The Paycheque Protection Program is now more accessible, but it is still flawed
The Paycheque Protection Program – a forgivable loan effort designed to help small businesses cover costs during the Covid-19 pandemic – is now more accessible than ever, even if it still does not meet the needs of many companies.
The White House announced on Monday a new round of changes which aim to prioritize smaller businesses and strengthen support for black and Latino business owners who were left behind in the early waves of the program. These adjustments attempt to make program loans more useful for the self-employed and to clarify how non-citizens can apply. They are also trying to clear the queue for very small businesses by forcing banks and other lenders to only process applications from businesses with less than 20 employees, for a period of two weeks.
The updates are in response to major disparities in the allocation of PPP loans, and they resolve some long-standing issues. So far sole proprietors and independent contractors – 70% of whom are women or people of color – have been cheated by the program because of the way loans are calculated: last year some received as low as $ 15 after applying to the program. Those who run smaller businesses with fewer employees are also among those who have not received as much support as their larger counterparts. (As CNBC notes, 98 percent of small businesses have 20 or fewer employees, but they received 45 percent PPP funding.)
The latest changes aim to fill these gaps, with over a month remaining in the current PPP application process and $ 150 billion remaining in congressional allocated funds.
Small business advocates welcome these changes, although they note that there is still a long way to go to improve the program, which has proven confusing and overwhelming for many. Because PPP still has relatively rigid rules on how the money can be spent, as well as a complicated loan cancellation process, some small businesses have been reluctant to use the program and risk taking on more debt.
“Because some of the parameters of PPP are so strict, we would like small business owners to get direct access to grants,” said Awesta Sarkash, government affairs manager for Small Business Majority, a small business organization. The subsidies would give businesses a lot more flexibility – and could be an important part of future Covid-19 relief.
What the changes would do
Despite campaigners’ concerns that P3 funding will still not reach all homeowners who need it, overall, the changes ensure that more people can get funding from the program – and put pressure on lenders to get funding from the program. ‘they help small organizations. Here’s a look at what the tweaks are:
- Individual homeowners can calculate their loans differently: Previously, self-employed people calculated their loans using net profits instead of gross income, which failed to capture the full costs that sole proprietors and independent entrepreneurs face. The new formula aims to help both groups obtain larger loans, CNBC Reports:
For companies with employees, PPP loans generally represent 2.5 times salary costs. But for one-person businesses that have no payroll, lenders have used IRS 1040, Schedule C, net profit number, which includes deductions. For this reason, some workers saw very low loan amounts in previous cycles of the program.
To solve the problem, the SBA is revising the formula to match what it uses for farmers. This essentially means that they will instead calculate loan amounts from gross income instead of net profit, said Chris Hurn, managing director of Fountainhead Commercial Capital.
By changing the way sole proprietors and entrepreneurs determine the amount of their loans, this new process should allow them to receive support more closely tailored to their needs.
- Individuals convicted of an unrelated felony in the past year can apply: Previously, those convicted of felony in the past year were not eligible to apply for the program. The new administrative guidelines change that and ensure that anyone convicted of a non-fraud crime can get P3 funding. It makes the same change for people who have defaulted on their student loans – by opening applications to those who had previously been blocked for that reason.
- Loan requests for non-nationals are clearer: Non-nationals with legal immigrant status have been able to apply for the program since its inception, but previously there was confusion about the personal information required to do so. The new changes note that people with green cards or visas can apply for PPP using their individual tax identification number.
- A two-week deadline is reserved for smaller companies to apply: Between February 24 and March 10, only small businesses with 20 or fewer employees will be able to apply for the PPP, eliminating queues for lenders, including banks and fintech companies. While demand for PPP has declined since its inception, this special layaway helps ensure that small businesses get the consideration they need from the program.
- The app evolves to help collect demographic data: So far, around 75% of applicants have not provided demographic information, making it difficult to officially track who has been able to access these loans. To better understand the scope of PPP, the administration is supporting a redesign of the application form so that people are more encouraged to submit self-identification information.
What could make the program even more accessible
While these adjustments go a long way towards affordability, they don’t do much to address some of the program’s bigger issues, including the complications of canceling the loan.
As designed, business owners can request a loan forgiveness after receiving the funds and demonstrating that they have been used to cover salary costs and operational needs. The current formula requires business owners to spend 60% of the loan funds on personnel costs in order for the loan to be canceled, with the option of spending the remaining 40% on non-salary costs like utilities and rent.
These limitations, however, do not match the financial needs of many small businesses, which may have operating expenses far greater than their payroll. Additionally, companies have to complete a loan forgiveness application to ensure they don’t incur debt under the program, which puts added strain on already strained organizations.
For months now, advocates have argued that PPP should simply take the form of grants, instead of forgivable loans – a demand that has been echoed by 80 percent of small business owners. As Sarkash said, one way to do this could be to distribute the remaining P3 funds in the form of grants instead of loans, a change that would require further action from Congress. Currently, Democratic lawmakers plan to allocate nearly $ 50 billion to help small businesses in a new Covid-19 relief bill, some of which are grants.
“The Biden administration’s updates on the PPP are a welcome recognition of the key gaps and challenges in the program.” Main Street Alliance director of government affairs Didier Trinh said in a statement. “These updates will help expand access, but more is needed to support small businesses. “