Black businesses have been hit hard by the COVID-19 pandemic, with a 26% decline in the number of active Black business owners between February and May 2020.1
The federal government’s Paycheck Protection Program—which issues forgivable loans to keep businesses open and employees on payrolls—failed to adequately support Black businesses, in part through its design. Policymakers decided to issue the program through banks, and because Black business owners are less likely to have existing relationships with banks, they were less able to access the funding.2 The fee structure also incentivized banks to prioritize loans to larger rather than smaller businesses,3 and Black-owned businesses tend to be smaller and have fewer employees.4 The Inspector General of the Small Business Administration (SBA) found that the SBA failed to follow the requirements of the CARES Act to issue guidance to lenders to prioritize underserved borrowers, and failed to require lenders to ascertain demographic data on PPP borrowers.5
While the government neglected to collect and distribute comprehensive data, independent studies show that just 40% of Black businesses have been approved for a PPP loan,6 and only 8% of Black businesses were successful in receiving the amount they requested through the program.7 Although lending discrimination in the program has not been studied comprehensively, one study showed that in several instances bankers offered Black business owners different levels of encouragement or steered them toward different products than they did with white business owners, including toward home equity lines of credit (which must be repaid).8
The Administration and Congress can help Black businesses by extending the covered period for forgiveness of Paycheck Protection Program (PPP) loans to December 31 (from June 30), and streamlining the forgiveness process for PPP small dollar loans. The next stimulus package should also mandate data collection on loan forgiveness, and require regular reporting on PPP and Economic Injury Disaster loans and grants.9 Collecting, tracking, and disseminating data will help policymakers understand if the program is working as intended, and will help lawmakers spot any systemic issues of discrimination or disparate access to stimulus programs.
Decline in Active Business Owners Between February and May 2020
The relief package should also provide significant funding for CDFIs and Minority Depository Institutions (MDIs), which were instrumental in helping PPP loans reach Black entrepreneurs and other businesses often left out of the economic mainstream. This relief should include at least a $1 billion emergency appropriation for the Community Development Financial Institution (CDFI) Fund to provide rapid response grants to CDFIs. The package should also include significant additional resources to build long-term equity capital in CDFIs and MDIs that serve underserved communities, for technical assistance and training grants to these institutions, to provide loans to very small businesses that serve communities of color, and to prepare for an economic recovery in the wake of the pandemic.10
Congress and the Administration should also agree to strengthen the Minority Business Development Agency by making the office permanent (it was created by executive order in 1969) and by enhancing its ability to make grants to under-represented populations in the business community.11
This blog post is part of a larger report, Pandemic Relief Priorities for Black Communities, which includes sections on providing financial support for Black workers, expanding internet access among Black households, and protecting our democracy.
1 Robert Fairlie, The Impact of Covid-19 on Small Business Owners: Continued Losses and the Partial Rebound in May 2020 (Cambridge, MA: National Bureau of Economic Research, July 2020), at 6-7, 16 (showing that the decline in the number of active business owners between February and May 2020 was 26% among African Americans, 19% among Latina/os, and 11% among whites).
2 The Paycheck Protection Program Continues to Be Disadvantageous to Smaller Businesses, Especially Businesses Owned by People of Color and the Self Employed (Washington, DC: Center for Responsible Lending, May 27, 2020) (“By requiring applicants to go through a lender, rather than directly applying to the PPP program, the program ensured that those businesses with existing credit relationships were more likely to access PPP funds at the outset of the program and in future rounds of funding. In the previous five years, 46% of white-owned businesses with employees accessed credit from a bank, and 6% accessed credit from a credit union. During that same time, just 23% of Black-owned employer firms accessed credit from a bank, and 8% from a credit union and 32% of Latino-owned employer firms accessed credit from a bank and 4% from a credit union. These disparities put them at a distinct disadvantage when accessing PPP funds through banks.”).
3 Ibid. (“The PPP fee structure also heavily incentivizes loans to larger firms that can garner higher fees.”).
4 Ingrid Gorman and Connie E Evans, The Tapestry of Black Business Ownership in America: Untapped Opportunities for Success, (Washington, DC: Association for Enterprise Opportunity, February 2017), 34 (“There are fewer Black business owners than we might expect given the population size; businesses that do exist have fewer employees than nonminority firms; and revenues are much smaller for Black-owned firms, even when comparing the same industries.”).
5 SBA Inspector General, Small Business Administration’s Implementation of the Paycheck Protection Program Requirements (Washington, D.C., May 8, 2020), at 4.
7 Global Strategy Group, Federal Stimulus Survey Findings (Color of Change and UnidosUS, May 13, 2020). Like many other nonprofits and businesses, the Joint Center for Political and Economic Studies received a PPP loan.
8 Anneliese Lederer and Sara Oros, Lending Discrimination within the Paycheck Protection Program (Washington, DC, National Community Reinvestment Coalition, July 15, 2020) (Black and white testers experienced a “difference in levels of encouragement in applying for a loan. . . . A difference in the products offered. . . . A difference in the information provided by the bank representative… Black male testers were offered home equity line of credit (HELOC) products instead of/in conjunction with small business loan products.”).
9 See HEROES Act, Division I, Sec. 90016 (requiring mandatory regular reporting by the SBA on a number of specific demographic, industry, size, and geographic data points for PPP loans and EIDL loans and grants).
10 See HEROES Act, Division A, Title III (appropriating $1 billion for financial and technical assistance to CDFIs), Division K, Title VII, (2020) (authorizing $5 billion to the CDFI Fund, of which $1.5 billion would be set aside for minority-owned lenders); U.S. Congress, Senate, The Jobs and Neighborhood Investment Act, S _, 116th Cong., 2nd sess., introduced in Senate July 21, 2020 (allocating $17.9 billion to CDFIs and MDIs, including $7 billion to build long-term equity capital in eligible CDFIs and MDIs (low and moderate income community financial institutions), $8 billion in Treasury funding to support very small businesses in low and moderate-income and minority communities (Neighborhood Loan Program); and $2.9 billion to the CDFI Fund—bill summary here).
11 See U.S. Congress, House, Minority Business Resiliency Act, HR 6869, 116th Cong., 2nd sess., introduced in House May 14, 2020 (increases MBDA’s budget, makes MBDA permanent, and authorizes the creation of regional and district MBDA offices).