Paycheck Protection Program – the true ventilator for small businesses swiped by COVID-19?

May 4, 2020
Editor(s): Jiamin Fang
Writer(s): Nuoya Liu, Richard Yuan

Small business loans, as the name suggests, are designed to help small businesses – typically recognized as those with less than $35.5 million in sales and less than 1500 employees – attain funds required to meet their operational concerns. Specifically, loans are taken out by these businesses to address working capital, inventory, and payroll issues.

The United States, in particular, is heavily involved in loans to small businesses, which have become a huge area of concern recently.  The COVID-19 pandemic has resulted in many small businesses in the US suffering financially, due to less consumer demand and enforced government restrictions. The demand for cash has surged, yet their access to funds and means of financing remain limited. As a result, many small businesses are unable to meet their short-term commitments (e.g. workers’ payroll) and are struggling to remain viable in today’s increasingly uncertain environment.

In response to this, in early April, the Small Business Administration (SBA) launched the Paycheck Protection Program (PPP), offering small businesses with a loan of $349 billion. Loans could be used to cover rent, mortgage interest, or utility expenses, but the main intention of the SBA was to keep employees of small businesses on the payroll.

This Paycheck Protection Program (PPP) complements well the existing unemployment insurance relief provided by the Families First Coronavirus Response Act. Instead of providing direct financial support to individuals affected by the outbreak, PPP, in theory, serves as a backdrop for banks to give small businesses a bridge to the vaccine. It is designed not only to prevent mass layoffs but also to help vulnerable businesses make it through the crisis, thereby accelerating the recovery process upon reopening the economy.

However, opposite to the lawmakers’ intentions, more than 245 public companies applied for at least $905 million from the government program. At least $243.4 million of the total $349 billion of the fund has been allocated to publicly traded companies, according to Morgan Stanley. Furthermore, some of these public companies who claimed for the support, in fact, have market values well above $100 million. For instance, among these companies was the Fiesta Restaurant Group ($189 million), which received a PPP loan of $10 million despite a massive employment size of over 10,000 people. A separate report published by The Associated Press also revealed the same issue: at least 75 companies under this taxpayer-backed aid were publicly traded.

In addition to individual publicly-traded firms taking unfair advantage of the system, “banks including JP Morgan Chase and Bank of America have also come under fire after reports that bigger customers got better treatment and were generally much more successful in tapping the PPP than small mom-and-pop businesses, leading to allegations that lenders unfairly prioritized some clients”, as pointed out by CNBC.

Since the program operates on a first-come-first-serve basis, this rather shameful act by large companies drove the program away from its initial promise of easing the financial burden for the nation’s smallest business owners. Indeed, by the 16th of April, the program ran out of money as the US Small Business Administration (SBA) announced that it was “unable to accept new applications for the PPP based on available appropriation funding”. Along with this announcement from the SBA is the struggle for actual small business owners to obtain relief loans.

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After all the media exposure of public companies taking unfair advantage of the PPP last week however, many companies have been asked to return the funds back to the program. So far, 15 companies have already returned $116 million and another $310 billion is rolling into the program to meet the expected volume of demand from actual small business owners when the program reopens.

In order to examine the effectiveness of these small business loans once they eventually reach the hands of small businesses, it may be helpful to look at how similar measures in the past have eased unemployment and stimulated economic activities. Between 1990-2009,  guarantee programs were introduced in the US and benefited 157400 firms in multiple dimensions. Upon analyzing the employment performance of these firms and comparing them to those firms that did not receive the same financial support, it was found that each million-dollar of loans in the first three years of loan reimbursement resulted in an increase of 3-3.5 jobs. Likewise, when the EU Multi-Annual Program and Competitiveness and Innovation Framework Program were implemented, analysts had also observed positive growth in firms’ tangible and intangible assets, sales, and employment. Metrics measuring the probability of default for affected firms were, on the other hand, lowered to a large extent.

The conclusion that could be reached is that business loan programs have, without a doubt, been effective in the past. It is reasonable to assume that the PPP would produce the same economic benefits for small businesses and all other affected stakeholders. Economic recovery from the pandemic could be accelerated and financial impact on individual employees minimized. This should not be surprising as small businesses are known to be a key driver of private-sector employment as well as economic growth. It was estimated by the SBA that small businesses in the US make up about 50% of private-sector employment, provide more than 60% of net new jobs in the private sector, and contribute to 46% of private-sector output. As a matter of fact, whether or not small businesses are performing well is a key determinant of many US citizens’ incomes and spending capacity. Therefore, it is in the government’s interests to ensure the proper functioning and operation of small businesses.

Besides the US, new lending and loan guarantee programs have also been announced in many countries in the European Union and elsewhere in an effort to support business financing activities and mitigate the negative impacts of COVID-19 on employment and economic activities. Further, international financial institutions such as the EBRD, the European Investment Bank (EIB), and the International Finance Corporation (IFC) have also designed support packages for small and medium-sized enterprises (SMEs) to help them during the global economic downturn.


Fischer, B & Payne, K. (2020, 2020-04-30). “How Lobbyists Robbed Small Business Relief Loans”. Retrieved from https://www.nytimes.com/2020/04/30/opinion/coronavirus-small-business-loans.html

Gereben, A & Wolski, M. (2020, 2020-04-29). “The impact of public sector lending to SMEs on employment and investment”. Retrieved from https://voxeu.org/article/impact-public-sector-lending-smes-employment-and-investment

Price, M & Schroeder, P. (2020, 2020-05-01). “For small business loan program, forgiveness may be the hardest part.” Retrieved from https://www.reuters.com/article/us-health-coronavirus-usa-stimulus/for-small-business-loan-program-forgiveness-may-be-the-hardest-part-idUSKBN22D598

SBA Office of Advocay. (2012, 2012-09). “Advocacy: the voice of small business in government”. Retrieved from https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf

Son, H. (2020, 2020-04-28).  “Public Companies took far more small business loans than first thought – here’s the latest tally”. Retrieved from https://www.cnbc.com/2020/04/26/small-business-loans-public-companies-took-855-million.html

Song, J. (2020, 2020-01-22). “Average Small Business Loan Amount in 2020: Across Banks and Alternative Lenders”. Retrieved from https://www.valuepenguin.com/average-small-business-loan-amount

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Jiamin Fang
Nuoya Liu
Richard Yuan