By Neil Hare
President Biden announced changes to make it easier for companies with fewer than 20 employees … [+]
As an early move to put his stamp on the Paycheck Protection Program (PPP), President Biden announced some new changes on February 22, 2021 that will make it easier for companies with fewer than 20 employees to obtain credit and will screen some of the largest borrowers . In a public address and subsequent written publication by the White House, Biden put forward some “reforms” for the PPP, the SBA’s loan to grant a program that is now in its third round of funding.
On December 27, 2020, Congress passed the Economic Aid Act, and former President Donald Trump signed the bill, granting an additional $ 284 billion for PPP. The new funding is for first-time borrowers and businesses that received a PPP loan in the first rounds and saw gross revenues decrease 25% or more in each quarter of 2020 from the year-ago quarter.
Biden’s intent with his PPP changes is to give the smallest companies time to apply before larger companies potentially take over the lion’s share of this round, which is currently open through March 31, 2021. The President introduced a 14-day deadline from Wednesday. February 24, 2021 when only small businesses with 20 or fewer employees can apply to give them time to put together the necessary documentation and lenders to focus on them. The White House found that 98% of American small businesses have fewer than 20 employees.
In addition to this moratorium, the President announced the following additional changes:
1. More help for sole proprietorships, independent contractors and the self-employed
Biden announced a change in how loan amounts are calculated to provide more help to sole proprietorships, independent contractors, and the self-employed, including repair companies, estheticians and small independent retailers. Biden noted that these companies make up a significant majority of all businesses, many of whom are black, and those without employees are “70% owned by women and black people.”
Many of these companies received little PPP funding due to the structure of the program. Under current guidelines, a PPP loan for a company with employees and on a payroll system is calculated by taking a month’s payroll and multiplying it by 2.5. For independent contractors, sole proprietorships and the self-employed, the loan amount calculated is based on an average month of “net income” or gross income minus taxes and expenses (Appendix C on their tax returns) multiplied by 2.5. In many cases this formula has resulted in very small PPP loans to these individuals.
To address this issue, the Biden administration said it will “revise the credit calculation formula for these applicants to provide more relief and allocate $ 1 billion to businesses in this category with no low and middle income (LMI) employees) areas. “
2. Relief for offenders who have not been fraudulently convicted
The current PPP excludes a company if it is at least 20% owned by someone who has been arrested or convicted in the past five years for a grant fraud crime or another crime in the previous year.
The White House said it is adopting reforms to the PPP Second Chance Act, a non-partisan law jointly introduced by Senators Ben Cardin (D-MD), Rob Portman (R-OH), Cory Booker (D-NJ) and James Lankford was sponsored (R-OK), which would remove the restriction on those convicted of a crime within the past year, provided the applicant or owner is not detained at the time of the application.
3. Include entrepreneurs who have defaulted on student loans
The new reforms will remove an exclusion that prevents small business owners who have defaulted on their federal student loans from receiving PPP loans. Currently, the PPP is not available to any company that is at least 20% owned by an individual who is currently defaulting or has defaulted on a federal debt, including a student loan, in the past seven years. Biden noted that “Millions of Americans have defaulted on student loans, including a disproportionate number of black borrowers.”
4. Providing PPP to lawful non-citizens
While the PPP law allows all legitimate US citizens such as green card and Visa holders access to the program, a lack of guidance from the SBA has created some confusion. Many of these business owners use Individual Tax Identification Numbers (ITINs) to pay their taxes and there is a confusion as to whether they can use their ITIN to apply for PPP. According to the White House, “the SBA will issue clear guidelines in the coming days that otherwise eligible applicants cannot be denied access to PPP for using ITINs to pay their taxes.”
Biden strives for fair distribution and transparency
Since the goal of the first two rounds of PPP was to get the funding into the hands of small business owners as quickly as possible, mainly to keep workers on the payroll, some of the common requirements for SBA loans have been dropped. First and foremost, companies only had to certify themselves that they had no access to “capital elsewhere”, which has to be documented for typical SBA loans. And they also had to confirm that “economic uncertainty” required the loan. This relaxation of regulations led some to conclude that fraud and abuse were widespread throughout the program.
In addition, certain companies like Shake Shack, Sweetgreen, Ruth’s Chris Steak House, and most recently a company owned by star quarterback Tom Brady, received funding, creating a backlash in public relations. In many cases, companies have followed the rules and met the requirements. However, some claimed that while technically meeting the requirements, they should step back and bring small and minority-owned companies to the top. In response, the SBA created a safe haven for companies to return PPP loans with no questions asked, and many larger borrowers did just that.
It has been really well documented that companies with CFOs, controllers, CPAs of accountants, attorneys, and those with strong banking relationships found it much easier and faster to get credit. Many of the smallest businesses lack these resources.
Biden set out the following measures aimed at addressing fairness and transparency:
- To combat waste, fraud and abuse, borrowers now require loan guarantee approval, unlike the previous round of PPP, which is conditional on passing SBA fraud checks, Treasury Department’s Do Not Pay database and public records. For borrowers on the largest loans, believed to be over $ 2 million plus a “random sample of other loans,” the SBA will now perform manual credit checks.
- To “promote transparency and accountability,” the White House announced a new and improved PPP loan application. The new application will encourage self-reporting on demographic data to “better illustrate the impact of PPPs on different population groups”. If you read between the lines on the other hand, this measure will give some borrowers a break as they feel the need to disclose more personal information than has previously been required. On the other hand, it will enable better tracking of the impact of funds in different communities.
- The SBA will also improve key areas of their website to provide tips, tools, and information to borrowers to understand the various relief options available and how to complete loan applications. This site upgrade coincides with increased engagement with stakeholders, companies with fewer than 20 employees, minority and women-owned companies, and companies in economically disadvantaged communities so the SBA can learn about and respond to the needs of those companies.
- Finally, the White House is trying to improve the relationship between the SBA and lenders to give more small businesses access to the capital they need. In its statement, the administration described these efforts as “an opportunity for lenders to make recommendations and ask questions about the PPP, and to move forward with resolving outstanding questions and concerns in a more rational manner.” This could be a very harmless and laudable initiative or a back door mechanism for improved banking regulations. Only time can tell.
What are the bigger effects of Biden’s changes to the PPP loan program?
These new reforms, while not earth-shattering, do signal various aspects of the new Biden government. On the positive side, their focus on the smallest businesses and those in the most economically deprived areas is a positive step in giving more businesses access to PPPs. The economic impact of Covid on all small businesses has yet to be fully understood and calculated. More help is needed – and fast – to survive the hopefully final stage of Covid.
It’s also positive that Biden addresses the needs of small businesses early in his administration. While small businesses have always been referred to as the “backbone of our economy” and the greatest creators of jobs and innovation, they are often forgotten when large corporations flex their muscles and the politics is done.
The negative signal here, however, is that the speed at which the original PPP funding was deployed could be replaced by more red tape at both the front end of the application and the back end of the application for forgiveness. This will certainly be the case with large borrowers, as Biden found that he did not consider companies with 500 employees to be small, even though the SBA defined them as such. The message is clear to the banking industry as well that there is a new sheriff in town and that more control and regulation are likely.
CONNECTED: EIDL Warning: Why You Need to Read the Fine Print on a Loan Agreement
About the author
Neil Hare is an attorney with McCarthy Wilson LLP law firm and President of Global Vision Communications, where he specializes in campaigning, advocacy and communications for small businesses. Follow him on Twitter @nehare and on LinkedIn. For more articles by Neil and the full bio, visit AllBusiness.com.