Harpreet Chima owns Subways. It’s a family business that started in 1993 with just one sandwich shop. When things were booming, that total grew as high as five; now he has three, selling foot-long subs and chips and cookies throughout Stockton, California.
Once the coronavirus crisis began, Chima, like countless small-business owners across the country, saw his venture hit hard. He kept the restaurants open, but amid California’s shelter-in-place orders, sales plummeted: Within weeks they’d bottomed out at 50 percent off their normal figures. As March became April, Chima cut his staff’s hours by about 20 percent, straining to keep payroll as close to normal as possible. Despite a cash reserve, paying full rent to the sites’ three landlords was already out of reach. One agreed to halve his $2,000 monthly payment for three months. To the other two, whom he owed $2,500 and $5,500 per month, he paid half and one-fifth, respectively, and hoped for the best. He got next to no guidance from Subway’s corporate offices.
The massive public-health crisis came with other costs as well. While some franchises like McDonald’s were able to funnel operations through the drive-through window, Subways serve foot traffic by design. Already, his workers wore customary plastic gloves, but additional safety precautions were needed for them and for customers, and Chima ordered masks through his supplier. Weeks later, none had arrived. So he decided upon what seemed like the next-best thing: a protective barrier. He went to every Home Depot in Stockton, all of which had sold out of plexiglass sheets. Finally, he found them at a store two hours away, and nearly bought out their entire supply. “We put plexiglass across the whole countertop,” Chima described. “Our employees are like bank tellers now, it’s completely covered.”
In late March, Congress convened to figure out how to save the economy from existential peril. Its answer, the CARES Act, signaled to small-business owners all over the country that they could trust the federal government to provide assistance that had been lacking elsewhere. Their saving grace would be a federal agency that few had ever heard of: the Small Business Administration.
The SBA exists in large part for crisis situations just like these. Its newly minted Paycheck Protection Program, or PPP, was meant to serve a dual purpose: For companies with fewer than 500 employees, it would provide bridge capital for business owners to ride out the shutdowns, while providing enough funds to shield their workers from layoffs. The loans would cover eight weeks of worker salaries and operations, and if businesses spent at least 75 percent on maintaining payroll, the loan would be forgiven. In the name of speed, private banks and lenders would disburse the money, and the SBA would backstop.
In many ways, Chima was the perfect candidate. For many years, the SBA has routinely underwritten the expansion of fast-food giants and chain restaurants by supplying franchisees, who pay fees back to their corporate parents, with cheap seed funding. Chima hadn’t used an SBA loan in the past, but he kept fastidious payroll records, so it wasn’t hard to apply, and in Stockton, where rents aren’t as astronomical as in other parts of California, spending 75 percent of his loan on wages for his 21 employees was feasible. Bank of America, where Chima had his accounts, limited the program at the outset to small businesses with which it had a pre-existing relationship; Chima figured this gave him an in.
So, when the program opened for applications on April 3, Chima downloaded a form off the Bank of America website, uploaded payroll information and personal identification, and hit submit.
What he thought might have been the end of the story, or at least a two-month intermission, was just the beginning of a Homeric quest. Two days later, Chima received email confirmation that his application had been received. Then, for days, nothing. The bankers at his local branch had no insights; the SBA website told him not to reach out to local branch employees.
Ten days on, an email alerted him that his application was incomplete. It didn’t specify what was missing, but there was now an updated version of the forms. So, quickly, he downloaded and re-uploaded them. He got that same email alert on the 17th. Again, he re-uploaded. On the 18th, the same. A local community bank turned him away, on the grounds that he didn’t already have an account with them. He tried applying through PayPal, but ran into problems with their application as well; it refused his driver’s license as valid identification. He emailed them for help, too, and got no response. He also applied directly through the SBA website for an Economic Injury Disaster Loan, and was awarded a paltry $10,000.
By April 17, the SBA had already announced that the initial $349 billion appropriation for the PPP was gone.
So after weeks of waiting, and with May rent looming, Chima had received just $10,000 to stave off catastrophe. He wasn’t an exception. “I’ve talked to four other small-business owners and none of them have gotten anything so far,” he told me. One had received an EIDL.
COUNTLESS STORIES HAVE emerged to this effect: small-business owners left out of a too-small program, hastily assembled by an overmatched administration, furnished by a too-greedy private banking sector. All of this has conspired to push mom and pop to the brink. Already there have been lawsuits; with each new revelation about the program’s well-fed recipients, outrage swells.
Who is to blame? And how did the SBA, a government department that has been generously described as a backwater for almost its entire 70-year existence, end up as the last line of defense against a global economic crisis? One would think that an agency designed to cater to the needs of something so universally adored and essentially American would be as robust and well managed as any in the federal government. One would be wrong. Understaffed, underfunded, habitually scorned, sleepy, captive, and at times uncertain in its own methods, the SBA became the most important unknown government agency, basically overnight.
The SBA was founded in 1953, under President Eisenhower. It was cobbled together from spare parts of the recently dismantled Reconstruction Finance Corporation, an agency created by Herbert Hoover but expanded drastically by Franklin D. Roosevelt to become one of the essential bodies of the New Deal. At the height of the New Deal era, the RFC loaned money to state-chartered banks and small banks in rural areas that were not part of the Federal Reserve System. The RFC could make loans that the Fed and other lenders would not accept, expanding access to funding to crucially underserved and underdeveloped parts of the country. It even bought stock in flagging industries and helped them right the ship.
As the country prepared for World War II, Congress gave Jesse Jones, the RFC’s head, practically limitless power in establishing weapons and defense manufacturing. At the same time, it created the Smaller War Plants Corporation (SWPC), which made direct loans and encouraged banks to lend to small entrepreneurs, diversifying military contracting and preventing monopolistic dominance. As the RFC waned, Eisenhower, wary of the “military-industrial complex” from his time commanding the Army, looked to create a nondefense analogue to the SWPC. “Eisenhower was an anti-monopolist, he very much understood small business, and believed the role of government was to keep industries from becoming too concentrated,” said Stacy Mitchell, co-director of the Institute for Local Self-Reliance. “Republicans wanted to differentiate themselves from Democrats and decided to launch the SBA as part of that thinking.”
The decision was met with trained disinterest from the small-business world. “The small-business community wanted protection and working antitrust laws,” said Brian Callaci, a labor economist and Postdoctoral Scholar at the Data & Society Research Institute. Antitrust was still relatively robust in the 1950s, and access to capital wasn’t as big a concern, Callaci explained. “No one really wanted the SBA.”
But in an age when federal agencies were actually responsive and well organized, SBA got off to a good start. It provided useful and necessary funding for upstart small businesses, particularly to those frozen out of the traditional banking sector. It also lent to natural-disaster victims (an analogue of the Economic Injury Disaster Loans granted during the coronavirus crisis), assisted small business in obtaining government contracts, and provided management and technical assistance to startup entrepreneurs.
But before long, large corporations discovered the SBA money pot, and began scheming to siphon funding for their own advancement. The automobile, oil, and hotel industries pestered the agency for access. But the chain restaurant industry was most successful in breaking through. Fast food in particular relied on franchising to circumvent some restrictions on monopoly behavior. Like Harpreet Chima, franchise owners were freestanding legal entities, but the parent company controlled them through restrictive and far-reaching contracts.
Franchises were initially considered, in the words of then-Administrator Eugene Foley, “distribution outlets of large businesses.” But in 1966, the SBA succumbed to lobbyist pressure from the International Franchise Association and changed its rules, which overnight set it on its current path toward corporate capture. The SBA now actually gives special preference to aspiring franchisees, despite the fact that the failure rate of Subways and 7-Elevens is much higher than that of the average independent small business. In 2014, 43 percent of first-time franchisees obtained financing from SBA loans.
Once chain restaurants had picked the lock, the SBA’s anti-monopoly convictions became etiolated even further. In the late 1960s and early 1970s, President Richard Nixon turned to the SBA as a way to advance a vision of minority capitalism, placating some civil rights activists in a marginal, pro-business manner. But that wasn’t the only reason for his embrace. One of Nixon’s biggest financial contributors was Ray Kroc, founder of McDonald’s, who saw in the SBA an opportunity to underwrite the expansion of his burger empire. Companies like McDonald’s had more than enough money to furnish financing for their own upstarts, but as Kroc cunningly divined, a willing federal agency putting up the money itself would mollify his downside. That blueprint has caught on industry-wide.
From the outset, the agency was wary of loans in disadvantaged communities, an ominous echo of the Federal Housing Administration’s reluctance to forward housing credit in “redlined” cities. In 1966, the SBA ruled that “we do not intend to provide start-up financing for a small grocery, beauty parlor, carry-out food shop … unless there is a clear indication that such a business will fill an economic void in the community.” The Minority Lending Program set up in the Nixon years never matched its promise: SBA loans to African American business owners sunk from 38 percent of the SBA’s minority-lending portfolio in 1980 to 9 percent in 2004; loans to Latinos were cut in half. (Loans to Asian small business, by contrast, skyrocketed during this period to about two-thirds of the entire program.) Now, according to sociologist Tamara K. Nopper, “the SBA publicly promotes the idea that black economic progress has sufficiently been made.”
A critical change in SBA policy accompanied (and perhaps caused) those minority-lending shifts. In the early 1980s, the SBA decided to save money on staffing by switching from a direct lender to a guarantor of loans originated by private banks. It just so happened to save the agency from the firing squad of the Reagan Revolution, as private banks intervened to protect the generous guarantees, and the fees they were wringing out of the program. But it also led to black-business access to SBA loans deteriorating, mirroring private banks’ disinterest in servicing minority communities.
For many years, the SBA has routinely underwritten the expansion of fast-food giants and chain restaurants by supplying franchisees with cheap seed funding.
Over the next 20 years, the SBA limped along, brutally underendowed, a frequent target for elimination by Congress, showing up in the public consciousness only as a scandal generator. As part of George W. Bush’s contemptible Hurricane Katrina response effort, the administration deputized the SBA’s Office of Disaster Assistance to disgorge more than $6 billion in loans to Gulf Coast disaster victims. Investigations later found that more than half of the loans were issued with shoddy paperwork, hundreds of millions of dollars went missing, and a significant percentage of borrowers fell into default without making a single payment. An alleged botched cover-up, according to journalist Keith Girard, “was a cynical, contrived campaign to clear a backlog of Katrina loans from the SBA books—at any cost—simply to help the Bush administration save political face.”
For the beleaguered agency, scandals became commonplace. In 2008, Congress created three new disaster relief programs, designed to get needy businesses funds within 36 hours. The SBA only piloted one of the programs, and it issued zero loans in seven years. A 2008 inspector general report found a quarter of SBA loans involved improper payments; a 2010 audit by the Government Accountability Office found 61 of the top 100 small-business contractors were in reality large businesses. In 2018, a review of the preceding decade found a glut of objectionable lending: funding to 74 yacht clubs, plastic-surgery clinics, $280 million to private country clubs, $12.2 billion to highly capitalized venture capital firms, and more.
Perhaps most important, the agency had done little to inconvenience a rapid, accelerating, and uninterrupted consolidation of the American economy. Born as an anti-monopoly tool, the SBA became as ineffective as the rest of the federal government to prevent the Second Gilded Age.
Despite that battery of indictments, despite enduring dysfunction, despite being so overlooked that President Trump initially appointed the first lady of professional wrestling Linda McMahon as its head, the SBA, up through this March, still offered an essential service. The vestiges of its mission can be seen in the professional development it gives to minority entrepreneurs, in the way it helps to a limited degree mitigate some of the obvious racial biases in the banking world. “It’s a relatively tiny sliver of the whole, but it’s critically important,” said Mitchell, of the Institute for Local Self-Reliance. “SBA loans have heavily gone to small businesses, women-owned businesses, people of color, people who don’t quite meet the underwriting criteria but are close. Bottom line, this is an agency that does important stuff but doesn’t function as well as it should.”
And then, the coronavirus hit.
IN 2019, THE SBA GUARANTEED about $30 billion in loans, not even 5 percent of all small-business lending from banks and credit unions. In the $2.2 trillion CARES Act pandemic response package passed on March 27, it was suddenly tapped to disburse $349 billion in emergency Paycheck Protection Program funding, more than 11 times its annual loan book, in a matter of days. “It was good policy to tie this notion of a forgivable loan to you holding on to your employees, that was a good feature,” Sarah Bloom Raskin, former Treasury official and Fed governor, told the Prospect. “But the SBA’s website is notoriously the most crashable website out there. Even pre-pandemic, businesses could barely rely on that website.”
The leader of this uncertain project would be Jovita Carranza, approved by the Senate in January 2020, just weeks before the crisis unfolded. Carranza had served as an adviser to Treasury Secretary Steve Mnuchin on the Opportunity Zones program in the Trump tax cuts, which within months had been revealed as a shallow and often openly corrupt ploy to help investors skirt the capital gains tax. At least she had experience at the agency, serving as the SBA’s deputy administrator from 2006 to 2009.
Carranza’s initial few weeks in office followed the time-honored tradition of Republicans in government advocating for the demise of the very agencies they direct. Her first proposed budget sported an 18 percent cut overall and a 36 percent cut to entrepreneurial development, despite the fact that the SBA, for all its limitations, essentially costs taxpayers nothing. This attempted hit on the budget came while coronavirus clusters raged in Washington and New York state.
By the time shutdown orders crested in April, at least 43 percent of businesses had temporarily closed, and employee counts fell to 40 percent of the level in January. Small business, which accounts for an estimated 44 percent of gross domestic product, was facing an extinction-level event, and would need a herculean intervention to have any shot at salvation.
It wasn’t a foregone conclusion that the SBA would head up this program. For many, it made more sense to have the Treasury, which is better staffed, more capable, and already in possession of the relevant documentation through the IRS, do such a task. But Congress tapped the SBA, an agency with just 4,000 employees. If there’s any bureaucratic muscle left in the atrophied Trump administration, the SBA isn’t it.
PPP loans, furnished as an expansion of the administration’s usual 7(a) lending program, would offer either $10 million or 2.5 times a small business’s average monthly payroll, whichever was less, at an interest rate of 0.5 percent (a rate that doubled after banks groused). The loan would be forgiven entirely so long as at least 75 percent of it was spent on payroll, and all employees were retained, or rehired. There was also a separate program for Economic Injury Disaster Loans, with an advance of up to $10,000, also forgivable.
Even in a normal year, the SBA is in no position to handle its own 7(a) lending. So it followed its familiar model: contracting lending out to private banks and financial firms (including upstart financial-technology companies, which earned new validation as vital lenders despite sitting outside the regulatory perimeter). The agency didn’t release guidelines for the program until the night before it was supposed to begin. Some banks were so flummoxed by the vagaries of the rules that they didn’t open lending for days, a real problem for business owners reliant on their long-standing banks, since the program was first come, first served. When the money ran out, the loans closed.
The PPP loan application opened on April 3, and the mad dash began, although it was more maddening for some than others. The SBA’s “E-Tran” system, which took in the loan applications for authorization, crashed repeatedly. The chair of the Independent Community Bankers of America claimed on April 7 that one-third of community banks were locked out of the system.
By April 16, less than two full weeks after the PPP’s kickoff, it was already out of money. In some sense, against all odds, that was a huge success. The SBA was tasked primarily with getting money out as fast as possible. Despite widespread confusion, and given its limitations, two weeks wasn’t bad. The paucity of funding, which pitted businesses against one another, wasn’t the SBA’s fault. “I think the program was relatively successful,” said Shaoul Sussman, legal fellow at the Institute for Local Self-Reliance and litigation clerk at Pearl Cohen.
But as recent history has shown, an inadequate bailout, in a moment of acute crisis, presided over by private financial entities with their own set of aims, breeds certain outrage. And even though money got out the door, the initial returns on where that money went were less rosy.
Due to shutdown orders, small business, which accounts for an estimated 44 percent of gross domestic product, was facing an extinction-level event.
The first scandal wave came from the restaurant industry. That should have come as no surprise, given the SBA’s unique subservience to fast food. But in many cases, it wasn’t franchisees, but the corporate headquarters directly, that reaped the benefits. Ruth’s Chris Steak House, applying as two separate legal entities, secured $20 million in loans, circumventing the $10 million cap. Shake Shack, which trades publicly on the New York Stock Exchange with a multibillion-dollar market cap, secured $10 million, and Potbelly sandwiches and Taco Cabana maxed out as well. None has fewer than 500 employees.
This was no accident, but a direct function of program design. Tucked deep in the 900-page bailout was a clause specifying that, while applicants were limited to businesses with fewer than 500 employees, large restaurant chains needed just fewer than 500 employees “per physical location” to be eligible. This enabled AutoNation, a Fortune 500 giant with $21 billion in revenues, to grab at least $77 million through 81 separate dealership locations.
As The New York Times reported, that loophole was lobbied for by the National Restaurant Association and the same International Franchise Association that captured the SBA in the 1960s. Sen. Marco Rubio, head of the Small Business Committee, with help from Chuck Schumer, ferried it through. AutoNation, Shake Shack, Potbelly, Taco Cabana, and Ruth’s Chris were all later shamed into returning the loans.
In addition to franchises, over 200 publicly traded companies received PPP loans, despite having access to the capital markets for short-term assistance. This includes the two-decade-old tech veteran RealNetworks, traded on the NASDAQ. Another surprising PPP recipient was the Los Angeles Lakers, whose top employee LeBron James has a net worth of about $480 million, about 104 times the $4.6 million loan they received. (The Lakers, too, gave back the money.)
The second wave of scandal came from the banks. Congressional statute held banks completely harmless for any fraudulent activity within the loan applications. All they had to do was comply with anti–money laundering rules by confirming the borrowers were living, breathing human beings. For this, banks garnered outsized fees for processing the applications, as fixed percentages of the loan amounts. Though the percentages dropped from 5 percent for smaller loans to 1 percent for the largest, it still made bigger loans more lucrative, far outstripping the meager cost of processing.
Lenders did not need to wait for SBA confirmation of any sort, empowering them to do whatever they wanted. Large banks—JPMorgan Chase, Bank of America, and Wells Fargo, among others—predictably favored their own customers, because they could use their existing anti–money laundering compliance to cover those loans. They also, according to data and allegations in federal lawsuits, prioritized bigger loans to high-end clients, not only reaping bigger loan fees, but helping customers more likely to purchase other products.
More than 300,000 customers of JPMorgan’s business banking unit, which serves smaller firms, applied for loans; just 6 percent were approved. By comparison, some 5,500 high-dollar customers of the commercial banking business applied for funding, and nearly all of them got loans, according to the bank’s own data. The New York Times referred to that as “concierge service.” Within days, Wells Fargo, Bank of America, JPMorgan Chase, and US Bank were sued over alleged loan shuffling to prioritize high-dollar applications.
Despite this high-profile nefariousness, small banks seemed to navigate the program much better than their larger counterparts. An Institute for Local Self-Reliance study found that “three times as many PPP loans were made per capita in the ten states with the most community banks … compared to the ten states with the fewest.” Smaller banks, invested in the communities in which they lend, just worked harder to make the program succeed. Of course, those loans wound up being quite a bit smaller. Nearly 45 percent of the money in the first round of PPP went to just 4 percent of the firms that received loans.
In a cruel twist of fate, the PPP’s structure has resulted in the SBA presiding over a massive racial wealth transfer away from minority small-business owners. According to the Center for Responsible Lending, a galling 90 percent of women and minority business owners were shut out of the first round of the program, including 95 percent of black-owned businesses, 91 percent of Latino-owned businesses, and 91 percent of Native Hawaiian or Pacific Islander–owned businesses.
Even before this program, the SBA’s migration toward large, private banks to do its work was, in part, actively undermining its own mission. It was those very banks’ well-documented penchant for bias against women entrepreneurs and entrepreneurs of color that necessitated the SBA in the first place. A provision in the PPP statute restricts the formerly incarcerated from accessing the loans, and that population is disproportionately black and brown. With community banks shrinking in minority communities, and large banks refusing to cover those same neighborhoods, the people most reliant on the SBA quickly became the least likely to benefit from its newest and most essential lifeline.
Lastly, proving beyond a doubt that this was a Trump-administered program, close affiliates and major donors to the campaign raked in PPP cash. Electric-truck startup Nikola Motor, currently in the midst of a merger with a public company that values it at $3 billion, received over $4 million; it’s run by Trevor Milton, a billionaire Trump donor. Indiana-based coal mining outfit Hallador Energy took $10 million after it had sacked 60 employees in March, though it made sure to retain former EPA Administrator Scott Pruitt. The school Steve Mnuchin sends his kids to was among many elite private schools to grab some PPP money. Luxury hoteliers Monty Bennett and his son Archie Bennett became the single-largest recipients of small-business bailout money, pocketing over $59 million for their various holding companies that contain, among other properties, the Ritz-Carlton in St. Thomas. That father-son duo has given nearly half a million dollars to Trump since 2016. (After weeks of pressure, they finally gave back the money.) That’s far from an exhaustive list, but this magazine is only 64 pages long.
On April 23, Congress passed another stimulus bill, re-infusing the PPP with another $310 billion, and no additional oversight. When it reopened April 27, the SBA’s “E-Tran” system crashed within ten minutes.
THE PPP’S MONEY ALREADY drained, Chima kept applying. On April 18, he submitted applications to Lendio, an online lending service, and Ready Capital, a nonbank real estate finance company. “We’re just hoping one of these comes through for us,” he said. On April 21, Lendio sent him a notification that his application had been accepted, and he was in the line to receive money, if enough was allocated in the second wave. Three days later, Ready Capital informed him they were going to submit his application to the SBA. That same day, PayPal, despite the online application seemingly refusing his ID, sent a contract with loan terms, ready to sign. Then an email came from Bank of America saying he had been assigned an SBA number, “which I believe means funding is secured,” he told me.
[Full disclosure: The Prospect also received a PPP loan in the second round of funding, also through PayPal.]
Even with an additional round, uncertainty is the only thing not in short supply. One report found that only 5.7 percent of small businesses received a loan in the first round, though 70 percent of them applied. Plus, because 75 percent of the loan has to go to payroll to be forgiven, companies that spend excessively on rent would have trouble meeting that standard, sinking them into (admittedly low-interest) debt, with no guarantee on when their businesses would come back to life. High-rent areas include New York City and Seattle, epicenters of the crisis; they also happen to be heavily Democratic regions.
For those who somehow managed to secure the elusive funds, a new wave of confusion has crested. That’s because, for all the headline commitment to forgiveness, the program’s exact rules remain muddied and nebulous. The 75 percent payroll stipulation has disincentivized business owners from buying protective equipment for their workers, lest they spend too much on anything other than salary, and get disqualified from forgiveness. Fear of violating terms, or worse, committing bank fraud, remains high. Plus, eight weeks of payroll support, at this point, will not be enough to save almost anyone. Demand will return slowly. A survey from the Society for Human Resource Management found that 52 percent of small-business owners expect to close up shop within six months.
Big businesses are returning loans and small businesses are afraid to spend them. It seems possible that the SBA participated in another corruption-addled program and, against all odds, managed to overcome its extreme limitations to blunt the edge of the crisis. Did the SBA save the day? Did it save itself?
The SBA’s future is as murky as the small-business community’s. But this crisis has proven its necessity.
In many ways, the SBA’s future is as murky as the small-business community’s. But this crisis has proven its necessity. If small business is indeed critical to the fabric of American life, massively expanding SBA funding, and revoking decades of cuts to staffing, is an obvious choice. Hilariously, after banks were hammered for favoring the wealthy and well-connected for PPP loans, President of the Consumer Bankers Association Richard Hunt groused that “the government should have given money directly to businesses,” marking the first time in recent memory that a beneficiary of privatization argued against privatization, and instead for government to publicly provide services itself. The government should take the Consumer Bankers Association up on the suggestion, and staff the SBA the way that the Home Owners Loan Corporation was staffed during the New Deal, directly issuing loans out of a government office. The SBA should have an active representative within the next president’s Cabinet.
The coming months will prove decisively whether the SBA did manage to save small business, but saving the atrophied SBA from its own extinction should occur regardless of that outcome. Adding money for oversight to claw back fraudulent claims would help restore long-lost faith. And the SBA’s Office of Advocacy, which encourages small-business perspectives in regulations across the federal government, could be wielded to fight the corporate concentration sure to result in the pandemic’s aftermath.
For a potential incoming administration, restoring the SBA to its RFC roots could play an essential role in our economic recovery, directing resources where needed rather than hoping the free-market financial system will make unbiased decisions. A more imperial agency, with legitimate funding and staff, a remit beyond fast food, and a seat at the table, could meaningfully shape the post-crash economy. Finally, nearly seven decades after its founding, the small-business community might depend on it.
