Flaws in the Paycheck Protection Program are hindering small businesses owned by minorities and by women from securing federal coronavirus relief, according to lending experts and interviews with numerous owners.
Many diverse business owners applied for loans through the Small Business Administration program, only to come up empty because they either didn't qualify or the funds had been exhausted by the time their applications were processed.
"Based on how the program is structured, we estimate that upwards of 90% of businesses owned by people of color have been, or will likely be, shut out of the Paycheck Protection Program," said Ashley Harrington, director of federal advocacy and senior council for the Center for Responsible Lending, a non-profit group that combats abusive lending practices and recently examined the loan program's parameters.
"Roughly 95% of Black-owned businesses, 91% of Latino-owned businesses, 91% of Native Hawaiian or Pacific Islander-owned businesses, and 75% of Asian-owned businesses stand close to no chance of receiving a PPP loan through a mainstream bank or credit union," the center warned on April 6 as the Paycheck Protection Program, or the PPP, was starting to take applications.
Businesses quickly depleted the first round of funding for the PPP within two weeks of its launch. Congress is expected to vote this week to replenish the $349 billion relief fund with an additional $310 billion for small business loans.
One obstacle for minority business owners is that many banks participating in the low-interest, forgivable loan program are only issuing loans to existing clients to speed up the approval process that grants access to the money.
Businesses owned by people of color are less likely to have commercial banking relationships, Harrington said.
"[If] participating banks are requiring that applicants have a credit relationship — to already have some type of loan out — that already cuts many of these businesses out," she added.
Major banks that offered the SBA-backed loans, including Bank of America, JPMorgan Chase and Wells Fargo, also prioritized larger loan applications in order to maximize loan-origination fees and their own profits, according to several class-action lawsuits representing small businesses still waiting for their approved funding.
That alleged prioritizing presents another hurdle for smaller minority- and women-owned businesses.
On average, minority and women-owned businesses have 30% fewer employees compared to male- or white-owned businesses. Their average sales are about 50% to 90% of their counterparts', according to an analysis by the Brookings Institution, a liberal-leaning think tank. That means the value of the loans they were seeking — which are based on a businesses's average monthly payroll — would have been smaller.
Brookings Institution research also suggests that the U.S. Small Business Administration-backed loan program favored larger, and mostly white-owned, small businesses.
"In order to achieve scale and rapidity, they did it through lenders, and lenders rationally said, 'We'll start with our existing customers first because we have all of their info,' and those tended to be larger small businesses," said Joseph Parilla, fellow at the Metropolitan Policy Program at Brookings. "It stands to reason that the way the PPP was structured, approved loans tended to skew toward white-owned small businesses."
The same research shows that female-owned businesses, or businesses equally owned by a man and woman, face the highest degree of immediate and long-term risk amid the coronavirus crisis, because they occupy industries in which social distancing isn't possible.
"We would expect that restaurants, retail, gyms, salons and all these things that require social interaction would be in the immediate risk category, and women-owned businesses are more represented in that segment," Parilla said.
According to the CNBC/SurveyMonkey Small Business Survey released Monday, May 4, which surveyed 2,200 small business owners across America, while the $660 billion Paycheck Protection Program was instituted to give them a lifeline through the coronavirus and economic shutdown, only 13% of the 45% who applied for the PPP were approved. Among all respondents, 7% already received financing and 18% are still waiting for a response from a lender.
The experience small business owners have had applying for the $10,000 Economic Injury Disaster Loan Emergency Advance was worse. Only 3% of all small business owners surveyed were approved for such funding, and 16% are awaiting a response from a lender, the survey revealed.
Both relief programs are run by the Small Business Administration. PPP loans are capped at $100,000 per employee and can range in size. The $10,000 advance from EIDL does not have to be repaid, making it effectively a grant.
Sole proprietorships that represent 81% of all small businesses in America is a group particularly hard hit in this credit crunch. For them the window for relief loans opened late, giving them a shorter time opportunity to garner the money desperately needed to ensure they can remain in business.
This lack of aid relief has many on Main Street hemorrhaging red ink. According to the survey, 31% can operate only a few months or less, 7% less than a month and 6% less than a week under the current economic lockdown conditions.
According to Rohit Arora, CEO of Biz2Credit, an online lending platform for small business loans, there were multiple problems with the first round of disbursements. “The law was murky, and both applicants and bank loan officers were ill-equipped to process the data, as requirements were changing so fast.”
“Another issue is the fact that as a general rule, large banks haven’t focused on small business loans given to companies with less than 50 employees,” Arora says. “They have deemed it too labor intensive.”
Small community banks also faced issues. Many were ill-equipped to handle a deluge of applications and process large amounts of data into their systems in a short time frame, he notes.
Biz2Credit has already processed $1.6 billion in PPP loans. To date, the average loan size has been $170,000.
Karen Kerrigan, CEO of the Small Business & Entrepreneurship Council, says the regulations imposed on borrowers under the PPP has also been a challenge, and many business owners have decided not to tap the program for that reason. Among them: the 25/75 rule that says business owners must use 75% of the funds they receive only for payroll, and 25% for rent, mortgage payments, utilities and other operating expenses in order to get loan forgiveness.
“In many cases this has been a deal breaker. Rent and other operating expenses are high, and getting only a quarter of the loan to cover those costs is not enough,” she explains.
Another requirement for loan forgiveness is that business owners have eight weeks to bring back employees after the money hits their bank accounts. “What happens to those small business owners operating in hard-hit places like New York and New Jersey, where stay-at-home orders are still in place and no one knows when the shutdown orders will be lifted?” she says.
The regulations may be one reason 55% of small businesses in the CNBC/SurveyMonkey survey opted not to apply for PPP loans, and 71% did not apply for an Economic Injury Disaster loan.
“Many small business owners just didn’t like the model and knew they could not abide by the rules,” Kerrigan says.
“One bright spot is the fact that fintech companies like Square, PayPal, Intiuit, Kabbage and others are now authorized lenders of the PPP program. These companies serve millions of small business owners, many of whom are sole proprietorships and mom and pops. They have the AI and advanced technology to process these loans, as well as strong relationships with many borrowers who regularly use their concierge-type services.”
Natasha Crosby, a Richmond, Virginia, Black woman realtor who is an independent contractor, said her midsize, commercial bank only made its PPP loan application available on April 16 — the same day funds ran out. Other banks in her area required an existing lending relationship with them, effectively cutting her out of the program.
"I wasn't even able to apply and be in a position to be denied. I was essentially denied from the onset because I had been banking with the wrong bank," Crosby told CBS MoneyWatch.
Crosby, who is also the president of the Richmond's LGBTQ Chamber of Commerce, said that people "who weren't previously banking with an SBA-approved lender were put at a great disadvantage because you had to find someone willing to take on a new business customer — it affected who received the money."
Maryland food hall and bakery owner April Richardson was disappointed but not surprised that National Bank rejected her application for a $23,000 loan through the program.
"I never thought I'd get anything because I am a minority and a woman and own a micro-small business," she said.
Richardson said she was planning to use the loan to put her seven bakery employees back to work and fulfill an 11,000-cake order from Safeway, one of her grocery clients. Now she doesn't know how she'll stay in business.
"We were disenfranchised yet again," Richardson said. "But we will figure out a way to do something even if it's not an 11,000 cake order."
Having to wait weeks for loans to be processed because of filing and processing difficulties has been another challenge for small business owners.
The hiccups with the government rollout of aid to small business has many tempers flaring, and the fact that large companies like Shake Shack, the Kennedy Center and others tapped the program has made those feelings worse.
On Sunday, May 3, National Economic Council Director Larry Kudlow said the White House has made no decision on providing further funding for the emergency loan program for small businesses impacted by the coronavirus pandemic, but said a third round might be necessary.
CBS News’ Megan Cerullo and Lori Ioannou of CNBC contributed to the information in this report.
The CNBC|SurveyMonkey Small Business Survey for Q2 2020 was conducted across 2,200 small business owners between April 21-27. The survey is conducted quarterly using SurveyMonkey’s online platform and based on its survey methodology. The Small Business Confidence Index is a 100-point score based on responses to eight key questions. A reading of zero indicates no confidence, and a score of 100 indicates perfect confidence. The modeled error estimate for this survey is plus or minus 2.5 percentage points.