Early Monday morning, the Biden Administration announced it is instituting a 2-week period targeting Paycheck Protection Program (PPP) loans to small businesses only. The temporary freeze goes into effect Wednesday morning beginning at 9:00 am, and only small businesses with 20 or fewer employees will be eligible to apply for a PPP loan for the next 2 weeks. The move by the current Administration is an effort to provide much-needed funding to truly small businesses, as 98% of all small businesses in the US have 20 or fewer employees. Many of these small businesses do not maintain regular banking contacts or have access to the same network of lenders a larger, more mature business may be able to tap into.
The goal of the 14-day window is for lenders to work with their small business customers to facilitate faster loan processing, approval, and funding; the Administration felt this could be achieved by limiting the pool of potential applicants for a 14-day period. Up to 30% of all PPP applications have been denied during this round of funding due to up-front due diligence being performed by lenders to eliminate fraudulent loans and this temporary lock-out is an effort to guide funding to the hardest hit businesses.
The Biden Administration, in coordination with the Small Business Administration, has announced other structural changes to the PPP:
- The loan amount calculation and determination will be revised for Sole Proprietors reporting a loss for their business. Previously the loan amount was determined by evaluating a businesses Net Profit for the year based on the concept of “Owner’s Compensation Replacement”. This loan methodology had the unintended consequence of denying loans to businesses that reported a loss, which could be caused by a variety of reasons unrelated to corporate performance. The loan amount for these businesses will be determined by Gross Income, and specific details will be released soon.
Wiss Recommendation: Sole Proprietors that reported a loss on their 2019 or 2020 tax return should stay tuned for guidance to be released by SBA. These entities may be eligible to receive a loan under new guidance. Sole Proprietors with an application in process may want to wait and see what guidance is provided by SBA, it is possible the updates are favorable, and this business is now eligible to receive a higher loan amount. The SBA and lenders will not revise loan amounts that have already been approved, funded and disbursed.
Other notable updates:
- Borrowers with recent felony convictions not tied to fraud will now be eligible to apply for a PPP loan.
- Borrowers that are delinquent on their student loan payments will no longer be prohibited from receiving a loan under the program.
- The Administration has clarified that non-citizen small business owners who are lawful U.S. residents are eligible to receive a loan using their individual taxpayer identification number
The Biden Administration has also communicated stepped-up efforts to work with the lending community to address and streamline delays caused by validation checks during this round of PPP. The SBA has indicated increased communication and guidance to the lending community to speed up loan approval, decrease the number and volume of loan denials, while also protecting taxpayer money. SBA will also update their websites to help more potential applicants find relevant information they need to apply for a loan, continued outreach to the small business community, increased outreach, and communication with the lending community.
Wiss Recommendation: Small business concerns with 20 or fewer employees will have no issue applying for and receiving a loan during the 14-day window. In fact, many of these applicants should experience an expedited and streamlined application process. Small businesses with 20 or more employees should be patient with their lender during this process. We understand this update is frustrating and complicates the strategy we have advised during the process, but it is important to stay the course as the window will reopen to all eligible borrowers after the 14-day window on March 10th. As of February 21st, the SBA has approved $140 billion in loans, leaving approximately $145 billion in the program to be lent to eligible businesses. The application window closes March 31st, and it is widely anticipated funding levels will remain adequate until the application window closes.