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The PPP Doesn’t Work for Our Nation’s Most Essential Small Businesses: Child Care

The COVID-19 pandemic has had an unprecedented impact on our economy and, in particular, on our nation’s small businesses. Most businesses have been forced to close due to government shutdown orders, and many have had to lay off or furlough their employees in the process. Child care businesses and workers, essential to the operation every other sector of the economy, have not been spared. As our nation begins to lift stay-at-home orders, the ability for child care businesses to reopen will have a direct correlation to the ability for all other businesses to rebound and parents to return to work.

Child care is a cornerstone of our economy and a prerequisite for parents to participate in the workforce. Businesses cannot rely on their employees if employees cannot rely on a child care business to look after their children while they are at work. Unfortunately, because of the pandemic, 60% of child care programs have temporarily closed and without financial support, many of these programs might not survive.

The Paycheck Protection Program was created by Congress to provide financial support to small businesses, including child care businesses, to help them weather this crisis. The program offers financial assistance to ensure businesses can continue to pay their staff, cover rent and utilities, and ultimately open their doors again once they are able to safely. Unfortunately, the PPP has several structural deficiencies that prohibit our nation’s most essential small business—child care—to access the program and benefit from its support.

In an April survey by the National Association for the Education of Young Children of 5,000 child care providers, 53% of child care centers and 25% of home-based providers had applied for a PPP loan, despite skepticism from majority of providers about the potential for forgiveness. A follow-up survey of 500 applicants found that just half were approved for PPP loans. Approval rates for home-based providers were even lower, which is concerning given the majority of child care businesses are home-based, and they are also more likely to remain open during this crisis than child care centers. Even providers who have been in business for decades, such as the Braithburn Academy in Washington State, report difficulty accessing the PPP and uncertainty about if it would truly meet their needs.

Child care businesses and their employees are both hurt by the program’s shortcomings. As the nation’s unemployment rate has risen to levels rarely recorded—nearly 15% in April—child care workers have fared much worse. In fact, fully one-third of the child care workforce has lost their job since the pandemic began, nearly double the already striking national unemployment rate. This also indicates that child care businesses are having a greater difficulty keeping their employees on payroll through a PPP loan or other means, than many other business sectors.

As Congress considers how to continue supporting small businesses, the backbone of our economy, it must recognize how the PPP has failed to substantially support our most essential small businesses: child care. Child care businesses that have applied have reported challenges accessing loans, difficulty working with banks, and logistical challenges with required paperwork. These shortfalls of the program must be addressed if our nation is to reopen successfully.

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Problem: Short duration of the program is unsustainable.

The PPP’s emphasis on covering payroll for eight weeks is seemingly advantageous for a small business for which most of their budget goes to payroll, such as a child care business. However, as it becomes increasingly clear that this crisis will have longer lasting impacts, a short-term loan is not the solution for child care businesses that cannot reopen under more normal circumstances once their community lifts stay-at-home orders. Child care providers will reopen under limited capacity, smaller group sizes, and must adhere to strict sanitation measures and safety precautions, for the foreseeable future. All these changes mean a smaller budget due to a decreased customer base, and at the same time, higher costs associated with increased staff and supplies. Many more might not be able to immediately open their doors to serve children and families once the eight-week period ends. The terms of the loan put added pressure on providers to open their doors when it is not safe, both in terms of health and legal concerns.

It is clear that child care programs need a sustained pot of funds to help them make it to the other side of this crisis to a time when they can start operating under more normal circumstances. This might take several months or even years, but will undoubtedly take longer than the duration of the PPP. Given the program has nearly expired and we are yet to fully emerge from the pandemic, more time is needed for child care programs to access the capital they need to stay in business, pay their staff, and reopen safely.

Solution: Congress needs to expand the timeline for which child care businesses can use PPP funds through the duration of the pandemic. Unlike other companies that might be able to return to normal more quickly, child care businesses are at a disadvantage and cannot balance budgets without ongoing financial assistance. Congress has an interest in insuring these businesses do not close permanently, and could do so by extending the forgiveness period.

Problem: Banks as an unsuccessful gatekeeper.

Banks are the gatekeepers of the loans, and child care programs have documented struggles in working with banks to access loans. The most common explanation from banks for a child care business being denied funds were problems with the applicants credit score, or their lack of a business checking account (even if they had a personal account)—neither of which are required to qualify for a loan under Small Business Administration guidance. Rates of approval for borrowers who were not previous clients of their lender were lower than those who were a previous lender.

As most child care programs, especially home-based programs, do not have business bank accounts, relationships with bankers, or the professional supports to navigate the loan requirements, this can prevent many programs from applying in the first place, let-alone being successful. For example, Chase and Wells Fargo were granting PPP loans to existing customers only if they maintained a business account. Some small businesses are even suing large banks for allegedly prioritizing large companies. Family child care programs with mortgages or other relationships with these banks did not necessarily have business accounts, and were therefore ineligible to access loans through their typical lenders.

Interim updates to the PPP in April had the potential to make loans easier to access by child care providers, but will not go far enough in meeting the need or ensure all child care programs can easily access the program.

Solution: A dedicated pot of money within PPP is necessary for child care programs. Just as other sectors have been offered specific set-asides, child care needs to know they can access the program and will not be denied by a bank or be placed into competition with other larger, more experienced companies, or those who have prior relationships with banks. The funding should be tied to child care programs, not to the financial institutions that are the gatekeepers of such funds.

Problem: Diversity of child care program structures not reflected.

In the mixed delivery child care system, there are is wide variation in type, size, and structure of child care providers, which has created discrepancies in which programs have been able to access PPP loans. Approval rates for child care homes were lower than center-based providers, regardless of their client status with a bank. This discrepancy is also not apparently due to large loan requests—all home-based providers reported applying for loans of under $50,000 in comparison to just 38% of other programs. Additional reports of home-based providers across the country reflect their difficulty in accessing loans: of 40 providers part of the Marin Family Child Care Association in California, just one reported receiving a PPP loan.

In addition to providers being confused about the application process, some banks were also misinformed and rejected PPP applications if a sole proprietor is not on the payroll. This appears to have delayed some applications being complete in time before funds ran out on the first loan iteration, and caused others to refrain from applying when more funds were available. Some banks are requiring home-based providers to have an Employee Identification Number, which many do not have, or to be registered as an LLC, which some states do not require in order to be in operation. Many other limitations of the program prevent home-based providers from participating, such as the required proof of payroll and specific tax forms that home-based providers do not always have due to their status.

Solution: Sole-proprietors and family child care programs need to be clearly defined in small business lending guidance. Any child care program—for-profit or non-profit, home-based or center-based, small or large—should be able to apply for the program given they comply with other requirements. A program’s structure should not prevent them from applying or receiving a PPP loan and the program should be administered uniformly across all child care program types.

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