The 2021 release of the Paycheck Protection Program (PPP) is part of the Consolidated Appropriations Act (CAA), which was signed into law on December 27, 2020. The new release of the program arrived at the right time, as the health of small businesses had deteriorated toward the end of 2020. In this report, we first review the health of small businesses using market indicators and surveys. We then assess the effectiveness of this new round of the program as we did with the first round. As of February 15, $126 billion, or roughly 44 percent, of the PPP round two funds had been allocated.
Figure 1 shows that small-business revenue dropped to 34 percent from pre-pandemic levels at the end of 2020. The recent second stimulus checks of $600, also part of CAA, have had a much smaller effect on small-business revenue compared to the CARES stimulus check. Part of the reason for the difference may be because the second stimulus checks were half the size of the first ones and more restrictive with regard to eligibility. It should be noted that the cumulative effects on GDP from fiscal stimulus are much stronger from the increases in UI benefits and rebates to households than from the financial support to small businesses (PPP). Evidence from the first round of PPP suggests that employment recovery between April and August 2020 varied depending on the number of employees and industry. Since September, the recovery stalled though, particularly for the smaller businesses (fewer than 100 employees) and certain industries, e.g., in the retail sector. Thus, the 2021 release of the program distinguishes between “first draw” applications from companies that received a loan from the previous rounds and “second draw” applications from companies that did not. The eligibility for a second-draw loan is more restrictive than the first draw—the company must have up to 300 employees instead of 500 and must have experienced at least a 25 percent reduction in revenue.
According to a new report  from the Federal Reserve, just under 90 percent of the small businesses surveyed by the Fed reported that their business had not returned to pre-pandemic levels almost a year after the crisis began. Of those that lost ground, 30 percent said that without more government aid, their companies might not survive. In addition, the Fed found that 64 percent of firms in the survey would apply for more aid if it was available. It is worth pointing out that small banks were reported as the most common source for PPP loans, and the source from which applicants were most successful in obtaining all the PPP funding they sought. Furthermore, CDFIs and community banks (less than $10 billion in assets) ranked at the top for satisfaction of financial services provided during the pandemic—at 70 percent and 61 percent respectively—and were significantly ahead of credit unions, the latter ranking in third place with 48 percent.
Similarly, a survey  from the National Federation of Independent Business (NFIB) in December found that 45 percent of small-business owners would apply or reapply for second PPP loan and 33 percent would consider applying.
The latest survey  of senior loan officers from the Federal Reserve, released in January 2021, reported weak demand for loans from small firms and tightened underwriting standards from the banks, albeit less tightened than at the peak of the induced recession. Figure 2 depicts the two time-series.
Figure 1: Total small business revenue (source: Opportunity Insights)
Figure 2: Board of Governors of the Federal Reserve System’s Senior Loan Officer Opinion Survey, January 2021
The figures above underscore the need for further aid to small business. Thus, we next examine the effectiveness of the new round of the PPP program. For this purpose, we use the latest SBA report of the program  .
The new round started on January 11 with exclusivity to community financial institutions and smaller banks (less than $1 billion) in its first week. It opened to all participating PPP lenders on January 19. $101 billion, or roughly 35 percent of the PPP round-two funds, have been allocated so far.
- 91 percent of the allocation has been for second draw loans, namely for small businesses that had participated in the previous round of the PPP program.
- 44 percent of the total first- and second-draw loans, as well as 48 percent of the total loan amount, has been provided by community banks (less than $10 billion in assets).
- 70 percent of the first-draw loans and 26 percent of the second-draw have been for small businesses with 10 or fewer employees. This is a distinct accomplishment of the new round of PPP compared to the previous one.
- The top-five industries in funds received are:
- Accommodation and food services: 18 percent
- Construction: 13 percent
- Professional, scientific and technical services: 11 percent;
- Health care and social assistance: 10 percent; and
- Manufacturing: 10 percent.
It is not surprising that the accommodation and food services industry ranks at the top, given the aforementioned allocation profile of the funds and how much more smaller employers (1–499 employees) in this industry have suffered job losses compared to larger employers. The same holds for manufacturing. Construction is a bit of a surprise since smaller employers have performed better than larger employers. It would be interesting to see a breakdown of the industries by first- and second-draw in future updates from SBA.
Figure 3 shows the distribution of the allocated dollar amounts by state. As expected the top five states are California, Texas, New York, Illinois and Florida, based on their contribution to overall economic activity in the U.S.
Figure 3: Distribution of the PPP 2021 fund across states
However, a different picture is revealed when we adjust the number of loans approved by the number of small businesses (1–499 employees) per state, or when we adjust the loan amounts by the total small-business employment per state. More specifically:
- Figure 4 depicts the ratio of number of loans to small businesses by state, namely the small business absorption rate. A group of states from the Great Plains and Midwest—Nebraska, Iowa, South Dakota, North Dakota, Kansas and Oklahoma—rank at the top five according to this ratio, with values ranging between 44 percent and 66 percent. In contrast, the top five states for loan amount distribution now rank middle to low.
- Figure 5 depicts the average loan amount per small-business employee by state. This ratio is significantly less concentrated than the ratio of figure 4, as indicated by the coloring in the two figures. Although some of the Midwest states again rank at the top based on this ratio, Alaska and a few states from the East North Central and New England make it to the top 10.
Figure 4: Loans to small businesses (1–499 employees) ratio (absorption rate) across states
Figure 5: Average loan amount per small business employee across states (U.S. average = $2,050)
One of the goals of the PPP program has been to maintain employment relationships during the lockdowns. In addition, it would preserve the productivity capacity of the small-business sector and therefore speed up the economic recovery. To achieve this goal as effectively as possible, the program should favor the states that have been hard hit by the induced recession over the states that have not in its fund allocation.
Figure 6 depicts the relationship between the small-business absorption rate by state and the respective change in employment between February and December 2020. The colors of the dots in the figure represent the five regions: Northeast in dark blue, Midwest in light blue, Southeast in green, Southwest in orange and West in dark red. There is lack of a statistically significant relationship between the two variables. Although Idaho and Utah have very low absorption rates as they now have a positive change in employment rate, the Northeast states and some Midwest states, e.g., New York and Michigan, also have very low absorption rates despite having the biggest losses in employment since the start of the pandemic. On the other hand, some of the Midwest states, e.g., Nebraska and Iowa, have the highest absorption rates while their loss in employment is below the national level (–6.49 percent).
Figure 6: Correlation of small-business absorption rate with change in employment by state
- A distinct accomplishment of this new round of PPP is the allocation of its funds to smaller employers, particularly ones with 10 or fewer employees.
- The distribution of the second release of PPP funds across states has so far been quite uneven. It has lacked a significant relationship with the number of small businesses per state and the number of small-business employees per state.
- An analysis of the distribution of the small-business absorption rate of the fund by state has showed a very weak relationship with the change in state employment since the start of the pandemic.
- The above observations raise concerns about the effectiveness of the program for helping small businesses and supporting a quick recovery of state economies given the geographical asymmetry in the impact of the induced recession.
- These differences should be taken into account for the recovery trajectories of macroeconomic scenarios, particularly regional ones, that banks are using for business planning, loss reserving and capital planning.
 Senior Loan Officer Opinion Survey on Bank Lending Practices, Board of Governors of the Federal Reserve System.
Grigoris Karakoulas is the president and founder of InfoAgora, which provides risk management consulting, predictive risk analytics, price optimization, scenario generation and CECL/stress testing solutions, and model validation services. Contact him at email@example.com.