Past Business Relationships Influence Coronavirus PPP Lending, Study Finds
- A business with a previous loan relationship was 57% more likely to get a Paycheck Protection Program (P3) loan, with 75% of “borrower-relationships” getting a loan, compared to just 18% of “businesses”. without relations ”. , according to a study by researchers from Washington University in St. Louis, Boston College and the University of Geneva.
A personal connection between the lender and the borrower’s management – such as shared education, previous employment, or ties to nonprofits – has increased the likelihood of getting a loan amid the COVID-19 pandemic more than 7%, according to the study of PPP borrowings by listed companies.
- “Not only does our research provide unequivocal evidence of favoritism in bank lending during the first round of PPP financing, but it also suggests that banks have deviated from the program’s stated goals for their connected borrowers,” Xiumin Martin, professor of accounting at the University of Washington. Olin Business School, said in a press release.
Congress in late December approved $ 284 billion for PPP in a coronavirus aid bill, adding to $ 525 billion in forgivable loans given to small businesses under PPP loans last year.
The Small Business Administration (SBA) caught fire when Shake Shack, the Los Angeles Lakers, Ruth’s Chris Steakhouse and other large organizations secured P3 funds in 2020 before smaller borrowers. Many loan recipients ended up having doubts and returned their loans.
Bank patronage creates “allocation distortions that force connected businesses to repay their loans,” the researchers said, adding that tighter oversight weakens the impact of borrower connections to banks.
Last year, 27% of total PPP loans went to low- and middle-income communities, according to the SBA. Over $ 133 billion in program loans went to small businesses in historically underutilized activity zones (HUBZones), while small businesses in rural areas received $ 80 billion.
In the current loan cycle, the SBA on February 10 approved PPP loans totaling $ 104 billion to 1.3 million small businesses while trying to ensure better access to underserved businesses, the agency said in a press release.
Businesses in rural areas received 28% of the funding, while businesses asking for less than $ 100,000 received 82% of the loans, the SBA said.
“We are committed to taking additional steps to ensure equitable access for underserved businesses,” Michael Roth, senior advisor to the SBA administrator, said in a statement.
In their study on PPP support last year, the researchers found that businesses with previous lending relationships were 24% more likely to repay their loans than borrowers without such ties, while those with no such ties were 24% more likely to repay their loans. borrowers with personal relationships were 10% more likely to repay their loans.
“This evidence suggests that banks have deviated from the stated objectives of the PPP program by favoring their connected borrowers,” according to the researchers.
Oversight tightened after Congress approved additional P3 funding in April, potentially reducing bank patronage, the researchers said.
“Our research shows that banks have exploited the granting of PPP loans to strengthen their business relationships with large connected companies amid the COVID-19 crisis,” Martin said. “That, together with the assembly fees charged by banks and their lack of exposure to credit risk, amounted to a net shift from taxpayers to banks.”
At the start of last year, businesses closed as the coronavirus spread and, by April, unemployment had climbed to 14.7%, the highest rate since such a record began in 1948. , according to US Bureau of Labor Statistics.
PPP loans cushioned the blow from COVID-19, helping 5.2 million small businesses maintain jobs for 51 million American workers, according to the SBA. Unemployment in January remained high at 6.3%.
Less than $ 1.9 trillion coronavirus relief package proposed by President Biden, the government would provide more than $ 15 billion in grants to more than a million small businesses. The so-called US bailout would also leverage $ 35 billion in government funds into $ 175 billion in loans and investments for small businesses.