The aim of the Paycheck Protection Program (PPP) has been to help relieve small businesses suffering from the economic impact of COVID-19 business lockdowns. After multiple rounds of federal funding that expired in August of 2020—but just renewed again on December 27th—how well has the the PPP serve minority businesses so far? According to some financial experts, community leaders, and even members of Congress: not well enough.
As of December 27, 2020, Congress has approved additional funds for the PPP. Fundbox is no longer accepting PPP applications, however, the SBA can help you find a PPP lender.
Minority businesses matter
According to the National Minority Supplier Development Council (NMSDC), there are more than 4 million minority-owned businesses, employing more than 2.2 million people and generating over $400 billion in annual revenue. The National Bureau of Economic Research reports that the coronavirus shutdown has hurt African American businesses the most among racial and ethnic groups in the U.S. There was a 41% decline in black-owned businesses from February to April, 2020. That was two months before this writing, and the economic impact still continues.
Getting the PPP to those who need it most
When its second round of PPP funding was signed into law in late April, nearly $60 billion was earmarked for small and medium sized financial institutions. However, the U.S. Inspector General’s report faulted the Small Business Administration’s initial guidance in fulfilling its promise to prioritize underserved communities for the PPP, writing, “These borrowers, including rural, minority and women owned businesses, may not have received the loans as intended.”
Without such guidance or accountability (and because demographic information is not collected as part of the PPP process, aside from the option to select Tribal business), there were few tools to measure or enforce how well the PPP supported these minority communities. So the SBA dedicated funds to small financial institutions in the hope of reaching small, rural and minority-owned businesses. Their policy was to divide them evenly between financial institutions with less than $10 billion in assets and those with $10 billion to $50 billion. These would include community banks, regional banks, credit unions.
The U.S. Treasury also improved the likelihood that PPP funds would be directed to smaller businesses more in need of assistance by adding the requirement that applicants certify in good faith that they had no additional sources of capital. This new stipulation works in the favor of minority-owned businesses and entrepreneurs, who have characteristically lower access to capital and credit. “Black entrepreneurs are nearly three times more likely as white entrepreneurs to have business growth and profitability negatively impacted by a lack of capital,” notes the U.S. Chamber of Commerce, who report that 70.6% of Black entrepreneurs rely on personal and family savings.
Support for sole proprietors
Funding resources for sole proprietors and independent contractors are especially critical, because minority business owners are less likely to employ workers. Statistics from the SBA show that 96% of black-owned businesses are non-employee, versus 79% of white-owned businesses. The term “paycheck” in the title of the PPP may have caused some confusion among both banks and business owners as to the eligibility of self-employed persons.
In April, 2020, the SBA and the U.S. Chamber of Commerce issued final guidance explaining how the PPP loan can work for sole proprietors and independent contractors. For most independent contractors, calculating your PPP borrowing limit is a 3-step process:
Find line 7 (gross income) on your 2019 IRS Form 1040 Schedule C (If you haven’t filed yet for 2019, go ahead and fill it out). If the amount on Line 7 is over $100,000, write $100,000. Effective March 8, 2021, most lenders will now accept line 7 (gross income instead of line 31, net income, as previously required).
Divide the amount from Step 1 by 12.
Multiply the amount from Step 2 by 2.5 (or 3.5 if your business is in the Food Services or Accommodations industry). For most borrowers, this will be your maximum PPP loan amount.
For more details, see the Self-Employed PPP post on the Fundbox blog.
Progress report on the PPP
A May 2020 survey by the Small Business Majority reported these findings on PPP applications up to May 27th:
63% of Black and Latino small business owners applied for a PPP loan (compared to 69% of all small businesses).
63% of those who applied were approved for financing (compared to 73% of all small businesses).
Nearly 30% of all respondents who did not apply for the PPP said that they did not seek financing because they were concerned the loan would not be forgiven.
19% said they were told (or believed) they would not qualify.
12% could not find a bank to apply for a PPP loan.
Another study by UNIDOS found an even greater divide in PPP applications, with minorities asking for less funding than other businesses—and receiving even less than they sought. According to the May 2020 report:
51% of Black and Latinx small business owners who sought assistance requested less than $20,000 in temporary funding from the federal government.
12% received the assistance they requested.
41% reported receiving no PPP funds.
The previously mentioned Small Business Majority study noted that many of those who secured a loan expressed concerns with the program, with more than 80% concerned about the rules around loan forgiveness and having their loan forgiven. 58% specifically reported finding it challenging to spend at least 75%* of the loan on payroll.
[*Note: With the recent passage of the Paycheck Protection Program Flexibility Act (PPPFA), this ratio of payroll/operating expenses has changed from 75%/25% to 60% payroll and 40% operating expenses to qualify for loan forgiveness. For details on these and other major changes to the PPP forgiveness rules, check out our article or podcast on PPP Loan Forgiveness.]
A better future for the PPP?
The potential remains for Congress to renew the PPP. If so, what can be done to help improve minority-owned small businesses access to these funds?
Signal-boost the PPP’s availability to sole proprietors. The SBA’s move to open up and clarify the PPP for sole proprietors and independent contractors was a good first step, but more education and promotion efforts would help self-employed business owners, particularly in minority communities, to take advantage of the program.
Identify and help promote the minority and community financial institutions (MDIs and CDFIs) as well as fintech lenders who are offering PPP loans. As the Small Business Majority revealed, 12% of businesses surveyed could not find a PPP lender. Adding to the difficulty of finding PPP lenders is the fact that 25% of US households (mostly minorities, and many of whom are self-employed) are either unbanked or underbanked, meaning they have only a basic checking/savings account or none.
Simplify and improve education and clarity about the application and forgiveness process. Based on previous surveys regarding experiences with the PPP (nearly one third did not apply because they did not understand forgiveness), one thing that could greatly help borrowers is to spread greater awareness and provide a much clearer understanding of the PPP rules for applications and forgiveness. Much has been learned by PPP lenders like Fundbox that can improve your success in applying for a PPP loan, including required PPP application documents.
Alternative Options for Small Business Owners
For business owners looking for support outside of the PPP, there may be other avenues worth pursuing. See our updated list of State-by-State COVID-19 Resources for Small Businesses. Beginning your search at a state level may help decrease competition to receiving funding. For example, there are programs specifically designed to aid minority-owned businesses in Iowa (Iowa Economic Development: Targeted Small Business Program) and New Jersey (New Jersey Economic Development Authority: Small Business Fund).
Opportunity Fund is a nationwide source of microloans (as well as PPP loans) for underserved small businesses, particularly those owned by low- and moderate-income immigrants, people of color, and women.
Another source for small business resources, including mentoring, is SCORE.org, for 500 years, America’s premier source of free business mentoring and education. Also look into the SBA’s Office of Advocacy resources list. Entrepreneurs, particular young minority business owners seeking advice or long-term consulting from volunteers in their respective fields, may find free mentoring through the Sky’s the Limit organization.
Whether you apply for a PPP loan or choose to take advantage of other available funding resources for small businesses, good luck, and stay safe.