With just one week to go in the Paycheck Protection Program's exclusive 14-day lending window for companies with fewer than 20 employees, the U.S. Small Business Administration has released much-anticipated guidance for lenders on the latest changes. The problem: Some borrowers aren't going to like what they see.
The 32-page document, known as an interim final rule, published Wednesday, spans many of the changes to the PPP the Biden administration requested last Monday. Among others, President Biden asked the SBA to modify the loan formula for sole proprietors, independent contractors, and self-employed entrepreneurs--so called Schedule C filers--allowing them to apply for loans equivalent to their gross income, rather than their net income, which removes taxes and other expenses. Biden also authorized an exclusive lending window for the smallest borrowers, which launched on February 24 and ends on March 9.
"The Paycheck Protection Program is a bipartisan effort; Democrats and Republicans helped pass it," Biden said in his announcement of the changes. "But Democrats and Republicans have also voiced concerns about improving it. With their input, that's what we're doing in our administration: improving it."
However well-intentioned the changes may be, the new guidance will likely leave some business owners feeling disappointed.
For starters, it's clear now that you'll have to wait a minimum of eight weeks before you can apply for a second-draw loan--which is liable to be a blow for business owners like Jennifer Moxley who were hoping to be able to apply for both their first- and second-draw loans this round. An eight-week waiting period makes it impossible someone to get a second-draw loan before the current PPP round ends on March 31--even if they could handily spend down the loan proceeds during that time.
Using the prior, net income formula, Moxley applied in early February for her first PPP loan from BlueVine, a nonbank lender based in Redwood City, California. At just over $6,000, she says, it was a pittance. "I'm not ungrateful, but I have people to pay and I have rent and that's not that much money," she says.
Like many self-employed entrepreneurs, Moxley, who runs Sunshine Media Network, a Charlotte, North Carolina-based media company, doesn't pocket much of her earnings. While the nine-year-old business does well--she says she typically employs around 30 1099 employees--she invests most of her earnings back into her company. If Moxley were able to apply for a second-draw loan according to her gross income, she would be eligible for the maximum a self-employed entrepreneur might receive under the new formula--that is, $20,833--as her gross income in 2019 exceeded the individual earnings cap of $100,000. "When the White House said you're going to get special treatment ... I was like, 'Oh, my god, this is amazing.'"
Then, as details started to emerge, Moxley says she began to question whether to apply at all. "It's a joke," she says. "Small-business owners like me are missing out doing what they think is right."
Per the new guidance, Moxley also can't retroactively change her earlier loan amount and base it on the new formula. "If you applied earlier this week and your loan was submitted to SBA and approved, there is nothing you can do other than to cancel the loan and start over," says David Patti, a spokesperson for Customers Bank, which has been closely monitoring the latest PPP changes. And if you do cancel and reapply, which you can do only if the money has yet to reach your account, Patti suggests you may run into delays that could push your loan approval past the program's end date. "You run the risk that the lender won't get to you in time," he says. "It's a difficult situation. [We're] hoping there might be more clarity in coming days."
Further, the new guidance claws back a safe harbor for solopreneurs. While the SBA had previously stated it would only automatically audit all loans above $2 million, it's now making an exception for Schedule C borrowers with higher gross incomes. Because higher-income borrowers are presumed to have other available sources of liquidity, they may need to retroactively prove that they needed the loan.
PPP and the solopreneur
The challenges business owners like Moxley are facing now are just part of the difficult PPP experience for solopreneurs. While it's true that basing the original calculation on net income versus gross income almost always shortchanges founders who don't pay themselves well--which is the case for many sole proprietors--the biggest inequities of the PPP for this group aren't the government's fault, says Keith Hall, president and CEO of the National Association for the Self-Employed, a business association in Dallas.
"Small-business owners--particularly the self-employed--don't have the resources that other big businesses do. They don't have someone out there doing the application for them," Hall says. "If they take time to do the application, they're taking time away from selling to the next customer."
And many sole proprietors, independent contractors, and the like don't even know they're eligible for the program, says Martin Moll, founder and adviser at Breakaway Bookkeeping and Advising, a virtual network of bookkeepers and advisers in Tualatin, Oregon. "We find that many of the target audience President Biden is trying to reach remain unaware that applying for a loan is even an option. Either they stopped paying attention when they found out that they didn't qualify last year or, more likely, many sole proprietors are simply too busy earning a living to take the time to research the options available to them."
The stimulus package that recently passed the House of Representatives and is now under negotiation in the Senate intends to address that issue. The new bill contains $175 million for a "community navigator" program, which would work to increase awareness and participation in Covid-19 relief programs for business owners. The program would prioritize increasing access among businesses owned by socially and economically disadvantaged individuals, women, and veterans. But, it's also worth noting, the House bill does not contain an extension of the PPP past its existing end date of March 31.