New York City was the early epicenter of the COVID-19 pandemic outbreak, but many small businesses hit hardest were initially left out of the federal Paycheck Protection Program (PPP) because they faced difficulties meeting the program’s rigid requirements and lacked access to major lenders, according to a report released today by State Comptroller Thomas P. DiNapoli.
“The PPP was meant to be a lifeline for struggling small businesses, but it has proven difficult for many of New York City’s mom-and-pop operations to navigate,” DiNapoli said. “Federal lawmakers have made changes that better focus the program on reaching small businesses and the additional funding is a welcome shot in the arm. Lawmakers and administrators should keep modifying the program to make sure aid reaches the communities and industries most affected by the scourge of the pandemic.”
One of the key federal legislative provisions aimed at mitigating the pandemic’s damage to the nation’s economy was the creation of the PPP, designed to help small businesses and sole proprietors. The program offers low-interest, forgivable loans for small businesses that could be used to cover payroll costs, rent and utilities. The maximum amount borrowers can request through the program is $10 million. Washington allocated a total of $953 billion for the PPP in three rounds of funding in March ($349 billion), April ($320 billion) and December ($284 billion).
Phase One of PPP Left Out Hardest Hit Small and Minority Businesses
DiNapoli’s report noted that during Phase One, the program’s requirements prevented or discouraged small businesses from applying. The PPP initially required that 75 percent of loan funds be used to cover payroll costs (later lowered to 60 percent) in order to qualify for loan forgiveness. For smaller family-run businesses, payroll can often be a much smaller share of operating costs. In New York City, four-fifths of businesses have fewer than 10 employees.
Prior to the pandemic, the JPMorgan Chase Institute found that businesses in communities of color were the most cash-strapped and the least likely to have existing relationships with large banks. Many major lenders only accepted applications for the PPP program from customers with existing accounts. While most PPP loan records did not contain information on the race and ethnicity of business owners, many of the Bronx neighborhoods where businesses received fewer loans had higher concentrations of Hispanics and African Americans than the Manhattan and Staten Island neighborhoods where more loans were granted.
In the first phase of PPP loan disbursements, which began in April 2020, an average of 7 percent of all businesses in the city received loans, though the share varied widely by neighborhood. Of the 55 neighborhoods in the city, 46 had below-average shares of businesses receive loans, underscoring how heavily concentrated the loan disbursements were in just one-fifth of the city’s neighborhoods.
Only three neighborhoods had more than 10 percent of their businesses receive loans in Phase One: Chelsea/Clinton/Midtown in Manhattan, and Tottenville/Great Kills/Annadale and New Springville/South Beach in Staten Island.
In Brooklyn, only Brooklyn Heights/Fort Greene was above the citywide average at 7.7 percent, while in Queens, only Sunnyside and Woodside surpassed the average, with 9.3 percent of businesses receiving loans in Phase One. All other neighborhoods in Manhattan, Brooklyn and Queens, and every neighborhood in the Bronx, got a lower-than-average share of business loans.
Later Phases of Program More Successful
In Phase Two, 38.6 percent of businesses received loans through the program. In addition, loan distribution was more even, with 40 neighborhoods above the citywide average of 41 percent. The distribution also became more equitable with small loans accounting for 31.6 percent of loans disbursed. Congress expanded the period of eligible costs and extended the minimum loan repayment term. In addition, many lenders also sought out new clients without established banking relationships.
Through the program’s two phases, 45.6 percent of city businesses received PPP loans, slightly below the national average of 50.9 percent. Although they lagged in participation, the average loan size to city businesses was $143,500, higher than the national average of $100,700. New York City received a total of $18.1 billion in loans through the program.
DiNapoli’s report found in New York City’s:
- Construction industry PPP loans covered 57 percent of wages, while 48.2 percent of firms participated in the program. The leisure and hospitality sector, which includes restaurants and hotels, had 50.4 percent of wages covered by the program, with 50.8 percent of businesses receiving PPP loans. Both sectors were below the national averages of 59.3 percent and 57.9 percent respectively.
- Personal services firms, including salons, funeral homes and others, 59.7 percent of wages were covered by the PPP, though only 32.4 percent of firms participated; both of these levels were significantly below the national average of 67.6 percent.
- Retail sector received loans covering 34.6 percent of wages, with 48.5 percent of businesses participating in the program. Though New York City retail businesses received a slightly higher share than retail firms in the nation, they had a lower share of wages covered, and had the smallest average loan size of any industry sector at $73,200.
Phase Three: Further Enhancements but Additional Monitoring Needed
Federal lawmakers revamped much of the program in Phase Three to better target funds to small businesses. Earmarks of funds within Phase Three may also lead to greater diversity among borrowers, and to an increase in the level at which smaller businesses participate. The act provided $35 billion for first-time borrowers targeted in low-income communities, including $15 billion to businesses with no more than 10 employees.
Washington expanded the permitted uses for funds received through the program and allows certain businesses that have already received a PPP loan to apply for second-draw loans, limited to $2 million. Second loans would generally be available for businesses with 300 employees or less that can demonstrate financial losses. These enhancements should help to ensure that loan distribution is improved and that loans are available for all small businesses that need them, both in New York City and across the country.
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