PPP runs dry for small businesses, but thousands of applicants were left in the lurch

The unthinkable happened for some small business owners hoping to participate in the second round of the Paycheck Protection Program as the initiative abruptly closed ahead of schedule. Federal funds ran out weeks before its planned May 31 deadline, leaving lenders overwhelmed and millions of borrowers searching for help.

The PPP

The Paycheck Protection Program was established in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act. The program’s low-interest loans, issued by banks and other lenders and guaranteed by the Small Business Administration, were intended to help small businesses stay afloat amid the pandemic.



The PPP loans were meant to be forgiven, provided that recipients used the money to retain workers and on other permitted expenses.



The SBA had approved 11.6 million PPP loans totaling about $796 billion across its first April to August 2020 round to its second round, which began in January. The program was allocated another $292 billion by Congress earlier this year for round two.

Last-minute changes

• In February, the Biden Administration introduced significant changes to the program:
• A priority application window was established for the smallest businesses.
• Participants in round one became eligible for round two.
• $9 billion was earmarked for distribution through community financial institutions that focus on underserved communities.
• The method for calculating the maximum PPP loan changed to using gross income as a stand-in for payroll costs for businesses and sole proprietors

The modifications were intended to broaden access to the PPP. But the changes became a source of frustration and confusion for borrowers and lenders, who struggled to keep up.

The crisis

The sudden shutdown of the PPP has thrown both banks and borrowers off guard. With no running update on remaining funds with the SBA, lenders kept unknowingly extending PPP loans at a blistering pace and borrowers continued applying after the money had already run dry.



Moreover, hundreds of lenders are frantically trying to find community financial institutions to take over applications for underserved communities. But because smaller community banks have more limited capacity, the fate of vulnerable groups that the last $9 billion of PPP was meant to serve is unclear.



Some borrowers, told they were eligible for higher loan amounts, returned their loans in order to reapply for the bigger loan amount, only to end up with nothing.



Banks and borrowers are calling for the government to add more funds to the PPP. But with Congress having already offered the program twice, further funding seems unlikely.

Other relief programs

With PPP no longer coming to the rescue, there are few other options that struggling small businesses at least in theory could consider. These include the SBA’s Restaurant Revitalization Fund, Shuttered Venue Operators Grant program and Economic Injury Disaster Loan program.



However, these programs focus only on particular sectors and reportedly also have insufficient funds to cover all eligible businesses. The $28 billion Restaurant Revitalization Fund program had more than 266,000 applicants in its earliest weeks.

The state of the PPP program now

The second round of relief is effectively frozen for hundreds of thousands of small businesses. The SBA will have roughly one month to process loan applications that were already submitted before the funding ran out on May 2.



The agency reported that in the second round, from Jan. 11 to May 2, it had approved more than 5.6 million PPP loans totaling more than $258 billion from Jan. 11 to May 2, when it ran out of money except for community banks. A Treasury Department estimate said the program had saved 19 million jobs, but economists will likely be scrutinizing this figure and the program’s true effects for years to come.