The Paycheck Protection Program taught Marco Rubio a very important lesson

The Paycheck Protection Program (PPP) provided more than $800 billion in forgivable loans issued by more than 5,500 lenders to over 11.8 million small businesses across the country. It has been responsible for providing much needed funds at a much-needed time that helped these businesses stay open and keep their workers employed during an unprecedented global pandemic.

This is thanks in no small part to Sen. Marco Rubio (R-Fla).

“It not only was the most impactful legislation I’ve ever passed, but I believe it’s been the most impactful legislation that the Congress has undertaken in a quarter century or longer,” Rubio told me in a recent podcast conversation. “This is probably one of the few and rare times we were able to get something done and done quickly that actually impacted real people in a dramatic life changing way immediately.”

The program became law as part of the March 2020 CARES Act. But it wasn’t created just for the pandemic. In fact, a bipartisan group of senators led by Rubio was discussing a version of the PPP months before, mainly as a potential financing vehicle for small businesses facing supply-chain challenges (yes, there were supply-chain challenges before COVID-19). The pandemic accelerated its progress and turned this unique financing vehicle into law.

Of course, the PPP has not been without its challenges.

Early after its launch, most of the large banks were slow to move forward with the desperately needed financing, slow enough to prompt more than a few frustrated comments and tweets from Rubio at the outset.

“Some of the banks weren’t interested in it beyond their commercial clients, even their business accounts,” he said. “They were acting like if the money was their money, that they were at risk, there was no risk for the bank, the bank was just basically a pass.”

Ultimately, these larger financial institutions came around. But for a while, it was a struggle. The good news, according to the senator, is that many of the regional and independent banks were quicker to react. “Some of them were very proactive about marketing this,” he said. “In some ways, they ended up attracting a bunch of new account holders who haven’t forgotten how those regional banks were there in their time of need. “

Then, of course, there was the fraud. Lots of it.

The media have reported many cases in which crooked business owners used PPP funds to for illegal purposes, including the purchase of boats, cars and homes. A government watchdog recently estimated that as many as 57,500 PPP loans worth $3.6 billion were issued to potentially ineligible recipients. And this doesn’t even consider the many loans that were legally received, but by businesses owned by celebrities, investment firms and other wealthy shareholders who had dubious claims of “need.”  But were these fraud claims a surprise to the senator? Not really.

“Medicaid’s full of fraud,” he says. “There’s also credit card fraud, does anybody talk about getting rid of their credit card?” he says.

According to Rubio, the way you deal with fraud is to build some things at the front end to make it harder, but also to prosecute it at the back end. As the larger loans are being audited, an increasing number of fraudulent loans are being uncovered and addressed. “I think that’s beginning to happen, and people should go to jail and pay restitution for what they stole,” he says.

So, if it wasn’t the reluctance of banks or the significant amount of reported fraud, was there anything that the senator learned from creating and implementing this unprecedent government stimulus program in such a short time?

As a matter of fact, there was one big thing that took him Rubio surprise: many small businesses that needed help could only get this help through a bank or lender, and he soon learned that many of these business owners weren’t properly setup as businesses — at least from a banking perspective.

“Food trucks (for example) in some places don’t have a corporate entity business account,” he said. “There are many businesses out there that actually don’t have business banking relationships.”

This was a surprise to Rubio and others involved in developing the PPP. But when you think about it, maybe it shouldn’t have been such a shock.

According to a 2019 FDIC survey, an estimated 5.4 percent of U.S. households (approximately 7.1 million) were “unbanked” in 2019, meaning that no one in the household had a checking or savings account at a bank or credit union. Another study conducted by research firm Morning Consult found that 25 percent of Americans are either unbanked or “underbanked,” which means there is a just a personal checking account in the family and even then alternative financial service companies for money orders or check-cashing services were primarily used.

Of the 30 million small businesses in this country, about 6 million are employer-owned, which means that more than two-thirds are independent contractors, freelancers or individual proprietors — all eligible for PPP funds. But, unfortunately, many of these business owners couldn’t access the funds because they were either unbanked or underbanked.

Then there are minority considerations. According to the Morning Consult analysis, 30 percent of the banked or unbanked are Black and 41 percent are Latinos. Florida, Rubio’s home state, is home to 5.3 million Latinos, or 8 percent of the U.S. Latino population. There are more than 604,000 Hispanic-owned firms in Florida, not including the countless other independents and freelancers. So, he missed this one.

One thing’s for sure: For the next iteration of PPP, which has proven to be a model for future public/private financing initiatives, it’s likely that Rubio, or whoever is involved, will consider businesses that don’t have business banking relationships. But let’s not blame the senator entirely for this oversight. It’s also the business owner’s responsibility to stayed informed and involved.

Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.