The pandemic may have caused 200,000 business closures – fewer than expected

Store closed coronavirus
A store closure in New York.

  • A Fed survey found that 200,000 extra US businesses have permanently closed in the past year.
  • That’s on top of the estimated 600,000 businesses that close in a given year.
  • Small businesses were not hit as hard as expected, which could be because of government aid.
  • See more stories on Insider’s business page.

In recent years, Federal Reserve economists have estimated that 600,000 US businesses have permanently closed each year. But a Fed study released on Thursday found that the pandemic has resulted in an additional 200,000 permanent closures of businesses over prepandemic levels – or about a quarter to a third above normal.

Individual companies account for about two-thirds of the closures, while personal service providers, like hair and nail salons, were the hardest hit, accounting for 100,000 permanent closures between March 2020 and February 2021.

“Business exit implies permanent job destruction, potentially detaching workers from the labor market and limiting the speed of the employment recovery,” the study said.

The study also said that small businesses had lower exit rates than expected from early on in the pandemic, and while the Fed economists did not provide a reason for this in the study, many small businesses have managed to stay afloat with the help of government aid.

The expectations early in the pandemic were dire for small business. For instance, the National Federation of Independent Business found in a July survey that 23% of small businesses expected to be closed within six months unless economic conditions changed.

Government aid may have accounted for some of this upside surprise. Insider reported on March 16 that most small businesses continued to pay their bills during the pandemic through the Paycheck Protection Program, which gives loans to small businesses.

On top of stimulus aid, Biden’s infrastructure plan could also help mitigate the toll the pandemic has had on US businesses. The president proposed a $400 billion investment to strengthen and protect America’s businesses, which would encourage and promote domestic production of goods.

But the aid can only last so long, and The Wall Street Journal reported that businesses that have not yet permanently closed could soon collapse under the burdens of back rent and unpaid loans.

Insider also reported on Friday that the situation remains challenging for businesses that are open – they’re struggling to hire because of a labor shortage caused by a number of things, including unemployment benefits disincentivizing people to work and fear of contracting COVID-19.

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Biden signs PPP small-business aid extension into law one day before it was set to expire

Joe Biden
President Joe Biden.

  • Biden signed the PPP Extension Act into law on Tuesday.
  • This bill extends the small business lending program by two months, through May 31.
  • It also allows the Small Business Administration to continue processing applications through the end of June.
  • See more stories on Insider’s business page.

One day before it was set to expire, on Tuesday President Joe Biden signed the Paycheck Protection Program (PPP) extension into law, extending federal aid for small businesses through May 31.

Five days ago, the Senate sent the PPP Extension Act to Biden’s desk, which extends the small-business lending program by two months and permits the Small Business Administration to continue processing loan applications through the end of June. In both the House and the Senate, the bill passed with overwhelming bipartisan support, and Biden declared the law a “bipartisan accomplishment.”

“Without signing this bill today, there are hundreds of thousands of people who would lose their jobs, and small family businesses that might close forever,” Biden said before signing the bill.

Lawmakers lauded the passage of the PPP extension, given that many small business are still suffering financial hits brought on by the pandemic. That’s why Biden included $50 billion in small business aid in his stimulus plan, including $7.25 billion specifically for the PPP.

According to recent SBA data, the PPP has given out 8.2 million small-business loans thus far, totaling $718 billion, helping many small businesses continue paying their bills throughout the pandemic.

Since it was established under the CARES Act in March, though, the PPP’s loan disbursement has come in for criticism. For example, although loans within the program are intended for businesses with 500 or fewer employees, some large companies got them, such as fast-food chain Shake Shack getting $10 million, which it later returned.

Separately, the Office of the Inspector General found the PPP had distributed duplicate loans to over 4,000 borrowers due to problems in the SBA’s controls, which would have to be paid back.

Both Democratic and Republican lawmakers have said the benefits of the PPP outweigh its detriments and are needed to provide pandemic relief to small businesses across the country.

“These loans have saved small businesses throughout our nation,” Sen. Ben Cardin of Maryland said on the Senate floor last week. “They would not be here today but for this program.”

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House passes bill to extend PPP small business aid for 2 months

Blaine Luetkemeyer
Rep. Blaine Luetkemeyer (R-MO).

  • The House voted to extend the Paycheck Protection Program through May 31.
  • The bill also allows the Small Business Administration to process loan applications through June 30.
  • The 415-3 bipartisan vote may ensure small businesses won’t experience a lapse in needed aid.
  • See more stories on Insider’s business page.

To continue providing aid to small businesses recovering from the pandemic, the House voted on Tuesday to extend the Paycheck Protection Program (PPP) by two months, ahead of its expiration on March 31.

The bill to extend the PPP had been introduced on March 11 by Small Business Committee Chair Nydia Velàzquez, Ranking Member Blaine Luetkemeyer, Rep. Carolyn Bourdeaux of Georgia, and Rep. Young Kim of California. Less than a week later, the House overwhelmingly voted by 415-3 to extend the program through May 31 to avoid a lapse of aid.

The program has provided small businesses with $700 billion of emergency loans to date, according to a press release.

“Based on recent economic data and the demand for PPP loans, it’s clear that small businesses still need support. We are making progress in our public health fight against this virus, but this pandemic continues to impact communities across the country, and we can’t let up on our efforts,” Velázquez said in a statement. “By providing small businesses with two more months to apply and giving the SBA [Small Business Administration] an additional month to process applications, we will help ensure critical support isn’t cut off.”

Under the bill, the SBA has until June 30 – a month after the PPP ends – to continue processing loan applications, giving small businesses the chance to continue receiving aid after the Program expires.

Since it was first established under the CARES Act in March, the PPP has encountered a host of issues with loan distribution. For example, although loans within the program are intended for businesses with 500 or fewer employees, the fast-food chain Shake Shack received a $10 million loan, which it later returned.

And recently, the Office of the Inspector General found that the PPP distributed more than one loan to over 4,000 borrowers due to flaws in the SBA’s controls.

However, despite the flaws, small businesses have not yet recovered from financial hits the pandemic brought on, emphasizing the need for a PPP extension. In President Joe Biden’s American Rescue Plan he signed on March 11, $50 billion was set aside for small businesses, including $7.25 billion specifically for the PPP.

The bill now heads to the Senate, where it may be passed before members leave Washington in mid-April.

“As America begins to open up for business and vaccines become more widely distributed across the country, we must provide targeted relief for small businesses that need it most,” Luetkemeyer said in a statement. “This bipartisan legislation provides a commonsense extension to the Paycheck Protection Program and the tools for Main Street USA to contribute to their local economies once again.”

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PPP paid over 4,000 businesses twice, government watchdog says – and they’ll have to pay it back

coronavirus relief bill cares act stimulus check
  • The Paycheck Protection Program distributed over 4,000 duplicate loans in 2020, the OIG found.
  • Between April and August 2020, 8,731 PPP loans were duplicates, totaling about $692 million.
  • Of the 4,260 duplicate borrowers, 2,689 had the same tax ID and 1,571 had the same name and address.
  • See more stories on Insider’s business page.

The Paycheck Protection Program was established under the CARES Act to provide aid to small businesses suffering during the pandemic. But it provided too much aid, it turns out.

But the Office of the Inspector General (OIG) found that the Small Business Administration’s program has a major flaw: duplicate loans.

A report released on Monday by the Office of the Inspector General (OIG), a government watchdog, found that of the PPP loans approved between April 3 and August 19, 2020, lenders made more than one loan disbursement to 4,260 borrowers, including 2,689 borrowers with the same tax identification number and 1,571 borrowers with the same name and business address. Those potential duplicate disbursements totaled about $692 million and involved 8,731 PPP loans.

The SBA responded to the findings in the report by saying it will resolve duplications by recovering improper payments and and preventing loan forgiveness on the duplicate loans. That means small businesses will have to give back the duplicate loans, if they can.

According to the report, the SBA identified issues in 2020 that had caused duplicate loan applications to be processed. The SBA had turned off controls for its electronic loan application system, leading to duplication, even though the office had said it would rely on loan reviews to eliminate the issue. The report looked at the PPP’s first round in August 2020.

“Establishing strong controls to prevent improper or duplicate disbursements from occurring during initial loan processing is more effective than attempting to identify and resolve improper disbursements in the loan review phase,” the report said. “SBA’s efforts should focus on safeguarding funds up front, as it is more prudent and effective to prevent a loan from occurring than attempting to recover funds after the loan has been disbursed.”

The OIG recommended that the SBA:

  1. Review potential duplicate loans and take action to recover any improper payments;
  2. Review controls related to all PPP loans to ensure duplicate loans are not forgiven;
  3. Strengthen the SBA’s loan servicing portal controls for future PPP-type programs;
  4. And strengthen controls and guidance for lenders to ensure lenders meet program requirements.

The House Select Subcommittee on the Coronavirus Crisis had requested that the OIG conduct the report to review the vulnerabilities in the SBA’s loan processing system.

Along with the duplicate loans, the PPP faced issues shortly after it was implemented in March, famously including fast-food chain Shake Shack receiving a $10 million loan it ultimately gave back, despite the loans being intended for businesses with 500 employees or fewer.

However, lawmakers have advocated for the PPP and its importance in helping small businesses recover financially from the pandemic. In the $1.9 stimulus plan President Joe Biden signed on Thursday, $50 billion was set aside for small businesses, with $7.25 billion to be used specifically for the PPP.

And the House Small Business Committee on Thursday introduced legislation to extend the PPP through May 31, ahead of its current expiration date on March 31.

“The demand for PPP loans right now is a testament to the program’s effectiveness and the lingering impacts of this pandemic,” Small Business Committee Chair Nydia Velázquez said in a statement. “That’s why we cannot cut off aid now and this short-term extension is so important.”

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