PPP Revamped To Benefit Smallest Businesses; Changes Start Wednesday

If you own one of the nation’s smallest businesses—say a sole proprietorship or a firm with only a handful of employees—you may not have gotten much help to date from the Paycheck Protection Program (PPP). That’s despite the fact that firms with fewer than 20 employees make up 98% of small businesses. But this morning, the Biden-Harris administration announced changes that should address that situation. Here’s what you need to know.

The changes

The administration proposed five key changes.

1. A two-week application period just for small businesses. Starting on Wednesday and through March 9^th, the administration will only allow business with fewer than 20 employees to apply for relief. The 14-day period will allow lenders to focus on serving these smallest businesses.
2. More help for sole proprietors, independent contractors, and self-employed individuals. The Biden-Harris administration is reviewing the loan calculation formula for sole proprietors, independent contractors and the self-employed. While we don’t have the details on the new calculation, this will be a very important change. The administration points out that 70 percent of businesses without employees are owned by women and people of color. The administration will also set aside $1 billion for business in this category without employees located in low and moderate-income (LMI) areas.
3. Reduced barriers for former felons.  The administration plans to increase access to applications who have either: (1) an arrest or conviction for a felony related to financial assistance fraud within the previous five years; or (2) any other felony within the previous year. This would be consistent with the bipartisan the proposed PPP Second Chance Act.
4. Assistance for business owners who are late on student loans. The administration will also increase access to business owners who are currently delinquent or have defaulted within the last seven years on a federal debt, including a student loan.
5. More access for business owners who aren’t U.S. citizens. New provisions would allow non-citizen small business owners who are lawful U.S. residents to may use Individual Taxpayer Identification Numbers (ITINs) to apply for relief. In addition, the administration will allow access to PPP for lawful US residents with an ITIN like Green Card holders and those here on a visa. The SBA will address this inconsistency by issuing clear guidance in the coming days that otherwise eligible applicants cannot be denied access to the PPP because they use ITINs to pay their taxes.

 Capitalizing on current improvements

The Biden-Harris administration hopes these tweaks will expand on the improvements on the last round of PPPP, which opened a little over a month ago. Through yesterday, the program has approved more than 1.9 Million loans for $140 Billion through 5,158 lenders in 2021. Overall, the program has approved more than 7 Billion loans for almost $663 Billions dollars.

The White House also highlighted these changes:

• Businesses with fewer than ten employees’ share of funding is up nearly 60 percent
• Small rural businesses have increased their share by nearly 30 percent
• The share of funding distributed through Community Development Financial Institutions
  
  FISI
  and Minority Depository Institutions is up more than 40 percent

In a press conference earlier today, President Biden said small-businesses are “getting crushed.” According to the President, 400,000 small business have closed, with “millions more hanging by a thread.” Biden added that Black, Latino, Asian communities being hit the hardest. These changes, along with the broader American Rescue Plan are structured to revive small businesses, leading to an estimated 7 million new jobs this year, according to Moody’s Analytics.

What we still need to know

While the proposed changes are exciting, the rollout of the program has shown us that the devil is in the details. Here are some lingering questions.

How do we create more access?

Right now, the PPP program has distributed less than half of the funds available. Small businesses need help navigating the process and often don’t have accountants, bookkeepers or lawyers to assist them. Even those that do have a team, are still having trouble. I’ve heard from people who have had to submit the same information three times for a Second Draw loan, despite using the majority of the same info they used before.

And while Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDI) are particularly equipped to help with access only 89,232 of the 1.9 Million Loans (less than 5%) have been approved by those institutions. It is likely that many of these business owners either bank with larger institutions or lack a banking relationship at all. Additionally, the program does not have any reliable demographic data. Fifty-eight percent of applicants didn’t state their gender and 74% didn’t disclose their ethnicity for the 2021 loans.

Biden said the administration will increase access by increasing oversight, inviting Inspect Generals overseeing the program to publicly report any problems. “We will ensure every dollar is spent well,” he said.

What will the new formula for sole proprietors and independent contractors actually be?

Most small business owners without employees will be looking carefully for how this new formula works. One possible approach would be to base the maximum loan amount on gross business income, rather than net. Gary Romano, President & CEO of Civitas Strategies LLC, an organization that helps small business apply for PPP loans, says this change could increase his clients’ PPP loans by 250 to 300%. “That will have a positive impact on a very small businesses’ likelihood of making it through the pandemic,” he said.

An even more important is the questions of whether this formula will be retroactive for those sole proprietors who have already applied. We don’t know yet whether these businesses will be allowed to gross up based on the new formula.

How does the fit into the American Rescue Plan?

In his press conference, President Biden explained that these changes are just the beginning of a much larger, much needed recovery. He urged Congress to pass his American Rescue Plan, a $1.9 trillion stimulus plan that includes $50B to support the hardest hit small businesses after the current PPP Program ends March 31^st. The support includes $175 million to hire community organizations as navigators for the application process as well as a hotline for help available in multiple languages. There are still a lot of questions on how all of these moving pieces will fit together, especially with the first tax deadline being less than two months away, which has caused some in the government to ask for an extension of the deadline, as the IRS did last year.

So overall definitely exciting news.  More details to come.