It Pays to Revisit the Paycheck Protection Program

If you’ve been struggling to make ends meet while working for yourself or running a small business with relatively few workers, now is a good time to consider applying for a forgivable loan through the Small Business Administration’s Paycheck Protection Program. Unlike normal loans, PPP loans can be forgiven if certain requirements are met, meaning they’re essentially grants with strings attached.

The Biden administration on Feb. 22 announced changes to the program that are meant to make it more useful to the self-employed and the smallest employers, Bloomberg News reported. The same day, President Joe Biden warned that 400,000 small businesses have closed during the pandemic, and “millions more are hanging by a thread.”

One of the most salient changes: From Feb. 24 through March 9, the SBA is limiting approvals to businesses with fewer than 20 employees. The Biden administration noted that 98% of small businesses fit into this category. By temporarily limiting the approval process to them, the goal is to get more money to ventures that have a harder time accessing capital than their larger counterparts do. 

A further noteworthy change: The loan calculation formula is being revised so that the self-employed (and independent contractors and sole proprietors—basically, if you work for yourself) are eligible to get larger loan amounts than before. Applicants will be able to use the gross income listed on their tax returns, rather than their net profit, to calculate their maximum loan amount. Many self-employed people were “structurally excluded from the PPP or were approved for as little as $1,” a Biden administration fact sheet describing the changes explains.

To get forgiveness, there aren’t many strings attached for borrowers without employees; they can basically use the loan as they would use their own compensation. This SBA explainer offers details on the steps involved. The tweaks make sense because they could significantly increase access to capital for the smallest businesses, says Tom McHale, president of Pursuit, a community development financial institution that has received about 3,500 PPP applications totaling around $200 million since the program relaunched in January. (Participating lenders such as Pursuit—not the SBA itself—make the loans once the SBA has approved them.)  

Putting It All in Context

The 2020 PPP: This federal program was created last year to encourage businesses to keep workers on payroll. It attracted criticism for changing its rules frequently, for favoring larger entities with existing banking relationships over underbanked businesses, and for fraud. PPP is also credited with helping many businesses survive and keeping paychecks coming to employees. From April to August, the SBA approved 5.2 million PPP loans totaling $525 billion; when it closed, $134 billion was left unspent. 

The 2021 PPP: The program relaunched on Jan. 11, drawing on $284 billion set aside for it in the $900 billion pandemic relief package. The SBA has approved about 1.9 million PPP loans worth nearly $140 billion so far this year, according to this Feb. 21 report. PPP is scheduled to end on March 31. McHale expects the program will be extended if money is left over.

First-time borrowers apply for so-called first-draw loans. Businesses with 500 or fewer employees can borrow up to 2.5 times their average monthly payroll costs, up to $10 million. (The self-employed will follow the forthcoming gross income calculation described above.) The interest rate is 1% and the term is five years. The SBA’s PPP overview can be viewed here; rules for first-time borrowers are posted here. 

Previous borrowers apply for second-draw loans. Enterprises with 300 or fewer employees can borrow up to 2.5 times their average monthly payroll costs, up to $2 million. (Accommodation and food services businesses can borrow up to 3.5 times their average monthly payroll costs.)  Applicants need to show they’ve used, or will use, their first PPP loan. The interest rate is 1% and the term is five years. An additional wrinkle: Second-timers need to show at least a 25% drop in gross receipts over comparable quarters in 2019 and 2020. The rules for second-time borrowers are viewable here.

More about the PPP program, the expanded employee retention tax credit, and a forthcoming grant program for venue operators is available in our January story “A New Round of Relief for Small Business Owners.”

For more stories, strategies, and advice for Main Street business owners, check out the Bloomberg Businessweek Small Business Survival Guide.