Small-business loans didn’t reach their targets

Emily Lambert | May 26, 2020

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Collections COVID-19 Crisis

The Paycheck Protection Program was meant to pump billions of dollars into US small businesses, to help them stay afloat during the COVID-19 crisis. But it didn’t perform as hoped, according to research by Chicago Booth’s João Granja, Constantine Yannelis, and Eric Zwick and MIT’s Christos Makridis.

The public-health crisis caused by COVID-19 quickly turned into an economic one when governments imposed lockdowns and halted much business activity. Millions of small businesses were hit particularly hard and were left scrambling for cash to pay bills and employees. The Coronavirus Aid, Relief, and Economic Security (CARES) Act included a potential lifeline: the PPP initially offered $349 billion in guaranteed (and in many cases, forgivable) loans through the Small Business Administration. The goal was to prevent large-scale layoffs and bankruptcies. 

To assess its performance, the researchers looked at loan data from the SBA and employment data from Homebase, a software company that serves many small businesses including those in the hard-hit retail and hospitality sectors. They also consulted data from the Centers for Disease Control for COVID-19 case counts, and from data-analysis firm Unacast for location data that showed whether people have been limiting their movements because of social-distancing measures.

Some areas of the country, such as New York, have seen their economies particularly hard hit by the pandemic, as measured by business shutdowns and hours worked. But funds didn’t necessarily get to these areas—and had a better chance of reaching less-affected ones, such as North Dakota, the researchers find. Just 15 percent of businesses in most-affected regions received PPP funding prior to the disbursement of loans, while the percentage was double in the least-affected regions.  

“The fraction of establishments receiving PPP loans is greater in areas with better employment outcomes, fewer COVID-19 related infections and deaths, and less social distancing,” the researchers write. 

Banks may have been part of the reason. Small businesses had to work through financial institutions to receive PPP loans, and some of those institutions may have been more eager than others to participate, regardless of demand for PPP funds. Prior to the crisis, four banks—JPMorgan Chase, Bank of America, Wells Fargo, and Citibank—accounted for about a third of all small-business loans. However, they disbursed less than 3 percent of PPP loans. “These banks were disproportionately located in areas that received less PPP funding,” the researchers note.