A second round of $310 billion in funding for the Paycheck Protection Program (PPP)—the Small Business Administration's (SBA) emergency aid relief for small businesses—was authorized on April 24, 2020. The initial $349 billion of PPP funds was depleted within two weeks after the money was first made available on April 1st, with hundreds of thousands of loan applications left unprocessed. Even though PPP funds were intended to help small businesses hurt by the coronavirus (COVID-19), there was a lot of controversy about the number of big businesses—including many publicly traded companies—that obtained money during the first round of loan approvals.
Once the SBA receives loan applications from SBA-approved banks or lenders, the PPP funds are supposed to be disbursed on a first come first serve basis until they are depleted. Many bigger companies—with lines of credit and established relationships with SBA-approved banks—were able to get their loan applications processed quickly, meaning they were the first in line to get the limited PPP funds. This left smaller businesses, who were scrambling to get banks to approve their loans, at a disadvantage. By the time many of the smaller businesses were able to find a bank willing to process their loan, the PPP funds were gone.
To avoid shutting small businesses out, the second round of $310 billion includes $60 billion which is earmarked for applications processed through community banks, credit unions, and smaller lenders. These lenders are more willing to work with small businesses who don't have lines of credit or relationships with other banks. With this special allotment, Congress sought to ensure that more small businesses got access to the PPP funds, which they knew would not be sufficient to cover all the businesses seeking relief.
The SBA also implemented a new pacing system limiting the number of applications per hour that lenders could submit. This was to protect smaller institutions—and their small business customers—from getting blocked out of the system by bigger banks uploading thousands of applications per hour. By the time the SBA started accepting applications for the second round of PPP loans, lenders already had a huge backlog of applications waiting in the queue. There was concern that the bigger banks, with hundreds of thousands of such applications, would clog the SBA's computer system and once again block access for the smaller lenders with fewer applications. The pacing system was intended to even out the number of applications that lenders could submit per hour.
Within hours after the SBA started accepting applications, its computer system, E-TRAN, was overwhelmed. Throughout the day, the system crashed and many lenders—big and small—were blocked or unable to upload their loan applications. By the end of the first day, the SBA announced that it had processed more than 100,000 applications from more than 4,000 lenders.
There was a lot of criticism and negative publicity about bigger companies—including publicly traded companies—that were granted PPP loans in the first round of funding. The PPP was intended to help small businesses—defined as those with fewer than 500 employees—harmed by the coronavirus pandemic. However, because any business with fewer than 500 employees per location can apply for a PPP loan, restaurant chains like Shake Shack and Ruth’s Chris Steak House were able to obtain loans, as were a number of publicly traded companies and other big businesses like the Los Angeles Lakers. Many of these businesses returned the money after being criticized for taking limited resources away from small businesses, like gyms and hair salons, who don’t have other funding options or access to capital markets.
Treasury Secretary Steven Mnuchin assured borrowers that there would be stricter oversight of the loans in the future to make sure they go to small businesses. While there is nothing that prevents a publicly traded company or big business with fewer than 500 employees per location from applying for a PPP loan, the application includes a certification that the borrower does not have other sources of liquidity. Mnuchin said that the SBA will review loans over $2 million before they are forgiven to make sure that the borrower is in fact the type of small business that the PPP loans were intended to help through the COVID-19 crisis. Unfortunately, this type of review--after the loans are granted--won’t help preserve the limited pool of PPP funds that so many small businesses are so desperately trying to access.