Two years later, was PPP worth it? – Forbes Advisor
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In addition to the public health threat posed by Covid-19, many small business owners have faced a tough decision during the pandemic: downsize, go into debt, or shut down permanently. Thanks to the CARES (Coronavirus Aid, Relief and Economic Security) Act, the Paycheck Protection Program (PPP) has offered business owners a lifeline in the form of forgivable loans to cover payroll and weather the economic storm of Covid.
And although the PPP ended on May 31, 2021, many small businesses and lenders are still feeling the effects two years later. Many business owners credit PPP with keeping their doors open, but the program was riddled with fraud and the Department of Justice (DOJ) is still working through a backlog of potential fraud cases resulting from the hasty execution of the program. program. Additionally, the slow write-off of loans has resulted in a lingering debt of around $28 billion. Still, many lenders praise the PPP as a success.
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What the PPP has accomplished
Overall, the companies have received more than $800 billion in PPP funds over three funding rounds, with borrowers hailing from all 50 U.S. states and territories. The majority of 2021 funds have been extended to small businesses with fewer than 10 employees, with around 90% of loans approved being $50,000 or less. A working paper published by Harvard Business School concluded that PPP loans lead to a 14% to 30% increase in the probability of a firm’s survival.
Lenders involved in the program generally agree that the PPP provided much-needed funds to small businesses at a time when fear and anxiety were high. Chris Hurn is the founder and CEO of Fountainhead Commercial Capital, the nation’s sixth most active PPP lender. Fountainhead has funded more than 287,700 loans, totaling $4.72 billion and saving approximately 430,000 American jobs.
Hurn, like many commercial lenders, believes the program has had an impressive and significant impact on small business owners and the economy despite fraud issues. “It was the proverbial build of the plane after jumping off the cliff in many ways,” Hurn explained. “I think the program was a success. It is unfortunate that so many headlines are about fraud and abuse.
How PPP Funds Were Used
The PPP is estimated to have saved millions of American jobs, although the exact number varies widely by methodology. Likewise, there has been speculation over whether the PPP loans actually kept employees on the payroll – or just subsidized businesses that might have stayed open without the loans.
It is estimated that only about a quarter of the $800 billion in PPP funds protected paychecks that would otherwise have been lost. Furthermore, Federal Reserve data reveals that nearly half of the 77% of companies that received all the money they asked for still reduced the number of employees on the payroll.
Some experts like John Friedman of Brown University estimate that only 1.5 million jobs were saved in the first four months of the PPP; in contrast, the Trump administration’s Michael Faulkender says the program saved more than 18 million jobs in its first months.
PPP loan forgiveness
Beyond providing immediate financial support, the PPP aimed to help struggling businesses by offering loan forgiveness to borrowers who used at least 75% or 60% of payroll funds, depending on the funding round. According to data from the U.S. Small Business Administration (SBA), about 94% of PPP loans that were approved in 2020 had been canceled by December 2021. Overall, about $28 billion of all PPP loans remain unforgivable in February 2022, according to analysis by Bloomberg News. suggests.
However, Miami Herald reports found fintech Kabbage (now owned by American Express) only wrote off about 54% of the PPP loans it approved in 2020. US Census Bureau and SBA also reveal a downward trend in majority black and majority Hispanic regions of the country.
To apply for a discount, borrowers must first determine if their lender participates in the direct discount. Borrowers with participating lenders can apply for forgiveness online through the SBA PPP Direct Forgiveness Portal; all other borrowers must apply for forgiveness through their lenders.
Hurn said her company’s extensive outreach activities have so far resulted in the cancellation of around 80% of the PPP loans it has facilitated. He thinks the SBA’s online forgiveness portal is quick and easy to use, but many PPP borrowers are overwhelmed, short on time, and can be intimidated by the forgiveness process; others may not be eligible depending on how the funds were used. It’s also possible, he said, that some lenders weren’t as vigorous in their outreach efforts because of a lack of incentive to cancel loans.
PPP loan fraud
Fraudulent loan applications have also been an ongoing concern since the inception of the PPP. Because the program was larger than traditional SBA loan offerings, administration was difficult, and the need to fund loans quickly put even more pressure on lenders and the SBA. As a result, more than two million loans were eventually flagged for potential fraud issues ranging from misrepresentation and loan stacking during the application process to misuse of funds and false certification of forgiveness.
The DOJ has responded to these issues by bringing hundreds of criminal cases against suspected fraudsters, totaling up to $80 billion, or 10% of PPP funds. Although it is too late to change the initial administration and application requirements of the PPP, the overall success of the program may ultimately depend on the DOJ’s ability to convict fraudsters and recover funds.
The size of the PPP and the speed with which it was administered reduced the level of vetting of applicants. “A lot of this salacious fraud wouldn’t have happened if they had done one thing at the very beginning,” Hurn said – the fraud could have been limited by requiring verification of tax documents. According to Hurn, this process “would have eliminated 98% or 99% of frauds where the information was falsified or the loan amount was incorrect”.
While this took too long to be feasible under the PPP, these issues underscore the need for more streamlined verification processes between the IRS and SBA in the future.
What’s next for the PPP
At the end of the PPP forgiveness period, many lenders find themselves with loans to borrowers who did not apply for or are not eligible for forgiveness. Beginning in July 2021, these lenders were given the opportunity to apply for the SBA’s Collateral Purchase Program to offset ineligible loans. The next wave of the collateral purchase program is expected to begin this summer for new PPP loans not forgiven this spring.
In this phase of the program, lenders request payment against the SBA guarantee and must demonstrate compliance with SBA loan authorization, SBA requirements, and prudent lending practices.
Given the volume of loans not yet canceled, Hurn suspects this will be the next shoe to drop, with each application taking about 15 or 20 minutes for lenders to submit and the same time for SBA processing. While this may not seem like a long processing time, it can put a substantial strain on SBA resources when extrapolated over the billions of dollars in PPP loans that have yet to be forgiven.
In some ways, the collateral purchase program signals the beginning of the end of PPP loan administration for lenders, allowing them to get back to business as usual.
Was the PPP a success?
Two years later, many believe the PPP has been a success. Despite problems with fraud and the ongoing challenges posed by loan forgiveness, the program has helped millions of small business owners stay in business and prevented further panic in an already anxious time.