By Lauren Irwin-Szostak / April 28, 2020

Round two of the Small Business Administration’s Paycheck Protection Program (PPP) launched yesterday with $310 billion in additional funding, after the first round’s $350 billion was exhausted in less than two weeks (between April 3 and April 16).  Unfortunately, the SBA’s E-Tran loan processing system crashed shortly after the second phase opened yesterday morning, and complaints of overloading problems and processing delays – especially from small lenders, who were afforded a carveout for loans they initiate – abounded throughout the day.

            The system failure’s primary culprit appears to be overwhelming volume.  The SBA announced yesterday afternoon that “double the number of users [were] accessing the system compared to any day during the initial round of PPP.”  Indeed, during the day, the SBA lowered the threshold for banks to upload one-time bulk submissions of applications from 15,000 to 5,000, in the hope of reducing the number of filings without affecting the number of applications.  Still, despite the technical problems, the SBA reported that it processed over 100,000 PPP loans submitted by over 4,000 lenders yesterday.  

As a result, the second round’s $310 billion in funding is expected to be depleted within a few days.  The Consumer Bankers Association has already warned that those funds will be exhausted in four days (assuming the system doesn’t collapse beforehand) and estimated that $1 trillion – i.e., another $340 billion beyond the combined $660 billion in funding approved for the PPP’s first two rounds – will be needed to meet the demand for loans from small businesses.  The CBA also predicted that 1.3 million loans will be submitted to the SBA for approval in round two, on top of the 1.6 million loans that were approved in round one before its $350 billion in funding ran out.

And perhaps most ominously, the CBA expected that small business owners who did apply in the first round are unlikely to get funding in the second round due to the backlog of applications from the prior round.  According to the National Federation of Independent Businesses, only 20% of applications submitted in round one was fully processed with money sent to borrowers.  And the SBA reported that it received in the first round an estimated $400 billion worth of requests for every $10 billion in available funds, an underfinanced ration of 40:1.     

Not surprisingly, therefore, many experts expect that round two will soon be followed by round three.  Even before yesterday’s unprecedented number of applications, the U.S. Chamber of Commerce’s executive vice president and chief policy officer, Neil Bradley, predicted that the PPP’s second round would not be the final stimulus measure.  “The one thing I’m pretty confident about is that there’s going to be some type of additional support for small businesses,” Bradley said last Friday.  “It could be a replenishment of the PPP, [or] it could be a modified PPP program.”

Under the PPP, companies and nonprofits with fewer than 500 workers can apply for loans of up to $10 million at 1% interest to cover eight weeks of payroll and overhead expenses.  Even more attractively, so long as the borrower retains its workers at their existing rates of pay and uses 75% of the funds to cover payroll costs, the government will forgive most, and often all, of the loan and repay the bank lenders.  The other 25% of the loan proceeds can be used to pay non-payroll costs such as rent, utilities, and/or interest on mortgages.

But the PPP’s first round was plagued with controversy beyond volume-related system problems, as scores of public companies received multimillion-dollar loans while most small businesses were shut out completely.  More than 200 public companies received loans totaling over $750 million; large restaurant chains, hotel chains, and even professional sports teams received huge loans, with one hotel conglomerate receiving over $96 million even though it had previously laid off 9% of its workforce.  In stark contrast, even though approximately 70% of small businesses applied (or tried to apply) for loans in round one, only a small fraction received funding.

 The PPP’s second round added several provisions designed to redress those problems, including restricting public companies’ eligibility and reserving $60 billion for smaller community lending institutions.  This past weekend, the SBA also capped the total amount any bank could lend under the PPP at $60 billion and issued guidance for pacing the flow of applications.  Those provisions were designed in part to ameliorate the extent to which large lending institutions dominated the first round on behalf of their well-heeled clients.

However, by permitting lenders to make one-time bulk submissions of 5,000 (originally 15,000) or more bulk applications, round two still gave large banks a distinct advantage, since few smaller institutions could meet that threshold.  A national advocacy group representing small businesses, the Main Street Alliance, complained that the PPP still favors large lenders, and hence large businesses.  “The dangerous inequities we saw with the first round will not be resolved” in the second round, Main Street’s national director, Amanda Ballantyne, said.  “With funding likely to run out in 48 hours, it is ludicrous that Congress thinks it has already done its job supporting small businesses.”

Moreover, even though the second round offered lenders the opportunity to complete its clients’ application forms ahead of time (unlike the first round, for which the SBA did not publish those forms and guidelines until the night before the round opened), yesterday’s system overloads significantly negated that benefit.  For example, Massachusetts’ largest SBA lender, Eastern Bank, had about 3,000 applications ready to submit before yesterday’s second round opened, but it was able to submit just a fraction of them.  “Round 1 was awful.  Round 2 was atrocious,” Eastern Bank’s CEO, Bob Rivers, said yesterday afternoon while the problems persisted.  “The system just keeps kicking the applications back.  It can’t accept them.”

While a third round of stimulus to supplement the PPP seems inevitable, it is unclear what form that next wave will take.  Critics of the PPP argue that the current program, while well intentioned, is not achieving its objective of keeping employees on the payroll, as evidenced by the skyrocketing unemployment claims filed over the last few weeks.  Those critics advocate that the government should instead guarantee paychecks to all employees of all businesses up to a salary of $100,000, claiming that such a program would cost $506 billion over six months.

And roughly 30% of small businesses have thus far opted not to seek PPP loans, many out of concern that they may not be able to satisfy the program’s conditions for loan forgiveness.  For example, some small business owners who cannot operate remotely believe that continuing health risks, coupled with recent increases in unemployment insurance, would prevent them from maintaining their workforce even if they had the funding to do so.  But under the PPP, if they don’t devote 75% of their borrowed funds to payroll, their loan won’t be forgiven.  They would prefer to use more of the funds to pay bills like rent, utilities and vendors.  As the owner of three New York restaurants complained, “They need to relax the 75% rule and allow small business owners and restauranteurs to use that money the way they need to use it.  What’s happening now is restauranteurs and small business people are becoming unemployment offices.”

The problems plaguing the PPP’s first two rounds are killing small business in America.  The process is too restrictive, too cumbersome, and too slanted in favor of big lenders and big corporations.  Small businesses don’t have the staying power to survive this pandemic-compelled shutdown.  Too many of them have already shuttered, never to return.  The government must make funding available to small businesses NOW.

Lauren Irwin-Szostak is the President of Business Processes Redefined, LLC, a call center solutions management firm headquartered in Fairfield, New Jersey which is certified as a woman-owned business enterprise by both the New Jersey Woman-Owned Business Enterprise (NJWBE) and the Woman’s Business Enterprise National Council (WBENC).

Business Processes Redefined LLC