The PPP Experience

Adjusted for inflation, the Small Business Administration (SBA) facilitated $551 billion in loans through its 7(a) loan guaranty program between fiscal year 1991 and fiscal year 2019.¹ Over the 13 months from April 2020 through May 2021, SBA disbursed $800 billion in emergency support through the Paycheck Protection Program (PPP). Together with the Economic Injury Disaster Loan program—through which another $200 billion was distributed to small businesses—this was an achievement of epic proportion.

Inevitably, with a public effort of this scale, there are lessons to be learned for the broader small business financing market as well as government actions to expand access to capital. Fortunately, a considerable amount of research and analysis has been done on PPP and its effects. This research has looked at the impact of PPP relative to its purpose (preserving jobs), other economic effects, geographic variation in those effects, and the role played by different types of financial institutions in getting money to small businesses.

Paycheck Protection

The balance of research found that PPP preserved jobs during the pandemic:

• “We find that PPP boosted aggregate U.S. employment by 3.6 million at its peak around mid-May [2020] and by 1.4 million at the beginning of December [2020].”²
• “An 8% increase in employment, 11.5% increase in wages, and a 5.8% decline in the likelihood of closure within one month of PPP approval. Seven months after PPP approval, I find a 4% impact on employment, a 3.8% effect on wages, and a 3.5% decline in the probability of closure.”³

Not all research on PPP and employment, however, has been positive. One study concluded: “We do not find evidence that the PPP had a substantial effect on local employment outcomes or business shutdowns during the first round of the program.”⁴ Differences in research findings may be due to methodological variation and depend on the time period analyzed.

Effects Beyond Employment

The intent of PPP was, as the name implies, to preserve jobs by offering emergency assistance for small employers. Initial restrictions around the use of PPP funds—at least 60% had to be used for payroll costs—meant small businesses were limited in the extent to which they could cover other expenses. Nonetheless, the economic effects of PPP have been found to extend well beyond job preservation.

• PPP “likely had important effects in terms of promoting financial stability by avoiding corporate loan defaults and business evictions.”⁵
• The program allowed small businesses to continue paying rent, holding down delinquencies on commercial mortgages.⁶
• Loans less than $1 million “had a substantial multiplier effect in generating additional small business portfolio loans.”⁷
• Small businesses with PPP loans increased expenses by more than those in a control group. The positive effect on expenses lasted fewer months for smaller firms.⁸

Phased Rollout, Geographic Variation

The full $800 billion of PPP was not authorized in one tranche. As policymakers grappled with the scale of the COVID crisis—and when the “first draw” of PPP was exhausted within weeks—different amounts were approved at different times. The breaks in the program
and varying timelines offered researchers a chance to study PPP’s implementation through different lenders and how impact may have varied across the country.

• The first round of PPP (April 2020) did not reach the hardest-hit regions.⁹
• Areas with lower incomes and more people of color received a larger share of PPP loans from fintechs than banks.¹⁰

Differential effects were related to the role that different types of financial institutions played in PPP disbursement.

Fintechs, Banks, and CDFIs

For speed and administrative simplicity, PPP was structured to operate on top of the existing infrastructure of SBA’s 7(a) loan guaranty program. That program mostly works through banks in a “delegated lending” model, whereby banks have discretion in making loan guarantee decisions. The number of nonbank lenders that participates in the program is small. When PPP was first rolled out, its emergency loans were distributed through banks which turned initially to existing small business customers. Only later were fintechs and community development financial institutions (CDFIs) approved to make PPP loans. (Some fintechs acted as referral agents in the first round.)

Given the different roles that financial institutions played throughout PPP’s phases, the research findings are perhaps not surprising.

• Receipt of PPP loans “was strongly tied to bank branch networks,” indicating that a “large share of borrowers received credit through existing bank relationship.”¹¹
• Differences among banks determined disbursement variations across the country, particularly differences in labor capacity (to process the volume of PPP applications) and familiarity and experience with SBA lending processes.¹²
• Larger banks prioritized bigger small businesses while small banks “extend[ed] more even treatment to their smaller clients.”¹³
• Borrowers with less access to traditional banks were more likely to get PPP loans through fintechs.¹⁴

The urgency and uncertainty of the COVID crisis in spring 2020 necessitated a focus on speed of disbursement with minimal bureaucratic hurdles. It allowed SBA and its network of lenders to distribute loans worth nearly three orders of magnitude more than the annual amount of loans guaranteed through the 7(a) program. SBA’s Office of Inspector General, however, has repeatedly faulted the agency for inadequate safeguards in the program, leading to fraudulently awarded loans.¹⁵ Research, moreover, has found a high incidence of PPP fraud among fintech lenders. Misreporting and “discontinuities” were “much stronger” for fintech lenders than banks.¹⁶ The House Select Subcommittee on the Coronavirus Crisis also found that some fintechs participating in PPP “failed to stop obvious and preventable fraud.” Four fintech companies in particular were “easy targets for those who sought to defraud the PPP.”¹⁷