When the Paycheck Protection Program was launched by the CARES Act in March, Chris Short received promises that the program would save small businesses with skepticism.
He needed the money to keep his business – Billionaire’s Barbershop in Cary – afloat. But the rules of the program kept changing, and he worried that he might not be able to cancel the loan.
“I wanted to make sure I was eligible for an application and had the correct documentation,” Short told The News & Observer. “Nobody wants to get into debt during a pandemic.”
After reading more about the program, he said he decided to apply. But by that point the money was gone and the banks stopped accepting applications. “I called everyone who offered it,” he said, maybe seven or eight banks with no luck.
The barbershop, which Short opened in 2009, was able to stay open with around half of its business before the pandemic. But it was difficult: the store was closed for most of the spring so Short could use his savings to pay his bills. The savings were “enough to withstand the storm, but that’s almost over,” he said. He and his wife were both diagnosed with COVID-19 in November, and the two weeks he spent off work to be quarantined further detracted from his income.
So when the second round of PPP opened in January, he was excited for another try. The instructions are much simpler this time, he says, and unlike the last time, they are unchanged. He’s about to apply and he’s hoping he’s eligible for $ 40,000 or $ 50,000 – “a nice cushion” on his payroll.
But he said some of his friends, who also own hair salons, were nervous about the program and decided not to apply. He understands your hesitation.
“It’s a mental thing, it’s a fear … as a black man, I felt like I was going to the bank and asking for something that would be rejected,” he said. “That’s the part that affects you, as an African American, if you didn’t get this information early and then don’t have the resources or know who to turn to.”
Changes from the SBA
After skipping troubled business owners across the country in the initial PPP rollout, the Small Business Administration went to great lengths to get people like Short into the second round of the program.
While the program did not track the race of loan applicants, Studies have shown that black entrepreneurs were more likely to be denied credit in the first round than white entrepreneurs.
An associated press analysis of the loans granted in the first round showed that in the 20% of postcodes with the largest proportion of white residents, six credits were approved per 1,000 residents. That was almost twice the loan rate for people who live in the 20% of postcodes with the lowest percentage of white residents.
The differences were mainly due to the fact that black entrepreneurs were less likely to have an existing relationship with the traditional financial institutions that issued the majority of PPP loans. Over the past five years, 46% of white-owned companies have taken out bank loans, while only 23% of black-owned companies and 34% of Latin-owned companies did so Research by the Federal Reserve Banks.
In order to compensate for these inequalities in the second round, the SBA Guidance to lenders who encouraged them to lend to business owners in underserved communities, and introduced a minimum fee for lenders to motivate them to lend even the smallest of loans.
In the first round, the smallest companies – sole proprietorships – could only apply one week after the start of the program. That delay put black business owners at a huge disadvantage: of the 2.6 million black-owned companies that were in business before the pandemic, 2.1 million were non-employers, according to the U.S. Black Chambers.
This time, these companies are eligible from the start. The SBA also gave a benefit to the nontraditional lenders that smaller businesses and black-owned businesses tend to take advantage of by allocating $ 15 billion to businesses that borrow from municipal finance institutions.
In the latest round of PPP, approved by the stimulus package and launched on Jan. 11, the SBA has approved over 400,000 loans totaling approximately $ 35 billion to date. according to SBA.
“I think it’s probably a little more thought out than the other one so far [round]”Said Marquita Robertson, executive director of The Collaborative, a nonprofit that works to build wealth in financially vulnerable communities in North Carolina. But she said these fixes won’t resolve the reluctance of many color entrepreneurs to use the program.
“[People] in the black community were afraid of PPP because they are afraid of credit and didn’t know that if you kept your people on staff it would become a grant, ”said Robertson.
Breakdowns in the 2nd lap
Early bumps on the second lap – although far fewer than the first lap – raised additional concerns.
In one Letter to the Treasury Department and the SBA on January 25, the American Bankers Association warned that many borrowers were denied credit due to technical malfunctions in the application portal. A glitch denied second-round applicants who had not yet received a forgiveness for their first loan despite the SBA guidelines allowing them to reapply.
The association said there was also confusion about what types of documents would be accepted to prove lost revenue.
Tracy Ward, director of the Small business loan program of Self-Help Credit Union, which serves small businesses in North Carolina, said these technical issues prevented Self-Help from granting loans for the first few days the application portal was open.
One of the biggest changes the SBA made to the program was giving community development financial institutions like Self-Help, which typically work with smaller colored-owned businesses, a few days to apply for credit the program was opened up to big banks.
The disruptions prevented Self-Help from taking advantage of this early start. And while more comprehensive and helpful than in the first round, Ward said, as soon as they opened the application portal, community financial institutions were given lender instructions, leaving them little time to prepare.
The SBA “did a good job and is hurrying to do whatever it takes to get this out quickly, both last time and this time,” she said. But the program leaves “big gaps where companies need a lot of other help and support that is not covered”, especially for the smallest of companies.
Because the loan amount is based on payroll, sole proprietorships are often given “incredibly small loans,” Ward said, sometimes as low as a few hundred dollars. “It’s just not going to help them much.”
PPP doesn’t solve all problems
Leonardo Williams, who runs Zweli’s restaurant in Durham, said another round of PPP funding would help.
However, the program requires that 60% of the loan amount be used towards the full reimbursement of payroll, which means he is still in arrears with the rent.
“Work is not our biggest cost,” he said, especially at a time when everyone likes to take away and deliver. “Our biggest cost factors are the food costs and the rent.”
In addition, the application process is overwhelming. He barely has time to run a restaurant. Now he is faced with hours of complicated paperwork.
“To be honest, we opened the application two days ago and didn’t get through. They ask for so much more information, ”he said. “You have to show how you used money from the last PPP, and that’s really tough. Documentation will take so much time. ”
That gave companies that can afford to employ accountants a huge head start, he said. Zweli relies on him and his wife to find out exactly how they qualify for a scholarship and not just for additional debt.
Time is precious too. After months of arrears on rent, his landlord recently told him he couldn’t wait long.
“It’s traumatic,” said Williams, who is currently a small business owner. “This is stress for our family. It burdens us individually. We put all our energy into business and it is our breadwinner. That’s how we live.”
The second PPP round is already too late for many companies.
Many minority-owned companies stalled during the pandemic because they primarily operate in industries that require face-to-face interactions, such as barber shops and restaurants, said Henry McKoy, director of entrepreneurship at North Carolina Central University.
Ultimately, that will exacerbate the racial wealth gap, McKoy said.
“The fact that so many black companies have disappeared,” he said, “will have a huge impact on the general social mobility of the black community.”