Stock photo of a cell phone sitting on top of a laptop. The cellphone screen shows an article about the Paycheck Protection Program (PPP).
Photo by Tada Images via Adobe Stock.

Through extensive federal relief efforts, many sectors of the American economy are beginning to recover from the impacts of the pandemic. However, the resources that helped businesses and people withstand COVID were not evenly distributed. This lopsided administration of relief aid shapes the contours for an unequal recovery and underscores the importance of future targeted relief for people and communities hit hardest by COVID-19.  

This lesson is most apparent in the exclusionary design and implementation of the largest small business relief program in history: the Small Business Administration’s Paycheck Protection Program.

Enacted in 2020 by Congress at the onset of the pandemic, PPP was to be a lifeline for small businesses struggling with the economic downturn. Structured as forgivable loans offered through financial institutions, PPP funds could be used by small companies to support payroll and related expenses such as rent and utility payments. Despite the program’s intent, approximately $800 billion of funding was administered and deployed in a racially inequitable fashion. 

During the first seven days, the smallest of small businesses – self-employed individuals, which include sole proprietors – were initially excluded from receiving funding from PPP.

These self-employed individuals, such as nail techs, barbers, real estate agents, pet care providers and many others, knit together the cultural fabric of our communities. While they awaited guidance from the SBA on how to apply, hundreds of billions of dollars were claimed by larger, well-resourced businesses. 

The exclusion of these small businesses from hundreds of billions of dollars of relief disproportionately impacted businesses of color, particularly in the Deep South. Nationally, more than 90% of Black and Latino-owned businesses are self-employed, which includes sole proprietors, according to a 2020 analysis by the Center for Responsible Lending. In the Deep South, the rate rises given that 96% of Black- and Latino-owned businesses fall into this category compared to 82% of white-owned businesses, according to a Hope Policy Instituteanalysis of 2017 census data.

Moreover, some banks prioritized serving businesses with pre-existing relationships. This policy, combined with PPP’s first-come, first-served policy of disbursal in the early stages of the pandemic, exacerbated long standing disparities in access to the banking system. According to a 2020  Federal Reserve survey, 23% of Black-owned businesses have a recent banking relationship, but for white-owned businesses, the share is double that, at 46%. Ultimately, Black businesses (with at least one employee) that applied for a PPP loan were five times more likely to receive no PPP relief than white businesses, according to the Federal Reserve’s April 2021 Small Business Credit Survey.   

A stock photo of a Black woman posting a sign on a business door.
Photo by Lorenato via Adobe Stock.

Black- and Latino-owned businesses,which are disproportionately in industries affected by public health safety measures, had the smallest cushion to withstand an economic shock. This lack of resources is due to a long history of discrimination by the financial system which was now charged with throwing them a lifeline.

PPP’s shortcomings unfolded against a backdrop in which, from February through April 2020, the number of Black business owners declined by 41% and Latino business owners declined by 32%, compared with a 17% decline for white business owners. PPP had the ability to redress the challenges of small businesses hardest hit by the economic impacts of COVID-19, but the program ultimately exacerbated pre-existing inequities for small businesses of color.

These inequities were not limited to PPP alone.  For example, the allocation for small business relief by the state of Tennessee served as another sobering example. Minority-owned business owners in Tennessee were almost completely shut out from this critical program. According to a September 2020 Tennessee Department of Finance and Administration report, 90% of the Tennessee Small Business Relief Fund funded by the CARES Act went to white businesses. This outcome was driven by the state’s racially discriminatory funding formula.

Although the program’s design and lack of accountability meant relief funds might not have reached those who needed it most, it demonstrated where financing could be possible: through mission-driven community lenders. 

Community development financial institutions and minority depository institutions have the mission of expanding economic opportunity to underserved communities that historically have had difficulty accessing and developing relationships with financial institutions. 

CDFIs and MDIs outperformed non-CDFIs and MDIs in PPP lending to underserved communities such as low- and moderate-income areas and small businesses. Only 28% of total PPP loans were directed to businesses located in low- and moderate-income areas, whereas 40% of loans deployed by CDFIs and MDIs were directed to the same population. Over two-thirds of CDFI and MDI PPP loans were to small businesses with loan requests less than $150,000, significantly greater than the program overall (50%). 

CDFIs and MDIs provided access to PPP for businesses that did not receive assistance elsewhere. In a December survey of HOPE Credit Union PPP borrowers, which HOPE cited in its April testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs,  36% of borrowers were declined by a bank or did not have another option, but ultimately accessed relief through HOPE. Like other CDFIs and MDIs, HOPE was the channel by which small businesses and businesses of color could access necessary relief. 

For example, in Memphis, 61% of HOPE’s PPP loans were made to Black-owned businesses. Across HOPE’s five-state footprint, it deployed over $140 million to support over 5,000 businesses, the majority of which were sole proprietors (68%) with a median loan size of just over $14,000. Nearly all (98%) the loans were for less than $150,000. 

Though it is clear that community-based lenders were able to fill the gap left by other financial institutions and overcome the structural flaws of the PPP program and other relief programs, the responsibility of fair lending should not rest on their shoulders alone. 

Policymakers must ensure the inequities perpetuated through PPP and state-funded programs are not replicated in future relief efforts. All financial institutions should be accountable to higher standards of equity and accountability in lending to people, businesses, and communities of color. 

Because small business ownership is a critical avenue in closing the racial wealth gap, the inequities from PPP will reverberate for generations. This exclusionary legacy of PPP must inform the direction of resources and policy moving forward to ensure that small businesses, particularly those owned by people of color, can survive and thrive in the post-COVID economic recovery.

Kiyadh Burt is a Senior Policy Analyst at Hope Policy Institute. He is responsible for producing blog posts and policy briefs, providing credible analysis on HOPE’s programmatic issues, and raising awareness on the challenges and successes in the Deep South. His primary areas of research include community and economic development, consumer protection, small business relief and financial inclusion.  

Diane Standaert is the director of the Hope Policy Institute. In this role, she guides the development and execution of HOPE’s federal- and state-level policy and advocacy strategies. She brings more than 16 years of experience in policy deployment and expertise on a range of financial services issues such as small-dollar lending, fair lending and debt, along with a legal background in civil rights.