Why the public listing of PPP loan recipients is another blow to small businesses

The now infamous Paycheck Protection Program (PPP) was put in place by Congress at the onset of the COVID-19 pandemic. For a business, it means it can borrow money to meet cash flow needs and possibly have that loan forgiven. It is a try at getting money primarily to small businesses that need short-term cash, although some large enterprises are also eligible.

In a new improvisation, a list of recipients of PPP loans is going to be made public because, according to Congress, the public “has a right to know” who is getting the loans. Do you think this will encourage or discourage small businesses to borrow money?

Right now, I can say without exaggeration that COVID-19 poses the largest risk to small businesses in the history of the United States. It has recently been estimated by the National Bureau of Economic Research that at least 22 percent of all small businesses and about 40 percent of black owned businesses will fail as a result of COVID-19. I am not surprised, and I believe the estimates may be low.

Most people do not know that small businesses operate with razor thin margins. The average net profit margin is approximately 5 percent for a small business. This means that, if a small business has sales of $1 million a year, their net profit is $50,000. That is not a lot of money for a ton of risk. Small cash flow deficits are almost impossible to overcome.

The reason Congress says they are publishing a list is to have on record all the people and businesses who took federal money—a sort of accountability. I do understand this, but what Congress does not understand is that making the list public is going to discourage businesses from applying. Imagine if we compiled a public list of all people who had an FHA loan for their first-time home purchase. Would this encourage or discourage people to buy homes? How about publishing a list of veterans who get a VA loan to buy their home? It has the potential to become a kind of public shaming tool akin to a Scarlet Letter except the engraving will be a P.

Congress has chosen a seemingly arbitrary number of $150,000 under which loan recipients will not be named. But, who came up with the $150,000 figure? I can see a bunch of interns to congressmen swatting about a number and landing on this arbitrary one. Too many small businesses will be on the list as a result.

The Paycheck Protection Program is a good idea with extremely poor execution. First, as we know, the money does not go directly to businesses. It goes first to a bank and then each loan has to be approved by the SBA, even though little underwriting is needed or required. This is like handing a football off twice before running with it, except it involves the government, which is even more inefficient. This led to immense delays in getting the money out.

Second, the calculation of the amount of each loan was based on the poor assumption that businesses just had to pay people to meet most of their total costs- the idea was to protect jobs. One of the negatives to having lifelong politicians in Washington is that they don’t understand some of the basics of how businesses run. When the history of the program becomes fact, we are going to find that not nearly enough small businesses got money and, instead, they got caught in a bureaucratic mess.

Now, business owners interested in applying for the remaining PPP money have to consider whether they want to be listed publicly as having received government aid.

The idea of giving loans to businesses during this time is a good one, but the Paycheck Protection Program is a case study in how even a good idea, if not implemented remotely the right way, has little benefit to the people it is supposed to serve.

Brian Hamilton is the co-founder of Sageworks, where he developed an artificial intelligence platform used to help millions of small businesses understand their financial information. He is also the founder of the Brian Hamilton Foundation and Inmates to Entrepreneurs, both national organizations that help small businesses.