What You Need To Know

By Neil Hare

In an early move to put his stamp on the Paycheck Protection Program (PPP), on February 22, 2021, President Biden announced some new changes that make it easier for businesses with fewer than 20 employees to get loans, and puts enhanced scrutiny on some of the largest borrowers. In a public address and subsequent White House written release, Biden laid out some “reforms” to the PPP, the SBA’s loan to grant program now in its third round of funding.

On December 27, 2020, Congress passed, and former President Donald Trump signed into law, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), which authorized an additional $284 billion for PPP. The new funding is for first-time borrowers and businesses who received a PPP loan during the first rounds and saw a decrease in gross receipts of 25% or more in any quarter of 2020 compared to the same quarter in 2019.

Biden’s intent with his PPP changes is to give the smallest businesses time to apply before larger firms, perhaps, take the lion’s share of this round, which is currently open until March 31, 2021. The president instituted a 14-day period starting Wednesday, February 24, 2021, during which only small businesses with 20 or fewer employees can apply, giving them time to compile the necessary paperwork and for lenders to focus on them. The White House noted 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 aid for sole proprietors, independent contractors, and self-employed

Biden announced a change in how loan amounts are calculated to provide more help for sole proprietors, independent contractors, and self-employed individuals, which include home repair contractors, beauticians, and small independent retailers. Biden noted that these businesses make up a significant majority of all businesses, many of which are people of color, and businesses without employees are “70% owned by women and people of color.”

Many of these businesses only received small amounts of PPP funding due to the structure of the program. Under current guidelines, a PPP loan for a business with employees and on a payroll system is calculated by taking one month of payroll and multiplying that figure by 2.5. For independent contractors, sole proprietors, and self-employed, their calculated loan amount is based on an average month of “net income” or gross revenue minus taxes and expenses (Schedule C on their tax returns) multiplied by 2.5. In many cases, this formula has resulted in very small PPP loans to those individuals.

To address this problem, the Biden Administration stated it will “revise the loan calculation formula for these applicants so that it offers more relief and establish a $1 billion set aside for businesses in this category without employees located in low- and moderate-income (LMI) areas.”

2. Provide relief for non-fraud convicted felons

The current PPP excludes a business if it is at least 20% owned by an individual who has either an arrest or conviction for a felony related to financial assistance fraud within the previous five years or any other felony within the previous year.

The White House explained it is adopting reforms from the PPP Second Chance Act, a bipartisan bill co-sponsored by Senators Ben Cardin (D-MD), Rob Portman (R-OH), Cory Booker (D-NJ), and James Lankford (R-OK), which would eliminate the restriction on anyone with any felony conviction within the last year unless the applicant or owner is incarcerated at the time of the application.

3. Include business owners who are delinquent on student loans

The new reforms will eliminate an exclusion that prevents small business owners who are delinquent on their federal student loans from obtaining PPP loans. Currently, the PPP is not available to any business with at least 20% ownership by an individual who is currently delinquent or has defaulted within the last seven years on a federal debt, including a student loan. Biden noted that “millions of Americans are delinquent on student loans, including a disproportionate number of Black borrowers.”

4. Provide PPP to non-citizen lawful residents

While the PPP statute does permit all lawful U.S. residents like green card and visa holders to access the program, a lack of guidance from the SBA has created some confusion. Many such businesses owners use Individual Taxpayer Identification Numbers (ITINs) to pay their taxes, and there is a lack of clarity whether they can use their ITIN to apply for PPP. According to the White House, “The SBA will issue 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.”

Biden seeks to address equitable distribution and transparency

As the goal of the first two rounds of PPP were to get funding in the hands of small business owners as quickly as possible, mainly to keep workers on the payroll, some of the usual requirements for SBA loans were waived. Primarily, businesses were only required to self-certify that they lacked access to “capital elsewhere,” something that needs documentation for typical SBA loans. And, they also needed to attest that “economic uncertainty” required the loan. These easing of regulations led some to conclude that fraud and abuse ran rampant through the program.

Further, certain companies like Shake Shack, Sweetgreen, Ruth’s Chris Steak House, and recently a company owned by star quarterback Tom Brady, received funding, causing a public relations backlash. In many cases, the companies followed the rules and complied with the requirements; however, some claimed that while they technically met the requirements, they should have stood back and let small- and minority-owned businesses get to the front of the line. In response, the SBA created a safe harbor where companies could return PPP loans with no questions asked, and many larger borrowers did just that.

It has been correctly well documented that businesses with CFOs, comptrollers, bookkeepers CPAs, lawyers, and those that have strong banking relationships found it much easier and faster to receive loans. Many of the smallest businesses lack these resources.

Biden laid out the following measures that claims to address fairness and transparency:

• In order to address waste, fraud, and abuse, unlike with the previous round of the PPP, borrowers will now need loan guaranty approval contingent on passing SBA fraud checks, the Treasury’s Do Not Pay database, and public records. For borrowers of the largest loans, presumably over $2 million plus a “random sampling of other loans,” the SBA will now conduct manual loan reviews.
• In an effort to “promote transparency and accountability,” the White House announced a new and improved PPP loan application. The new application will encourage self-reporting of demographic data to “better illustrate the impact the PPP is having across various population segments.” Reading between the lines, on the down side, this measure will give some borrowers pause as they feel the need to disclose more personal information than previously required; on the upside, it will provide more tracking on the back end of the impact of funds across different communities.
• The SBA will also improve key areas of its website to help borrowers with tips, tools, and information to understand the various relief options available and how to complete loan applications. This upgrade to the website will coincide with increased outreach to stakeholders, businesses with fewer than 20 employees, minority- and women-owned businesses, and businesses in economically disadvantaged communities, in order for the SBA to hear about those businesses’ needs and to address them.
• Finally, the White House seeks to “enhance” the relationship between the SBA and lenders to provide more small businesses with access to the capital they need. In its statement, the Administration described this effort as an “opportunity for lenders to provide recommendations and ask questions about the PPP and drive resolution of open questions and concerns in a more streamlined way.” This could be a very benign and commendable initiative or a back-door mechanism for enhanced banking regulations. Only time will tell.

What are the bigger implications of Biden’s changes to the PPP loan program?

While these new reforms are not earth-shattering on their face, they do signal several aspects of the new Biden Administration. On the plus side, their focus on the smallest businesses and those in the most economically disadvantaged areas is a positive step to allowing more businesses access to PPP. The economic impact of Covid on all small businesses is yet to be fully understood and calculated. More help is needed—and fast—to survive what is hopefully the last leg of Covid.

It also is positive that Biden is addressing the needs of small businesses early in his Administration. While small businesses are always cited as the “backbone of our economy” and the biggest creators of jobs and innovation, they are often forgotten when big business brings its muscle to the table and policy is finalized.

The negative signal here, however, is that the speed with which the original PPP funding was deployed could be replaced with more bureaucracy on both the front end of applying and the back end when applying for forgiveness. This will certainly be the case for large borrowers, as Biden noted that he didn’t consider businesses with 500 employees as small, despite the SBA defining them as such. The message is also clear for the banking industry that there’s a new sheriff in town, and more scrutiny and regulations are likely.

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About the Author

Neil Hare is an attorney with the law firm McCarthy Wilson LLP, and President of Global Vision Communications, where he specializes in small business policy, advocacy, and communications campaigns; follow him on Twitter @nehare and on LinkedIn. See more of Neil’s articles and full bio on AllBusiness.com.