minority-owned corporations, stays an essential avenue for future analysis.

Nathan Kaplan is a analysis analyst in Cash and Fee Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Photo: portrait of Claire Mills

Claire Kramer Mills is a supervisor and director of neighborhood growth evaluation within the Financial institution’s Communications and Outreach Group.

Asani Sarkar is a monetary analysis advisor in Non-Financial institution Monetary Establishment Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

The best way to cite this put up:
Nathan Kaplan, Claire Kramer Mills, and Asani Sarkar, “Did Modifications to the Paycheck Safety Program Enhance Entry for Underserved Companies?,” Federal Reserve Financial institution of New York Liberty Road Economics, July 6, 2022, https://libertystreeteconomics.newyorkfed.org/2022/07/did-changes-to-the-paycheck-protection-program-improve-access-for-underserved-firms/.

Associated studying:
Who Benefited from PPP Loans by Fintech Lenders? (Might 27, 2021)
Who Obtained PPP Loans by Fintech Lenders? (Might 27, 2021)
Small Enterprise Credit score Survey: 2021 Report on Employer Companies


Disclaimer
The views expressed on this put up are these of the writer(s) and don’t essentially mirror the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the duty of the writer(s).

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