How Effective Was the PPP?
A Study of Small Business
The Paycheck Protection Program was intended to help small businesses weather the economic downturn of COVID-19. But how effective was it in addressing the needs of American small business owners?
The Paycheck Protection Program (PPP) was signed into law as part of the CARES Act on March 27, 2020. Since then, the SBA has reported over 7 million approved loans distributing more than $687 billion dollars making it one of the largest and farthest reaching business relief programs in US history.
Since the PPP was announced, our teams at Bench have been assisting businesses with understanding the PPP and EIDL. We provided free consultations and a comprehensive set of resources dedicated to help business owners navigate the process of receiving the relief funding. In addition, our bookkeepers worked directly with thousands of our clients to help them complete their loan applications. These businesses we spoke with were telling a different story about the programs.
Some applicants were frustrated to find out they were ineligible, barred from the relief they badly needed. Others opted not to apply, concerned about whether their loan would be forgiven leaving them with even more debt during a pandemic.
We wanted to know whether the PPP was truly effective in helping out American small businesses. So we went to the source.
We reviewed a subset of around 10,000 small businesses using Bench in 2020 and still in operation in 2021. The goal: to find out how many received COVID relief, whether it was enough, and how much it impacted them.
Who received PPP and EIDL loans
In May 2020, the National Federation of Independent Business (NFIB) Research Center released a survey to its members. The results showed 80% of respondents applied for a PPP loan and 90% had received approval. This painted an optimistic picture that the majority of businesses received COVID relief in the thick of the pandemic.
Our findings said otherwise. A staggering 62% of the businesses we surveyed received no form of funding through either the PPP or EIDL.
Percentage of businesses who received financial relief in 2020
17% of surveyed businesses received a PPP loan, 10% received the EIDL and a further 10% received both
62% of businesses received no financial relief funding at all.
Who received relief funding by industry
We broke our data down to see if industries most affected by COVID received a greater proportion of relief funds.
Hard hit industries like gyms and restaurants were above the average in how much relief they received. Of the bars, restaurants, gyms, and fitness centers we looked at, 50% of them received some form of COVID relief. While these sectors were successful relative to other sectors in accessing relief funds, this still means half of businesses in these substantially impacted sectors received no funding.
Receiving the least amount of relief are tech-forward businesses. E-commerce, software, and web content businesses were likely less affected by lockdown measures imposed upon brick-and-mortar stores and might, in fact, have seen a boost in business as the economy moved online to adapt. Perhaps that’s why fewer of these businesses opted to take advantage of the relief programs. At least 70% of businesses in these less affected industries received no funding at all.
This shows that despite the many benefits of the PPP and EIDL programs, many businesses did not receive relief. This could potentially be because they were ineligible, incorrectly believed they were not eligible, did not need the funding, or got stuck in the bank’s approval process.
Who received relief by business size?
A narrative that came out in the initial months of the PPP was that larger businesses were ultimately getting the bulk of the funding. Even New Age Beverages Corporation—makers of Nestea and valued at nearly $140 million—took a $6.8 million dollar loan. SBA data released late last year suggests that a quarter of the PPP funding in 2020 went to the largest 1% of borrowers. But was it also the case that larger businesses were more likely to access PPP funds?
According to the businesses we surveyed, it was.
To determine business size, we used annual expenses as an indicator of the scale of business operations (i.e. the more money spent on expenses, the larger the business). Using this method, we see that larger businesses were more likely to receive a PPP loan. More than 60% of the businesses we looked at with over $500,000 in annualized expenses received a PPP or EIDL loan. Compare this with smaller businesses with $50,000 or less in annualized expenses where only 20% received a PPP or EIDL loan.
80% of these smaller businesses received no funding at all.
Why did smaller-sized businesses receive less financial relief?
The reason that smaller businesses received less financial relief could be because they had low to no payroll costs. This would mean they were only eligible for a small loan amount (if eligible at all) possibly making applying not worth the hassle.
It also raises the question of whether larger businesses have greater resources to dedicate to understanding the PPP and submitting an application. It stands to reason that a smaller, one person operation didn’t feel they had the time to dedicate to applying for a PPP loan and, if they received one, understanding the forgiveness rules to ensure they get it fully forgiven.
What has been done to help smaller-sized businesses access funding?
In late February, President Biden made a change to help businesses that might have belonged to this group. It allowed self-employed individuals who filed a Schedule C to include their gross income as a payroll cost. For businesses that weren’t running payroll and having low to no profit in 2019 or 2020, this made a huge impact on how large of a PPP loan they were eligible for. But this change didn’t come into effect until March 3, 2021—almost a full year after the program opened up.
How prevalent is loan forgiveness
At the time of the writing of this report, approximately 6% of the businesses we looked at that received PPP loans had received forgiveness. It’s possible that with the changes in forgiveness rules, businesses were holding off on applying for forgiveness until there’s consistency in the process.
We expect this number to increase significantly in April when many loans will reach the end of their 10-month deferred payment period. Then businesses will have to start making loan payments if they don’t receive full forgiveness.
But this will also put an administrative burden on the lenders and SBA who will have to process these forgiveness applications. With so many businesses waiting to apply for forgiveness, a large influx of applications could slow down processing times leaving borrowers in the dark on their loan forgiveness status.
The good news is that of the businesses that applied for forgiveness, 72% received forgiveness on the entire PPP loan. Only 16% of those that applied received forgiveness on less than 90% of their PPP loan. We only expect these numbers to increase as the forgiveness process has been made easier in 2021. For example, businesses with loans of $150,000 or less now have a simplified forgiveness form.
How important were PPP loans to their recipients
It’s difficult to say exactly how important a PPP loan is to a business. To measure this, we looked at the PPP loan as a percentage of the business’s total annualized expenses. The reason being the greater the percentage of total expenses covered by the loan, the more “impactful” a PPP loan was. We broke this data out by industry type again to see which industries received the most impactful PPP loan amounts.
Payroll intensive businesses in hard hit industries received the largest PPP loans relative to their annual expenses. Arts and entertainment came in first with PPP loan amounts of around 12.5% of their annual expense levels. Restaurants and bars, two business types that struggled to stay open amidst the pandemic, saw PPP loan amounts of almost 10% their annual expenses.
Surprisingly near the bottom was retail stores whose PPP loan amounts covered just 3% of their annual expenses. These are businesses whose revenues saw big declines as in person shopping became less viable. Retail stores also saw a massive decline in employment in 2020 despite the PPP intending to protect paychecks.
How did spending change in 2020
We wanted to understand whether the pandemic and PPP affected business spending in 2020. When looking at the top 10 expenses (and 4 additional expenses of interest) from the businesses we surveyed, the impact of the PPP is immediately evident.
In 2020, we saw salaries and wages climb to the top expense category overtaking contractor costs. Because the PPP loan only covers salaries and wages, not contractor costs, it’s possible businesses cut down on the amount spent on contract labour. As a result of the PPP, it appears that businesses moved towards using more labor on payroll.
Rent expenses dropped from third to the fifth top expense. Despite rent being a PPP covered expense, many businesses still moved away from having a physical location.
The impact on restaurants is also shown in the decline of spending on business meals. With business meals being 100% deductible in 2021 and 2022 and vaccines being distributed, we expect to see spending at restaurants get back to normal levels.
Looking back at 2020, it’s clear that the PPP had its challenges in reaching the intended demographic of small businesses in America. Larger businesses had the best access to relief funds. This was likely a result of payroll costs being an eligibility requirement. These businesses also have more resources to dedicate to applying for funding and understanding the program requirements.
There’s also positives to be found when assessing the recipients of relief by industry type. Businesses in industries that were less affected by the pandemic proportionally received less relief funds in the form of the PPP and EIDL. This suggests some businesses opted out of a relief opportunity if they don’t believe they truly need the funds.
We’re hopeful the changes introduced by President Biden in 2021 will make the PPP more widely accessible. Perhaps these will be the last major changes to the PPP and the program’s state of consistency will push more businesses to apply. There’s still a large amount of funding left with more money being injected into the program soon. With a vote to extend the PPP to June 30, 2021, we hope to see an uptick in PPP adoption.
The PPP may have had a rocky start, but there are signs this program has been impactful on the businesses that received fully forgivable loans. As these loans become more accessible, they may provide the lifeline still needed by American small businesses.
Need help with a PPP loan?
During these difficult times, Bench is committed to supporting small businesses by helping them navigate the steps to access financial relief. We provide free resources for understanding and applying for the PPP, and have been connecting businesses with lenders to take the guesswork out of receiving a PPP loan. Whether you're applying for the first time or need some support in understanding the terms and conditions, we have all the information you need to get started.