The volume of loans approved under the Small Business Administration’s (SBA) previously popular Paycheck Protection Program (PPP) was down 84% last week, according to new SBA data.
Two weeks ago, the program was averaging 442,000 loan approvals a day, but last week this number dramatically dropped to 52,000 daily approvals. Given that the PPP is the federal government’s principal measure for stimulating the economy during the COVID-19 downturn, this may signal higher unemployment rates to come in May. According to the Department of Labor, as many as 29 million Americans lost their incomes in April due to coronavirus, and the unemployment rate tripled to 14.7%, up from 4.4% in March. This represents the country’s highest unemployment rate since the Great Depression of 1929.
To date, banks have approved $530 billion in PPP low-interest or forgivable loans to small businesses with fewer than 500 employees. More than 90% of this money was distributed in the program’s first three weeks.
Analysts and bankers are attributing the sharp decrease in PPP demand to a drop in demand, and to a smaller degree, processing delays. CBS News has reported that one big bank saw more than 25% of its applicant borrowers abandon their requests. A key factor in the decrease in demand is a change in eligibility rules. Initially, there was a program loophole that permitted restaurants and hotels to borrow from the PPP even if they had more than 500 employees. However, this loophole was closed in mid-April by stating that companies that have alternative financing means, such as public markets, are not eligible. Another reason that demand has decreased is that in order for the loan to be forgivable, the SBA has stated that the borrower must spend at least 75% of the funds on workers, which is a criterion that is hard to meet for many small businesses.