Prior SBA 7(a) Relationships Enable 29 Percentage Point Funding Boost during PPP Crisis

The allocation of emergency credit during times of economic crisis often favours those with established financial connections, a phenomenon Chunyu Qu and colleagues investigate through analysis of the US Paycheck Protection Program. Researchers examined a comprehensive dataset linking Small Business Administration loan records with detailed firm information, revealing how pre-existing relationships with banks significantly influenced access to vital funding. The study demonstrates that firms previously approved for SBA 7(a) loans experienced a substantial advantage, being almost 30 percentage points more likely to receive funding during the initial, frantic weeks of the PPP in April 2020. This finding underscores a critical tension between the speed of crisis response and equitable access to resources, as reliance on existing lending networks, while accelerating distribution, systematically disadvantages firms lacking established credit histories.

In April 2020, banks heavily relied on legacy ties as a screening technology, with firms possessing prior 7(a) relationships approximately 29 percentage points more likely to receive funding than observationally identical non-7(a) firms. However, by June 2021, this “insider advantage” had largely disappeared, indicating that policy adjustments and extended timelines ultimately reduced initial intermediation frictions. These findings demonstrate a fundamental trade-off between speed and equity in crisis response, as leveraging existing credit rails accelerates deployment but systematically excludes informationally opaque borrowers. This research discusses policy implications for designing future digital infrastructure that decouples verification from historical lending relationships.

PPP Loan Amounts, Regression Analysis of Factors

Regression analysis of loan data reveals key factors associated with PPP loan amounts, including pre-PPP 7(a) loan participation, employment size, firm age, financial stress, credit score, and sales. The data indicates that smaller firms, particularly those with 1-20 employees, were more likely to have utilized SBA 7(a) loans prior to the pandemic. Younger firms demonstrated lower 7(a) participation rates, suggesting that businesses require time to establish themselves before accessing these loans. Firms with strong financial health and high credit scores also exhibited higher 7(a) participation, as expected.

Analysis of monthly data shows a peak in both PPP applications and 7(a) loan participation in April 2020, reflecting the initial surge in demand for emergency funding. Firms with prior 7(a) loans applied for PPP funding more quickly, demonstrating the benefit of familiarity with SBA programs. Both PPP applications and 7(a) participation declined in subsequent months, with a small resurgence in early 2021, though with a lower proportion of applicants having prior 7(a) experience. A comparison of the 7(a) and PPP programs highlights key differences, including loan purpose, credit checks, loan forgiveness, collateral requirements, and loan amounts.

PPP loans offered a flat 1% interest rate and were 100% SBA-backed, while 7(a) loans have variable rates and varying levels of guarantee. These differences reflect the distinct goals of the two programs, with PPP focused on immediate pandemic relief and 7(a) supporting general business growth. The data confirms that prior SBA experience facilitated access to PPP loans, particularly early in the program, and that the 7(a) program effectively reaches small businesses. Further research could investigate the impact of PPP loans on firm survival and growth, and the effectiveness of the program in reaching underserved businesses.

SBA Relationships Speeded Emergency Loan Access

This research investigates how established lending relationships influenced access to emergency credit during a period of significant financial uncertainty. The team employed a sophisticated reweighting technique to construct a rigorously comparable group of firms for analysis, ensuring that observed advantages weren’t due to pre-existing differences in firm characteristics. Experiments revealed a distinct pattern in credit allocation, particularly during the initial phase of the PPP in April 2020.

Results demonstrate that firms with prior 7(a) relationships were approximately 29 percentage points more likely to receive PPP funding compared to observationally identical firms without such history. During this initial period, banks relied on these existing ties as a screening mechanism, using prior 7(a) participation and strong credit scores as indicators of reliability and reducing verification time. The data shows this reliance on established relationships significantly impacted which businesses received immediate support. However, the study also uncovered a notable shift over time. By June 2021, the advantage conferred by prior 7(a) relationships had largely disappeared, indicating that policy adjustments and the extension of program timelines successfully mitigated the initial information challenges.

Measurements confirm that late-stage PPP recipients closely resembled the broader population of small businesses, suggesting a more equitable distribution of funds as the program matured. This work quantifies a “program-layering premium,” demonstrating that participation in existing guarantee programs creates an advantage when accessing future emergency aid, a dynamic that policymakers should consider when designing future financial infrastructure. The breakthrough delivers insights into the trade-off between rapid deployment of funds and equitable access, highlighting the need for inclusive, digitally-driven verification systems that move beyond reliance on legacy banking relationships.

Established Lending Ties Aid Crisis Funding

This research demonstrates how established relationships between lenders and borrowers significantly influence access to credit, particularly during times of economic crisis. The findings reveal that, in the initial weeks of the PPP launch, firms with pre-existing 7(a) loans were considerably more likely to receive funding than comparable businesses without such a history, highlighting the importance of established lending connections when information about borrowers is limited. However, this advantage diminished over time, as the program matured and adjustments were made to address initial bottlenecks.

By mid-2021, the disparity in funding rates between firms with and without prior 7(a) relationships had largely disappeared, suggesting that policy interventions and increased processing capacity helped to level the playing field. The study acknowledges that the initial reliance on existing lender relationships, while expediting fund distribution, inherently disadvantages firms with limited credit histories or those new to the lending system. Future research could focus on developing digital infrastructure that separates the process of verifying borrower information from the need for pre-existing lending ties, potentially fostering a more equitable distribution of credit in future crises.