Here’s Why Adding Billions More to the Second Round of PPP Won’t Fix It
Why simply adding more money to the pot won’t end the problem of venture-backed startups and large corporations landing relief loans
The Paycheck Protection Program (PPP)— a federal initiative to provide loans to small businesses that are forgivable if businesses retain or rehire their workers — has proven wildly popular, burning through an incredible $350 billion in funding in less than a month. It’s also left millions of small businesses unable to participate. To address the shortage, the Senate has rushed to approve an additional $310 billion in funding that may be signed into law this week. The scale of these outlays is staggering, amounting to over $2,700 per U.S. household to date, and rising above $5,000 per household if the new funding is passed.
While the new legislation is likely to rescue the program as is, it does so at an extreme fiscal expense. But with a few strategic changes, a redesigned PPP 2.0 could be more impactful — and cost-effective — by ensuring that funds are targeted directly toward firms that truly need the funding, and not to firms that could manage without it.
What went wrong the first time
The program, as it currently stands, provides two year loans to small businesses and nonprofits (typically defined as fewer than 500 employees), at a very low fixed interest rate of 1%. Enrolling firms are able to borrow up to 2.5 months of the firm’s payroll, net of salary exceeding $100,000 annually. But importantly, these “loans” can be completely forgiven as long as the firm uses at least 75% of the funds to maintain payroll expenses, and the rest is spent on other fixed costs such as mortgages, rent, and utilities.
The original sin of PPP 1.0 was its inability to set clear parameters for which small businesses qualified for its relief loans. While struggling businesses should be thrilled to receive such loans, the problem is that financially sound businesses are delighted to apply for and receive them as well. And under the current rules, there are few impediments to them doing so. The only formal requirement is that “current economic uncertainty makes the loan necessary to…