Small Enterprise Entry to PPP Loans: Key to Success
By Neil Hare and Mark Madrid
When small businesses try to access the newly approved $ 284 billion under the Paycheck Protection Program (PPP), they should fall back on the lessons learned and the many positive stories that surfaced in the first round of PPP in 2020 . The main lesson is that the small business companies that have successfully obtained and gained access to PPP loans made use of strong resource networks and were better prepared to apply for, obtain and track loans and seek full forgiveness. The good news is that these networks are available to all small businesses.
While the design and execution of PPP certainly had its problems, it largely achieved what it set out to do: provide funding for companies with fewer than 500 employees to keep those employees on their payroll for an eight week period. In March 2020, when Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which approved the PPP program, the federal government estimated that the Covid-related shutdown would only take two months – wishful thinking. When PPP closed on August 8, 2020, 5.2 million loans were granted for an estimated $ 525 billion, with $ 130 billion remaining in the program.
However, aside from the shortcomings of PPP, it found that companies that were willing to document their payroll, income and expenses, and that already had personal relationships with lawyers, accountants and bankers, applied for and received the money. For the most part, companies that didn’t even apply. And like many factors in this pandemic, women-owned and minority-owned companies and companies in economically disadvantaged areas were the least networked and prepared and were therefore receiving disproportionately low numbers of PPP funding.
Critical Research on US Latino Companies
This fact was documented in a research report funded by the Latino Business Action Network (LBAN) carried out by the Stanford Latino Entrepreneurship Initiative (SLEI) at the Stanford Graduate School of Business. LBAN drives the growth and scalability of Latinx entrepreneurs through the research, training and development of a national ecosystem – offering both “what you should know” and “who you should know”. The study surveyed 7,000 (total) Latin American owned companies (LOBs) and white owned companies (WOBs) with at least one employee about the impact of Covid on their businesses and their ability to access PPP funds.
Most of the results on how the two groups felt about the pandemic last March were not surprising. Both groups forecast roughly equal numbers that Covid would lead to declines in sales, store closures, lost productivity, layoffs and supply chain bottlenecks. A nearly identical number, 82% of LOBs and 81% of WOBs, said they had been negatively affected by the Covid-19 pandemic, and an identical number (33%) of both groups applied for PPP loans.
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Regarding barriers to access to PPP finance, a comparable number of LOBs and WOBs reported lack of a banking relationship and technical issues such as: B. Problems submitting documents through websites. The gap widened when there was a lack of application guidelines (45% of LOBs versus 37% of WOBs) and required application documents (22% of LOBs over 15% of WOBs). Despite these relative similarities, the WOBs were able to overcome these difficulties to obtain PPP loans at more than double the rate of LOBs.
Next, the study looked at scaled-up companies that have gross annual sales of $ 1 million or more and that applied for PPP loans. The gap was largest in this group: 54% of WOBs said they had received all of the PPP funding they applied for, compared to only 20% of LOBs.
The real eye-opener, however, came when the study superimposed scaled LOBs that had completed the Stanford Latino Entrepreneurship Initiative’s Education Scaling program over the other two groups in terms of applying for and accessing PPP loans. An overwhelming 82% of this group received PPP loans versus 18% of scaled LOBs and 28% of scaled WOBs.
Peer-to-peer and resource networks are improving access to PPP loans
A key focus of the Stanford Latino Scaling Program is to give businesses the ability to scale over the powerful networks that have been built around the program. The SLEI study shows that companies, Latinx or others that are part of established networks are more resilient in times of crisis like Covid because they have the trusted contacts and resources necessary to survive. To further document this fact, it is helpful to look back at the requirements of the PPP program – largely the same as for the newly passed PPP Aid Act – and how important an established network was in applying for and receiving funds.
Since the PPP intended to keep employees on payroll for approximately two months, the loan amount was calculated by documenting a month of payroll in 2019 times 2.5. Borrowers would apply for this amount through a lender. In order for borrowers to seek forgiveness and receive what would turn the loan into a grant, they would need to use at least 60% of that money on payroll and the rest on a limited number of expenses: rent, utilities, mortgages, and interest on existing debt. Borrowers were required to track the appropriate use of this money over a period of eight to 24 weeks and then ask for forgiveness.
Applicants, including sole proprietorships and independent contractors, were required to provide their lender with documentation relating to their 2019 payroll, income statement and bank statements, as well as a two-year tax return. This led to the widespread discrepancy among companies that were able to quickly and securely apply for and gain access to PPP loans, efficiently track them, and seek forgiveness without the fear of acquiring unwanted debt. Companies unprepared and unclear about the regulations feared not only the acquisition of debt, but also civil or criminal penalties for misleading the government through inaccurate reporting of claims.
Establishment of banking, accounting, legal and salary relationships
We recommend all companies, whether scaled or not, to establish the following relationships in order to take advantage of the new PPP program and ensure resilience in the future:
Companies that had a personal relationship with someone in their bank were able to understand the program and required documentation. In many cases, this relationship has meant speeding up applications to the SBA and getting a loan number within hours. This was especially important in the first round when money was running out.
It was and is clear that most business owners don’t have such a personal relationship. Unrelated companies have faced long customer service waits, confusion, late applications, missed deadlines, and, for many, the decision not to apply. The lack of a banking relationship was even greater in minority communities that have no banking connections, are under-banked, or have historically distrusted bankers.
Bookkeeping and legal relations
Many small businesses were out of date on their tax returns a few years later. For many, this made applying for PPP loans impossible or very difficult as documenting 2019 income and expenses was time-consuming. Most small businesses don’t have in-house accountants, accounting software, finance managers, or CPAs. Likewise, most small businesses do not have access to a lawyer who can advise them on the legal parameters surrounding PPP.
Payroll Provider Relationship
Companies that do payroll through a payroll clerk were able to quickly and easily document a month of payroll for 2019 when applying for access to PPP loans, and now easily document the use of PPP funds using reports, which were specially created for the award process. Of course, for many small businesses, sole proprietorships, and independent contractors, payroll is not handled through a vendor, which makes documenting payroll cumbersome, difficult, and time-consuming.
Better Access to PPP Loans: Lessons Learned
The ongoing Covid-19 pandemic brought some good news and important lessons. For small businesses, the most important lesson is to have access to trusted networks to answer questions in real time. To have pity; Referring accountants, lawyers, and bankers; and provide moral support – makes all the difference to survive, persist and thrive.
The good news is that these networks already exist and any business, whether minority, women, or white, should make its first decision in 2021 to use the services it offers. These networks include influential organizations such as LBAN, Chambers of Commerce, Trade Associations, Women’s Business Centers, SCORE, and Small Business Development Centers.
The new PPP loans and other assistance programs will remain complex. New regulations change the game regularly, making these networks more important than ever. Now is the time for the American business community to work together to provide real-time solutions that will help our small businesses navigate the Covid-19 pandemic and emerge stronger than ever on the other side.
RELATED: New Guidelines for the Next Round of PPP Lending: An Overview for Small Businesses
About the authors
Neil Hare, attorney and president of Global Vision Communications, specializes in small business policy and advocacy. Follow him on Twitter @nehare and LinkedIn.
Mark Madrid is the Chief Executive Officer of the Latino Business Action Network and a national champion of Latinx business in the United States and Puerto Rico. Follow him on Twitter @madridinspire and LinkedIn.
SLEI (Stanford Latino Entrepreneurship Initiative) is a research and educational collaboration between Stanford University and the Latino Business Action Network.