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


Editors’ observe: When this publish was first revealed the x-axis labels on the ultimate chart have 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 didn’t obtain Paycheck Safety Program (PPP) loans in 2020. To extend program uptake to underserved companies, a number of modifications have been made to the PPP in 2021. Utilizing knowledge from the Federal Reserve Banks’ 2021 Small Enterprise Credit score Survey, we argue that these modifications have been efficient in enhancing program entry for nonemployer companies (that’s, companies with no staff aside from the proprietor(s)). The modifications might also have inspired extra functions from minority-owned companies, however they don’t seem to have diminished disparities in approval charges between white- and minority-owned companies.

Adjustments within the Paycheck Safety Program in 2021

Critics have cited varied causes for underserved companies’ 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 companies of their approval processes. Others have argued that sure program guidelines—particularly the requirement that nonemployer companies calculate eligible mortgage quantities utilizing web revenue (reasonably than gross earnings)—have been particularly disadvantageous to the smallest companies. Nonemployer companies additionally had delayed entry to PPP on the onset of this system. For nonemployers and different small companies, a lack of program consciousness and issues about eligibility for the mortgage and subsequent forgiveness possible acted as boundaries to program take-up. Lastly, racial discrimination confronted by some candidates for PPP loans might also have performed an element.

In response to proof of underserved companies’ lack of entry to PPP, Congress and the Small Enterprise Administration (SBA) applied a number of vital modifications previous to the 2021 spherical of PPP. As a part of the Financial Help Act of 2020, Congress pre-allocated massive quantities of PPP funds for companies positioned 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 sometimes present credit score to underserved debtors, equivalent 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) have been permitted to submit functions to the SBA.

To additional enhance entry to PPP funds, the SBA and the Biden administration introduced extra modifications in late February. A very powerful of those have been: (i) an unique, fourteen-day borrowing window for companies with at most twenty staff; and (ii) permitting nonemployer companies to base mortgage quantity calculations on gross earnings.

PPP Software Take-up in 2021

Had been these initiatives efficient in growing utility take-up by nonemployer companies and small employer companies? The SBA’s PPP studies point out a transparent enhance in funding for smaller companies within the 2021 section of the PPP. Nevertheless, it stays unclear whether or not this elevated take-up is pushed primarily by modifications in utility habits or by modifications in approval charges. Moreover, nearly 71 % of PPP debtors selected to not report race/ethnicity data on their PPP functions, making it tough to attract conclusions about PPP entry for minority-owned companies. To resolve these points, we flip to knowledge 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 utility charges from 2020 and 2021, relative to the analogous charges for companies with staff on payroll. Software charges have been decrease throughout the board in 2021 than in 2020, however there was a a lot smaller drop for nonemployer companies than for another measurement class of companies. Furthermore, 36 % of 2021 nonemployer candidates have been first-time PPP candidates, in comparison with simply 12 % of 2021 employer candidates. Thus, this system modifications seem to have elevated utility take-up by nonemployer companies, with the caveat that employer companies might have had a bigger drop in demand for PPP funds between 2020 and 2021 than did nonemployer companies.

PPP Software Charges by Agency Dimension

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) companies are weighted on a wide range of agency traits in an effort to match the nationwide inhabitants of nonemployer (employer) companies. See the methodology part of the 2022 Report on Employer Companies for extra data.

The chart additionally means that initiatives focused towards small employer companies had combined results. We don’t observe a transparent impact of the fourteen-day exclusivity interval for companies with at most 20 staff, as utility charges for companies with 1-19 staff and with at the very least 20 staff characteristic comparable declines. Nevertheless, the pre-allocated funding for companies with at most 10 staff might have inspired companies to use: 19 % and eight % of companies with 1-4 and 5-9 staff, respectively, have been first-time candidates in 2021, in comparison with simply 6 % and a pair of % for companies with 10-19 and at the very least 20 staff, respectively.

PPP Software Take-up by Race and Ethnicity

We subsequent research modifications in PPP utility charges by proprietor race/ethnicity from 2020 to 2021. Within the following chart, we observe noticeably smaller decreases in utility charges for Black- and Hispanic-owned companies than for white-owned companies. Certainly, the applying charge for Black-owned companies exceeded that of white-owned companies in 2021. Moreover, we discover that 33 % and 30 % of Black- and Hispanic-owned employer companies making use of in 2021, respectively, have been first-time debtors, relative to only 11 % of white-owned employer companies.

PPP Software 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) companies are weighted on a wide range of agency traits in an effort to match the nationwide inhabitants of nonemployer (employer) companies. See the methodology part of the 2022 Report on Employer Companies for extra data.

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 at the very least some PPP funding. Nonemployer companies are the one class for which the 2021 approval charge was greater than the 2020 approval charge. In distinction, approval charges throughout all different teams have been barely decrease in 2021 than in 2020. This means that, at the very least for employer companies, modifications made to the PPP in 2021 didn’t enhance the success of functions.

PPP Approval Charges by Agency Dimension

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) companies are weighted on a wide range of agency traits in an effort to match the nationwide inhabitants of nonemployer (employer) companies. See the methodology part of the 2022 Report on Employer Companies for extra data.

Which modifications might have had uniquely optimistic, albeit small, results on approval outcomes for nonemployer companies? The steerage permitting nonemployer companies to calculate mortgage quantities utilizing gross earnings reasonably than web revenue possible performed a big function in growing approval charges. Moreover, nonemployer companies making use of for PPP in 2021 have been extra possible than employer companies to be making use of for first-draw loans, which didn’t require attestation and supporting documentation of at the very least a 25 % drop in revenues in at the very least 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 have been flagged by the SBA’s inner evaluate of the 2020 program) which will have disproportionately impacted employer companies.

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 comparable between 2020 and 2021, additional supporting the concept that determinants of PPP approval outcomes have been largely unaffected by the 2021 modifications to the PPP. An vital exception is an nearly 9 % drop (from 74.1 % to 65.4 %) in approval charges for Black-owned employer companies from 2020 to 2021. This exception is in step with the comparatively sturdy take-up of PPP functions by Black-owned employer companies in that extra underserved companies might 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) companies weighted on a wide range of agency traits in an effort to match the nationwide inhabitants of nonemployer (employer) companies. See the methodology part of the 2022 Report on Employer Companies for extra data.

Last Phrases

Our findings counsel that modifications made to the PPP in 2021 succeeded in growing credit score entry for nonemployer companies. For minority-owned companies, these initiatives seem to have improved utility take-up, significantly for Black-owned employer companies. Nevertheless, approval charge gaps between white-owned and Black-/Hispanic-owned companies weren’t attenuated. Understanding the causes of persistent gaps in PPP approvals between employer and nonemployer companies, in addition to between white- and minority-owned companies, stays an vital 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 group 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 right way to cite this publish:
Nathan Kaplan, Claire Kramer Mills, and Asani Sarkar, “Did Adjustments 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 publish are these of the creator(s) and don’t essentially replicate 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 creator(s).



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