LIVINGSTON, MT – APRIL 10: A sign reading “Buy Local” with closed restaurants and shops on Main … [+]
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At some point in the near future—perhaps as early as next week—Congress will authorize more funding for the Paycheck Protection Program (PPP). There is growing concern that the initial $350 billion for small business support will run out quickly. There are also worries that vulnerable small businesses are unable to access the funds and that the entire process is slow and clunky.
While more money is clearly needed, there are different ways that additional funding could be structured to enhance effectiveness. And, there are non-financial actions that could help the program run faster and more smoothly.
It may be too late to help many small businesses and their employees. Some business owners have already laid off employees to enable them to file for unemployment insurance. It’s unfortunate, it’s tragic, and it will leave scars on many. But, in the way the system is currently designed, it’s a rational business decision. If they retained their employees in hopes of receiving PPP money to pay them, many small businesses would run out of money before the loans came through. So business owners have, in some cases, taken this drastic step so their employees can get some immediate assistance.
What other actions should be considered, then, to help the entire range of small businesses?
At a high level, it seems like there are three options:
- More money for the programs that have been created;
- More money, but through expanded disbursement channels; and,
- Additional changes to enhance effectiveness.
More Money for New and Existing Programs
This is one direction in which Congress seems headed. Republicans proposed a bill last week to put an additional $250 billion into the PPP. Democrats had the same amount in their proposals, but wanted about half of it reserved for community development financial institutions (CDFIs).
Given the logistical strains that the original PPP loan guarantee allocation put on the SBA and banks, however, it’s not clear that simply shoving more money through it will result in greater efficacy. Another $250 billion, for example, likely won’t do much for the businesses mentioned above that already laid off their employees. More funding will run into constraints that some sectors are already running into, such as the requirement to spend three-quarters of loan money on payroll costs.
Congress could also consider including the bipartisan New Business Preservation Act in its next round of small business support. This bill would create incentives for equity investors to fund new companies across the country. When we eventually pivot to recovery, support for new business creation will be necessary.
More Money, Expanded Disbursement Channels
In one sense, this has already begun. Nonbank lenders could apply for PPP authorization and, although the process appears slow, several big ones have received approval.
But Congress and the Administration should think creatively. There has been a proliferation of local relief funds around the country from both the public and private sectors. Those funds are close to the action, they’re often intimately familiar with the local business landscape, and they can get money out the door quickly. Some portion of the new $250 billion slug could be directed into these local funds, as Bruce Katz and others at The New Localism have repeatedly suggested.
Additionally, Congress could consider sending money directly to entrepreneurial support organizations (ESOs). This includes local coworking spaces, incubators, accelerators, and more. Many ESOs are independently eligible for PPP money and disaster loans, since they’re small business themselves or nonprofits, which can receive funds. Many of them, however, are undoubtedly struggling during the crisis.
ESOs are important for supporting local entrepreneurial ecosystems, especially the young businesses that have only been started within the past few years. They will be absolutely essential during the recovery in every city and region. Creating some sort of direct or specific allocation for them would have knock-on effects.
It’s one thing to spend a boatload of money—or guarantee the spending of that boatload. It’s another thing to make sure money is getting out the door. Then, it’s a whole other thing to make sure the financial assistance is effective and helpful. And there do appear to be several actions that could be taken to do that.
There have been many calls, for example, for SBA and Treasury to clarify rules around banks’ participation in PPP, in order to incentivize greater participation. Ann Marie Mehlum and Javier Saade, both of whom spent time overseeing SBA programs, point out that additional money for small business support should be accompanied by improvements in process and technology.
Further clarity and resolution regarding the affiliation rule and venture-backed startups is another clear priority. Layoffs from startups are accumulating and many are likely deserving of help. Consideration should also be given to allowing small businesses to include their independent contractors in calculated payroll posts. This would mean independent contractors are ineligible to apply on their own (unless a business specifically excluded them from payroll costs in its loan application), but it would ease economic pain among this group, too.
The federal government could also work with states, counties, and cities to ensure regulatory certainty when the economy is open for business again. One person I spoke to recently said that, at a local meeting of public and private sector leaders, an attendee asked city officials whether small businesses that closed would have to re-apply for licenses when they opened back up. Incredibly, the city officials didn’t know. We need to make sure that reopening businesses and new businesses won’t face foolish or burdensome regulatory hurdles.
Let’s be clear: SBA and Treasury and banks across the country should be commended for their efforts to push out 10 years’ worth of loans and guarantees in a matter of days. We should all re-read and repeat that statement for perspective: a decade’s worth of money in days. That money will be a lifeline to millions of Americans.
To make it even more effective, policymakers should consider what other actions they can take besides check-writing.