If there isn't enough money on the business' end to immediately issue all refunds, what does PayPal do?
PayPal will pay out of their pocket and then try to recover the money from the linked account if there are no direct funds.
I had a PayPal dispute (and refund) over an e-bay scammer who scammed about 400 people (amounting to about $20K total). The scammer had marked things as shipped (to delay disputes) and nobody got anything. I'm sure the money was long gone before PayPal got the first dispute. Point being, Paypal will pay even if there are no funds.