Congress just approved $284 billion for Paycheck Protection Program, but it won’t fix these key issues

By Lexi Reese and Jeanette Quick

December 22, 2020

The definition of insanity is doing the same thing repeatedly and expecting different results.

The first two rounds of the Paycheck Protection Program (PPP) shut out businesses that needed it most and failed to create sustained economic support. The last round of PPP funding closed with $130 billion in unclaimed aid as the economy remained weak—a clear sign that something wasn’t working. Yet Congress has now agreed to put another $284 billion into the PPP without fixing its structural flaws. This policy failure will cost many workers their jobs and small-business owners a lifetime of investments.

The PPP was introduced in the spring of 2020 to help small businesses, but it mostly benefited large companies national restaurant chains, which received the maximum $10 million loans earlier last year. Underserved businesses, such as mom-and-pop shops and those owned by people of color and women, were largely left out of this much-needed aid. This new aid package also fails to lift the burden that small businesses face in providing affordable health insurance at a time when the health of individuals and the economy are inextricably linked.

The U.S. is seeing record COVID-19 cases, and lockdown orders are in effect again. Small businesses need help right now. While PPP funding will help some businesses in the short term, sustained support is still needed. Congress and the Small Business Association (SBA) must rethink how to help the businesses that need it most. Here are four areas that need to be addressed.

1. Fix accessibility roadblocks in the existing PPP

Congress must first address the roadblocks that have kept the smallest and most vulnerable businesses from accessing aid.

One long-standing issue is that banks and other lenders have been hesitant to extend loans to small businesses unless they have an existing relationship. Many of the smallest businesses, particularly those in communities of color, do not bank with major financial institutions and were denied aid in the first rounds of PPP. The new law sets aside only $35 billion for first-time borrowers. This means that the vast majority of the new funding will go to businesses that have already received a PPP loan, and the businesses that have been underserved will potentially get nothing again.

Many businesses have been unable to access PPP aid because they are sole proprietorships or are self-employed and do not have the 2019 tax forms required by the SBA. Sole proprietorships make up 95% of Black-owned and 88% of Latinx-owned businesses. New businesses, which have been created at an unprecedented rate in 2020, are also unable to benefit from the PPP due to documentation issues and ineligibility.

Congress must support new businesses by making them eligible for PPP and should expand the allowable forms of documentation to include bank statements or tax returns, making it easier for the smallest and newest businesses to demonstrate their eligibility.

2. Prioritize businesses that have been excluded from previous aid

Ninety-eight percent of U.S. small businesses employ fewer than 100 workers. Because PPP relaxed the “small business” definition for certain industries, many national restaurant and hotel chains with strong banking relationships received the majority of aid.

Additional federal aid must prioritize microloans—those under $50,000—that are crucial to the neediest businesses but unattractive to lenders. Congress should mandate that private lenders extend these loans to businesses regardless of their existing banking relationship and should further increase the fees that it provides lenders for making these loans.

Congress should also renew the State Small Business Credit Initiative (SSBCI), which provided funding to state programs and created $10 in small-business financing for every $1 of SSBCI funding. The SSBCI provided very small loans through lenders such as Community Development Financial Institutions (CDFIs), which have stronger relationships with underserved businesses, and addressed credit needs in low- and moderate-income areas.

3. Go beyond payroll to address health insurance needs

Congress designed the PPP to address the economic needs of employees by incentivizing small businesses to keep staff on payroll. But federal aid must also help protect employees’ physical health, especially that of frontline workers. Economic and physical health issues are closely intertwined during this pandemic. For example, we’ve heard from numerous small-business owners that they aren’t comfortable hiring employees unless they are able to provide them with health insurance, which is a significant expense.

An aid package must help small businesses provide health insurance to their employees affordably. Because small group health insurance can be unaffordably expensive, if available at all, the Affordable Care Act does not require that companies with fewer than 50 full-time employees offer health insurance. This exemption impacts 33 million employees. Additional aid should help businesses with fewer than 50 employees provide cost-effective health insurance by offering tax credits to these businesses regardless of where they purchase their insurance policies. Employee health is paramount to businesses being able to operate.

4. Build in long-term support based on economic indicators

The PPP was a short-term solution intended to support small businesses through the spring. It’s now clear that the pandemic is not a short-term crisis. Small businesses need long-term support to survive the winter, the third pandemic wave, and, most likely, a long wait for a widely distributed vaccine.

The existing PPP structure was designed to protect employment for the short term. Many businesses laid off employees once the eight- and 24-week requirements to maintain pre-COVID headcount expired. A Gusto report found that the likelihood of an employee losing their job rose 25% within a week of this expiration date. In fact, our report estimates that more than 900,000 jobs were lost as a result of these requirements expiring, representing about 40% of the jobs the PPP has been credited with saving.

Instead of another short-term patch based on optimistic assumptions about the virus and economic recovery, small-business aid must include automatic stabilizers that provide support based on economic indicators. For example, businesses that demonstrate ongoing revenue loss should be eligible for an additional eight weeks of payroll protection for each month that the labor force participation rate remains below pre-pandemic levels. This provision would ensure continued economic aid, rather than leaving many billions of dollars in aid unclaimed.

Small businesses urgently need a better aid solution

The coming months may be even more dire for small businesses than this spring when the PPP first rolled out. New lockdowns and winter weather will keep customers at home, and another wave of COVID-19 has spread across the country.

Repeating the mistakes of previous aid packages that excluded many of the businesses that desperately needed support will be devastating to our economy, with long-lasting negative consequences. Instead of renewing the same measures and expecting a better outcome, Congress must address the fundamental issues that made funding inaccessible to the underserved businesses that need it most.

Lexi Reese is the COO of Gusto. She formerly held positions at American Express, Google, and Accion International.

Jeanette Quick is Gusto’s lead counsel for Financial Services. She was previously senior counsel to the Senate Banking Committee, where she was the lead adviser on consumer finance, and senior attorney at the Office of the Comptroller of the Currency.

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