Businesses that already had a lending relationship with a bank were more likely to obtain loans through the Paycheck Protection Program (PPP), according to an analysis of PPP data through April 16 published in a blog on the Federal Reserve Bank of New York’s website.
New York Fed economists Desi Volker, Ph.D., and Haoyang Liu, Ph.D., write in the Liberty Street Economics blog that they found a correlation between the number of small businesses receiving PPP funds and those that had bank financing before the coronavirus pandemic. The Liberty Street blog is written by New York Fed economists but does not represent the views of the New York Fed.
Congress established the PPP to provide relief to small businesses as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The bill, signed into law March 27, authorized Treasury and the U.S. Small Business Administration to run the program.
The CARES Act made $349 billion in forgivable loans available to small businesses that were in operation on Feb. 15 with 500 or fewer employees, including not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Certain businesses with more than 500 employees in certain industries also can apply.
The first round of PPP funding was exhausted in less than two weeks. Congress then approved another $310 billion for PPP use.
A greater number of small businesses received loans in states that had a higher percentage of those businesses using bank financing in 2019, the New York Fed research shows. Data is not available for all states, but for the 20 with data available, the differences in approval rates are notable.
For example, in Minnesota, one of six states in the contiguous United States with more than 50.5% of small businesses having bank financing in 2019, more than 32% of small businesses received loan approval. In Arizona, one of five states in the group with the lowest percentage of 2019 bank-financed small businesses, less than 20% of businesses received PPP loans, according to the New York Fed data.
“Banks are quicker to accept loan applications from existing customers, since they already have much of the relevant information and screening is faster,” Volker and Liu wrote.
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