Charles Phillips Class A director of New York’s Federal Reserve Bank

By Peter White

NASHVILLE, TN — Ethnic Americans start and operate most of the small businesses in the U.S. Many “mom and pop” operations were devastated by COVID-19. Unfortunately, 90 percent of minority and women-owned businesses were shut out of the Paycheck Protection Program. (PPP).

The PPP was supposed to keep small businesses afloat during the pandemic and keep their employees on the payroll. But only 12 percent of African American and Latino businesses and 25 percent of Asian business received stimulus fund loans.

The Small Business Administration administers the program. The number of applications overwhelmed its automated e-filing program, E-TRANS. 

“You could argue they were the wrong agency to choose because that was 20 times more volume than they were used to doing all year and you’re trying to do that in a few weeks,” said Charles Phillips, a Class A director of New York’s Federal Reserve Bank.

Phillips said that the SBA is just a processing organization and wouldn’t have any money to loan unless the Federal Reserve and the Department of the Treasury gave it to them

“And it kind of went through a bottleneck. It should have just gone to a few big banks to get started and forced them to cover up everybody. They know how to do this at scale,” Phillips said.

About 52% of working people have jobs at big companies; small companies hire the other 48%. Generally, banks like JP Morgan or Bank of America do not serve smaller companies. 

There is a separate financial structure for them called Community Development Financial Institutions (CDFIs). “They are basically non-bank banks,” said Phillips. 

They exist to serve minority and underprivileged communities. Some are for-profit; some are non-profit; sometimes they raise funds on the open market. But they all need to be recapitalized regularly in order to keep making loans. 

Phillips said there are about 1100 CDFIs but only 90 participated in the first round of PPP. Most were not familiar with SBA programs and they did not know how to apply. “That’s usually done by large banks,” he said.

CDFIs had a steep learning curve dealing with the SBA and the application was really complicated. “More than half were filled out incorrectly,” Philips said. The program was set up on a first come first served basis. Big banks use computers to make applications to the SBA automatically. 

Filling out applications on line took time and the rules for small businesses kept changing. So people had to rework and resubmit their applications. Most of those small businesses never got loans. 

“So all the money went to the large banks. If you were a tiny company or a barbershop or something and you didn’t have a relationship with one of those large banks you wouldn’t have gotten a loan,” Phillips said.

Congress voted to provide funds for a second round of PPP loans and President Trump signed off on an additional $310 billion for the program on April 24.

“It wasn’t even a fair fight,” said Phillips about the first PPP. This time around, he said things are going better. A number of problems are being fixed: two weeks ago, the Fed announced a $10 billion fund just for CDFIs so they don’t have to compete with the big banks.

And to help them recapitalize, the Cleveland Federal Reserve Bank is allowing CDFIs to get loans against the loans they make. Phillips said  CDFIs are also working to bundle their SBA loans and sell them to investors or the handful of banks that specialize in the SBA loan market. The whole idea is to generate more capital so CDFI can keep making loans to small businesses.

Regarding small business owners, Phillips said the next phase of the CARES Act (that Mitch McConnell is holding up in the Senate) will allow for more flexibility about how the money can be used.  Under current rules 75% of the loan has to go toward salaries.  

“In the black community almost 90% of businesses are sole proprietorships. You don’t have W-2 and 1099 employees,” Phillips said. He gave the example of a barbershop where individual barbers rent chairs from the owner. They are basically partners. 

“So if you have whole program based on payroll you’re not going to be able to show that because it doesn’t exist.” 

Reynolds says that the next PPP will clarify some of the fine print. “It’s unclear about how the loans would be forgiven. Some small companies can’t accept a loan they cannot afford to pay back,” he said.

He said CDFIs should relax some of the steps they usually take before making a loan. “CDFIs have to learn ‘don’t do your normal 20 days and 60 days and all the documentation. You’re going to forgive the loan anyway. As long as the person is legitimate and you know them, process the loan’,” Phillips said.

Although he still gets calls from people who can’t navigate the SBA’s application process, Phillips says things are getting better.

In the first PPP round the average loan was $406,000. In the second round the average loan is $115,000.  The money is getting to smaller companies where it was intended to go.  The first round processed 38% of applications; the second is processing 67%. As of last week, 4.4 million PPP loans were approved; 2.8 million of those loans were for less than $50,000.