Lawmakers in Washington resumed negotiations over a fourth round of economic stimulus this week and for many pandemic-stricken small businesses, the clock is ticking. Loudly. Millions will fail if the government does not take bold action and fix structural flaws in how aid is distributed.
Black-, Latinx- and women-owned businesses have been hit the hardest, shut out for varying reasons from the Paycheck Protection Program (PPP). So, when the loan program, designed to help small businesses keep workers on payroll, was recently extended to Aug. 8, it was still not reaching those who needed it most. And with the recent spike in COVID-19 cases around the country, President Trump is now acknowledging the worst is yet to come.
Only about 4.9 million businesses have received aid—15% of the country’s 30 million small businesses. And while those nearly five million companies employ 84% of the 58.9 million small business workers, the numbers show that federal aid went to larger businesses, while many of the smallest businesses were left out.
For the businesses that were able to access PPP funds, the money is running out. Congress and President Trump must come up with a robust aid package to help these businesses and must extend COVID-19 unemployment funds. The surge in new infections and death make it clear: the economy is still deep in the woods.
The PPP has, in many ways, masked the true extent of the crisis. And while the most recent government numbers show national unemployment now at 11.1%, (down from 14.7% in April but still far above 3.5% in February), the figures don’t show the impact on people who remain employed. Gusto’s May Small Business report shows that wages for hourly workers have decreased by 23% compared to pre-COVID levels in February. Benefits, 401k contributions, and hours have also been cut.
The number of business owners dropped by 22% overall between February and April 2020, yet the numbers were much worse for Black- (41%), Latinx- (32%), and women-owned (25%) businesses. Despite this disproportionate impact, these businesses have not received equal access to aid. Just 12% of Black and Latinx business owners received the funding they requested from the PPP. In fact, there’s been concern that up to 90% of women business owners and those of color have been blocked from accessing the PPP due to structural flaws.
Many of these businesses do not have strong banking relationships and cannot meet strict documentation and tax return requirements, thereby disqualifying them from receiving aid. And even for those who do have the relationships, one recent study suggests Black business owners had a harder time securing PPP loans even with slightly stronger financial profiles than white applicants.
Here are three ways the government can truly help:
Make the PPP work for those that have been left out
Structural changes must be made to the PPP to allow equal access. Some officials have already recognized this need. Senator Marco Rubio (R-Fla.), chairman of the Senate Small Business Committee, has called for allowing chambers of commerce to be allowed to apply for aid, so they can set aside and distribute aid in underserved communities.
The smallest businesses without existing banking relationships must also be allowed to provide additional documentation to demonstrate financials, such as bank statements or other tax return certification. This will allow them to apply for aid.
Loan forgiveness must also be streamlined for those who need it most. The forgiveness aspect of PPP loans are crucial to supporting these businesses, yet confusion over how this will works has made many business owners hesitant to apply. Congress must quickly pass legislation that forgives PPP loans of less than $150,000 upon the completion of a simple, one-page document to save time and money for the businesses that have been hit the hardest.
Empower lenders dedicated to serving underserved small businesses
Community development financial institutions (CDFIs) are the primary aid distribution network for businesses that do not have strong bank relationships—which includes most Black- and Latinx-owned businesses as well as micro companies with less than 15 employees. Ten billion dollars was set aside for CDFIs through the PPP, but a flaw in the current system has prevented this money from being distributed. A mere 3% of the PPP funds disbursed has come through CDFIs or minority depository institutions (MDIs).
CDFIs have limited access to lines of credit or other financial resources from the Federal Reserve Board, which means that they face constraints that banks do not around how much capital they can deploy. Big banks can cycle through more funding and provide more rounds of aid than the CDFI. Congress should set aside more federal aid specifically for CDFIs, and require the Federal Reserve to prioritize CDFI access to financial resources.
Look beyond the PPP to provide continued small business relief
Congress must also consider additional tools beyond the PPP. Additional measures such as the employee retention tax credit (ERTC) and the negative payroll tax credit would help businesses during this crisis.
The ERTC provides a refundable tax credit of 50% for up to $10,000 in wages paid by an employer that has been financially impacted by COVID-19. The amount of wages covered under the ERTC must be expanded to make it more effective, while current restrictions that prevent businesses from using both the PPP and the ERTC must be lifted.
Related: ‘Our government has failed us’
The negative payroll tax can be used to send money directly to individuals through the payroll system. Similar measures have been successful at keeping people employed and equipping small businesses to reopen in countries like Ireland, Spain, France, Germany and England.
Small businesses cannot stay afloat while the country remains in the midst of a pandemic. They remain crippled by capacity restrictions and wary customers. Business owners cannot shoulder the burden of maintaining the 60 million people that work in them. The crisis we now face requires sustained government support to prevent serious economic consequences.
Lexi Reese is the COO of Gusto and has spent her career advocating on behalf of small businesses to help them succeed. Before joining Gusto, she led small business initiatives at American Express and Google and served as a policy advocate at Accion International, which provides loans to people living in poverty so they can start their own ventures.