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Why Didn't More Small Businesses Apply for PPP Loans?

By Maurie Backman – Jul 11, 2020 at 9:02AM

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PPP loans have been a lifetime for so many companies -- but why didn't more small businesses take advantage of them?

When COVID-19 emerged as a domestic threat back in March, local officials acted quickly, and that involved shuttering non-essential businesses in an effort to keep people in their homes and curb the spread of the virus. But while imposing lockdowns made sense from a health perspective, it was detrimental from an economic standpoint, as unemployment shot up overnight and countless small businesses began hemorrhaging cash in the absence of incoming revenue.

Thankfully, small-business relief was made available early on in the form of the Paycheck Protection Program (PPP) and its forgivable loans. Though many small businesses were shut out of an initial round of PPP funding, a second round made those loans accessible to more companies. But oddly enough, the PPP wound up with a lot of unclaimed money -- $130 billion, more or less -- by the time it was initially set to expire at the end of June (the deadline has since been extended into August). And that means a lot of small businesses clearly opted out.

A recent survey by Principal backs up this point. Among businesses with two to under 500 employees on staff, only 26% applied for and received PPP loans. And while that may seem odd, here are some reasons why small businesses may have avoided PPP loans or ended up without them.

Man wearing apron standing in doorway holding sign that says open

Image source: Getty Images.

1. Loans had to mostly be used for payroll to be forgivable

PPP loans were a great solution for businesses for which payroll is a huge expense. But for companies that aren't payroll-heavy, they're less useful. For PPP loans to be forgivable, 60% of their proceeds need to be used on payroll expenses. And while that's better than the 75% threshold that was initially attached to these loans, it may still be out of reach for some companies, as staffing needs have shrunk.

2. Loans were capped at 2 1/2 times monthly payroll

Small businesses that applied for PPP loans couldn't request unlimited funds. Rather, they were capped at 2 1/2 times their monthly payroll costs. For some companies, that sum wouldn't have gone very far.

3. The application process was cumbersome

When the PPP was first rolled out, many businesses struggled to submit applications, as banks' systems were overwhelmed. Furthermore, some businesses may have had their applications rejected due to payroll reporting errors -- errors that may have been hard to correct without the help of an accounting professional, which not every small business uses.

4. Forgiveness is still questionable

At face value, the rules of the PPP are pretty clear: Use 60% or more of your loan proceeds for payroll within 24 weeks of receipt, and that loan is eligible for forgiveness. But not so fast. The process of applying for forgiveness is still unknown, and if it's as cumbersome as the application process, some businesses could be at risk of not getting their loans forgiven, even though they followed the rules. As such, some companies may have opted out of the program for fear that they'd ultimately have to repay those loans despite doing everything right.

Though the Paycheck Protection Program was a lifeline for some small businesses during a period of crisis, it clearly wasn't a perfect solution across the board. As lawmakers debate a second relief package while the country grapples with a recession, small businesses that couldn't benefit from the PPP may be holding out for additional help -- loans or grants that are less restrictive but ultimately serve the same purpose of saving jobs and keeping local establishments from closing permanently.

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