Why the PPP bailout worked for some small businesses and not others

A congressional staff report this month on the Paycheck Protection Program didn't have much good to say about the Treasury Department's execution of it. The program failed to get enough money to the most vulnerable business owners, the report said. And while the report may have been partisan, there's clearly something to this.

The businesses most left out from the forgivable loans in the program were the true mom-and-pops, including many owned by Black entrepreneurs, that are not as well connected to commercial bankers.

A key contention by the congressional committee is not only that banks took care of their big customers first, they were directed to do so by the Treasury Department.

Fortune 500 firms are too big to get these forgivable loans, of course, but most of them seem to be weathering the pandemic year just fine. It's been a terrible year for many small businesses, especially those trying to deliver face-to-face services while a deadly disease spreads.

Minnesota has 20% fewer small businesses open than it did early in the year, as of the late September update by economists at a data site called Opportunity Insights.

What seemed to really help in getting a PPP loan quickly was being a good customer of a bank. Having an account at the bank wasn't likely enough.

Minnesota was highlighted as one of the bright spots for disseminating PPP loans, particularly early on when it looked like there wouldn't be enough money to go around.

A logical response to the charge that big banks took care of their customers first (with federal money) is that's what these banks could be expected to do.

For some business owners, an explanation for not having a bank relationship was that they didn't have a loan of any kind, not even a line of credit. With no need to borrow money, there had been no need to sit down with a banker to complete a loan application and provide all the other required documents or any need to meet later to see how the business is progressing.

With just a checking account, "doing business" with the bank could have been as limited as using the bank's website.

Other business owners complained that they were at the end of the line because they did not even have a business checking account, business owners such as home-based child care providers and independent contractors in a salon. How they even conducted business without a checking account is a bit of a mystery, although they might have run money through their personal bank accounts or used nonbank payment systems.

Those perceived to have been left out weren't shy about complaining, either. Wells Fargo & Co. once again stood out, as its PPP program led to an immediate public relations debacle when it announced it was done taking applications just a couple of days after going live with the program.

By June Wells Fargo had even been tagged in a securities fraud lawsuit that claimed it failed to disclose to investors that it had never intended to allocate PPP loans fairly, and investors had a right to know the company was willing to take that risk.

Wells Fargo did process a lot of small loans, as did the other big banks, although the regulators might be scrutinizing the details for a while. Yet a few calls to smaller banks confirmed that the community bankers did hustle to work with business owners who hadn't been customers, in part because they saw PPP loans as a chance to take market share.

The first callers for PPP loans at St. Louis Park-based Bridgewater Bank were existing customers, said Nick Place, the bank's chief lending officer. As for other business owners, he said, "They were going to their existing bank, until they just couldn't get an answer. Then they called us.

"Early on, as just a corporate policy or corporate stance, we decided we would help as many people as we could," he added.

The bank, with about $2.8 billion in assets, is bigger than what some might define as a community bank, but it still has only about two dozen lending officers. Only a handful were doing PPP loans at first but soon even staff in other departments were working past midnight to process loans.

Most hadn't been customers of other community banks, Place said. They were customers of banks like Wells Fargo or Bank of America who got nowhere on PPP because they had no idea who to call for help.

Place can't be sure how many new borrowers previously hadn't even had a checking account, but the bank did PPP loans with companies just under the eligibility limit of 500 employees down to sole proprietor hairstylists.

"They certainly qualified for a PPP loan as well," Place said, of the hair stylists. "Their PPP loan was a few thousand dollars, that's it. This is why a lot of these banks just focused on their existing clients. A $2,000 PPP loan, we lose money on that transaction."