Small business owners in hardest-hit states were less likely to get relief loans, study shows

Their research shows that in New York, for example, fewer than 20% of all small businesses in the state were approved for a loan during the Paycheck Protection Program's first round. But 55% of small businesses in Nebraska were approved.

The relief program, part of the $2.2 trillion congressional relief package passed in March, has been controversial, in part because loans were awarded to well-known and well-capitalized concerns -- including Shake Shack, Harvard and the LA Lakers, all of which returned the money -- while mom-and-pop businesses were shut out of relief in the first round.

The program was set up by Congress without geographic restrictions on who could receive the money. Applicants submitted a self-certification of need and had to have a total payroll of fewer than 500 employees.

The New York Fed economists found small business owners were more likely to be approved for loans if they had pre-existing relationships with community banks. While the Paycheck Protection Program approves loans on a first-come, first-served basis, lenders have prioritized those from borrowers they already have business with.

The New York Fed economists warned that their analysis is preliminary and acknowledged that the number of coronavirus cases per capita and unemployment claims are imperfect ways to measure the impact of the virus. There could be other factors at play, like the strictness of the state's stay-at-home orders.

A separate report released last week by the non-profit Institute for Local Self-Reliance, also found that more loans were made in states where local community banks constitute a larger share of the market, like North Dakota. It found that nearly three times as many emergency loans were made per capita in the 10 states with most community banks per capita, compared to the 10 states with the fewest.

The Small Business Administration gave out 1.6 million loans, worth about $350 billion, in the first round of the Paycheck Protection Program -- until it ran out of money. During that first round of funding, California small business owners received the most money, totaling about $33.4 billion. But according to the Fed economists' research, fewer than 25% of the state's small businesses were awarded loans.

In fact, fewer emergency loans went to California than Texas -- drawing ire from California Rep. Jackie Speier, a Democrat.

"Although California received incrementally more in loan funding, the amount still does not seem to adequately reflect the fact that California is economically much larger than Texas and one of the states hit hardest by the coronavirus," she wrote in a letter to Treasury Secretary Steven Mnuchin and Small Business Administrator Jovita Carranza.

The emergency loans were meant to help business owners continue to pay their employees and their overhead costs in order to stay afloat for the next two months. The loan will be forgiven if the funds are used to pay those kinds of expenses.

Only one loan is permitted per business. They are made in an amount equal to two-and-a-half months of average monthly payroll costs in 2019.

Congress has since replenished the program's funds with another $310 billion and a second round of loans started being processed last week. As of Tuesday, another $181 billion in loans to 2.4 business owners were approved.