Why aren’t more small businesses applying for PPP loans?
When COVID-19 became a domestic threat in March, local officials acted quickly, which involved shutting down non-essential businesses in an attempt 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 economically damaging, as unemployment shot overnight and countless small businesses began to drain cash in the absence of incoming income.
Fortunately, small business support was made available from the start in the form of Paycheque Protection Program (PPP) and its forgivable loans. Although many small businesses were excluded from a first round of PPP funding, a second round made these loans accessible to more businesses. But oddly enough, the PPP ended up with a lot of unclaimed money – 130 billion dollars, more or less – when it was originally scheduled to expire at the end of June (the deadline has since been extended to August). And that means many small businesses have clearly pulled out.
A recent investigation by Principal confirms this point. Among companies with two to less than 500 employees, only 26% have applied for and obtained PPP loans. And while it might sound odd, here are a few reasons why small businesses may have avoided PPP loans or found themselves without them.
1. Loans were mainly to be used so that the payroll could be forgiven
PPP loans were a great solution for companies where the payroll is a huge expense. But for businesses that don’t weigh a lot, they’re less useful. For PPP loans to be forgiven, 60% of their proceeds must be used for payroll expenses. And while this is better than the 75% threshold initially attached to these consolidation loans, it may still be out of reach for some businesses as staffing requirements have declined.
2. Loans were capped at 2 1/2 times the monthly payroll
Small businesses that applied for PPP loans could not apply for unlimited funds. Rather, they were capped at 2 1/2 times their monthly salary costs. For some companies, this sum would not have gone very far.
3. The application process was tedious
When the PPP was first rolled out, many companies struggled to submit applications because the banks’ systems were overwhelmed. Additionally, some businesses may have had their claims rejected due to payroll errors – errors that might have been difficult to correct without the help of an accounting professional, which not all small businesses do. not use.
4. Forgiveness is always questionable
At first glance, the rules for PPP are pretty clear: Use 60% or more of your loan proceeds for payroll within 24 weeks of receiving it, and that loan is eligible for forgiveness. But not so fast. The forgiveness application process is still unknown, and while it is as cumbersome as the application process, some businesses might run the risk of not getting their loans canceled, even if they followed the rules. As such, some companies may have chosen not to participate in the program for fear of having to repay these loans in the end, although they did everything correctly.
While the paycheck protection program has been a lifeline for some small businesses during a time of crisis, it clearly was not a perfect solution across the board. As lawmakers debate a second relief plan as the country grapples with a recession, small businesses that have not been able to benefit from the PPP can apply for additional help – loans or grants that are less restrictive but which ultimately serve the same purpose: to save jobs and prevent local establishments from closing permanently.