In response to the ongoing economic shutdown, the federal government has allocated over $700bn to small businesses through two flagship programs, the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP). All being equal, that accounts for $25,000 for every one of the 30 million small businesses in the US. After the first round of PPP loans was analyzed, it came to light that more than 100 publicly listed companies got relief loans of more than $3M each, raising questions about the fate of the businesses who are being excluded: Main Street businesses, particularly women and minority-owned businesses. While the PPP left much to be desired, its shortcomings underscore the need for additional, fairer relief programs and a strong look at alternatives to government small business relief.
Why did the biggest companies get such a large share of relief funding?
While the rollout of the EIDL and PPP programs left much to be desired, their very infrastructure made it difficult for many local businesses to benefit. Many of the issues begin with 1) a frenzied race to apply and 2) in the case of the PPP, its bank-based distribution. The flurry of last-minute changes and the volume of requests made issuing a PPP or EIDL loan a moving target for both borrowers and lenders. As a result, businesses with financial expertise in their corner were better able to adapt to the changing requirements of these programs.
Second, the PPP’s bank-based rollout made it harder for small businesses to be considered fairly. With funds so limited and the volume of applications much larger than most had anticipated, many banks chose to prioritize business customers that already had a relationship. Still others went further and only agreed to work with businesses with an existing line of credit or outstanding term loan. For many younger or smaller businesses, these relationships just weren’t there. Not only that, but it has also been well documented that large national banks prioritized larger PPP loans which often went to big public companies or chains.
Existing barriers put minority and women-owned businesses at a disadvantage for accessing relief loans
What has been less talked about is the fact that these two factors, the complex, rushed rollout and the bank-based distribution of relief programs, put minority and women-owned businesses at a statistical disadvantage. On April 22nd, CBS News reported that experts estimate that up to 90% of minority and women business owners could be shut out of the Paycheck Protection Program given its underlying requirements.
Ashley Harrington, senior policy counsel at the Center for Responsible Lending, draws a direct correlation between having a banking relationship and having an advantage in the PPP approval process. Unfortunately, because women and minority-owned businesses are less likely to have an established business banking relationship, they were statistically left out of relief efforts. According to a 2018 report from SCORE, 34% of male-owned businesses seek bank financing compared to only 25% of women-owned businesses that seek financing. According to the Federal Reserve, Black and Latino owned businesses were 20% less likely to obtain credit from a large bank, even when controlling for firm characteristics. These persistent inequalities create an unequal playing field in the race for relief funds. As a result, many great minority and women-owned businesses are in a more precarious position than ever before.
Local lending needs to be a part of the conversation
With small businesses and particularly minority and women-owned businesses at a disadvantage in receiving federal relief funding, crucial support will have to come from the community alongside a reimagining of large scale relief programs.
The exclusion of minority and women-owned businesses from both government and private sources of capital is, unfortunately, nothing new. Local solutions such as strategic loan funds and Community Development Financial Institutions have been stepping up to meet the need through a mix of grants and loan programs. Notably many of these programs offer technical assistance and pay special attention to businesses likely to be excluded from large government programs. Unfortunately, like the PPP, the overwhelming need for capital often means that these programs dry up within days of becoming available.
Alongside these efforts, investment crowdfunding is starting to play a major role in stabilizing Main Street businesses. Everyday people have an immense desire to help businesses in their community and investment crowdfunding has let them deploy capital to help their favorite businesses emerge on the other side. As an untapped source of capital, everyday people who are in a position to contribute can use their capital to preserve the Main Streets they know and love.
On our platform, we have launched two products meant to help local businesses access capital from their community to a great public response. The Honeycomb Relief Loan Program offers low-interest crowdfunded working capital loans to businesses affected by COVID-19. Meanwhile, our Loyalty Bonds program helps businesses raise debt-free capital by selling discounted gift cards through our crowdfunding website that disburses them over four increments across two years.
82% of Honeycomb relief loan and loyalty bond borrowers are women or minority-owned businesses
These two products have garnered national attention and are onboarding dozens of business owners a week, including many that were left out of the PPP program. An early calculation shows that 82% of our relief and loyalty bond borrowers are women or minority-owned businesses. In the midst of an unequal relief effort, business owners across the country are giving everyday people the opportunity to deploy their capital to support the community they love. When the large scale government efforts fell short, local lending is joining the fight.
Four years ago, the SEC created regulations that made it possible for local businesses to publicly solicit investment in hopes that by turning people into investors, we could create a more equitable capital landscape. Now, in this moment of crisis, we’re putting that hypothesis to the test. Can everyday people make mission-driven investments to support Main Street businesses and help close the investment gap? A whole community of business owners and Honeycomb investors believe that we can. We hope you can join us.
Interested in investing in Main Street businesses through a Honeycomb loan or a Loyalty Bond? Explore existing campaigns here: Honeycomb loans or Loyalty Bonds.
* Honeycomb Loyalty Bonds are gift-card products offered through Honeycomb SMB, LLC and are not a financial security.