Recovery Funds: Five Lessons from the PPP

The Paycheck Protection Program (PPP) was a lifeline for many businesses and nonprofits struggling with the economic devastation of the COVID-19 pandemic. The federal government moved funds to nonprofits and small businesses in record time to respond to mandated shutdowns. 

While PPP funds helped keep some organizations afloat, its implementation was marred by several failures that placed heavy burdens on those that needed it.

At NFF, we worked with many nonprofits to help them navigate the application process. We saw up close how hard it was for nonprofits to access and use PPP funds that they needed to make it through this crisis.

The rollout was so unclear that the Treasury Department released 19 updates to its FAQs for the PPP program, with the latest at the end of June. For many organizations, these updates came too late and only sowed further confusion about how to comply with the rules of the program.

As states around the country grapple with the challenge of reopening safely, many local and state governments will consider launching recovery funds to support small businesses and nonprofits . Based on our experience with PPP, here are five lessons learned that are critical to ensuring future loan programs facilitate an equitable, resilient recovery and future.

1. For maximum access, include community-based lenders.  When the PPP launched, countless nonprofits were effectively shut out of the application process because most lenders were large national banks. They were slow to accept applications and prioritized their biggest existing lending relationships. Just a handful of CDFIs met the criteria established by the Small Business Administration (SBA) to be PPP lenders and ran out of funds within days of opening their application portals. Only one of NFF’s clients – out of dozens who reached out to us – was able to successfully submit an application to Community Reinvestment Fund, a national CDFI that participated in the earlier stages of the PPP program before exhausting its lending capacity. A few weeks after launching the program, Congress expanded eligible lenders to include CDFIs, credit unions, and other nonbank lenders, but the damage was done. We heard from some clients that they didn’t feel they had a fair shot at the program, and that although they needed the funding, it wouldn’t be worth the effort to apply. It’s fair to say that such outcomes could have been avoided if CDFIs, credit unions, and other nonbank lenders were included in the PPP from the start.
    
2. Provide technical assistance alongside recovery funds. Like most CDFIs, NFF is a relationship-based lender that provides technical assistance to borrowers. We worked to make sure nonprofit leaders had the tools they needed to navigate through the PPP application process, compliance, and the loan forgiveness process. Along with our complimentary materials on cash flow planning, budgeting, and scenario planning, this PPP-specific technical assistance helped nonprofit leaders identify clear next steps they could take to manage PPP funds. Not all recovery funds will be lent or administered by CDFIs, but those designing stimulus programs should take note of CDFI practices that support borrowers and increase their chances of success—and loan repayment.  
    
3. Collect demographic data from borrowers to inform changes to recovery fund programs. A key weakness of the PPP was the patchy demographic data on the applicant pool and on successful borrowers. An analysis of PPP borrowers with loans above $150,000 shows that 85% of successful borrowers left the Race/Ethnicity field blank, and that among those who did answer, less than 2% were Black. We don’t have the data we need to understand at a more granular level how the PPP may have amplified existing funding inequities for Black-led organizations. This is especially troubling given that this could have been a unique opportunity to pinpoint specific ways the PPP’s rollout was marred by systemic racism. We know that supposedly neutral policies in federal programs can have disproportionately negative impacts on communities of color because they compound existing inequities.  While Congress took action to expand access to the PPP program by increasing available funding by $310 billion and increasing the number of eligible lenders, they didn’t have the right data needed to know if they were course-correcting for or perpetuating racial inequity.
    
4. Flexibility in use of funds. While the text of the CARES Act didn’t have too many restrictions in how PPP funds could be used, the SBA decided to impose a wide array of criteria that were not in the spirit of the original legislation. The most onerous of these criteria was the requirement to spend 75% (later reduced to 60%) or more of the PPP loan on payroll, leaving nonprofits with fewer funds than they needed to make rent, pay for resources needed to deliver their services, and cover their utilities in full. Recovery loan programs should provide funds to help companies meet their operating needs. Every company is different, and their use of funding will likely be different too. At NFF, we recognize that flexible, unrestricted funds are precisely what nonprofits need to meet their mission most effectively. Restricted funds imply that nonprofits are unable to best decide how to allocate funding they need to deliver their mission and put  communities at risk.
    
5. Provide specific funding for nonprofit organizations. At first, it appeared that nonprofits were going to be excluded from the PPP. After the nonprofit sector mobilized to lobby legislators, Congress added nonprofits as eligible borrowers. However, there were no changes to the application process, which was designed for for-profit organizations. PPP applications have a field for ‘beneficial ownership interest,’ where borrowers are supposed to put in owners’ names. Nonprofits do not have owners. We heard from numerous clients that they were unable to successfully apply for PPP funds because banks couldn’t process applications that left the ownership field blank. As a result, they ended up submitting their applications to multiple lenders until they found one that could process their request, which was a waste of time and resources. Nonprofit organizations have some key differences from for-profit organizations that need to be considered in recovery program design: board approval is required to take on debt, nonprofit net assets are calculated differently from for-profit equity, and many nonprofits have government contracts and multiyear funding that have to be evaluated differently from for-profit organizations.  

In spite of a number of faults with the PPP program, there is one feature of the PPP worth emulating: providing loan guarantees. Federally guarantees widen the pool of eligible borrowers by encouraging more lenders to provide capital to borrowers who have not traditionally used credit to fund their operations.