Congress left town last week for its summer recess without passing a new economic stimulus package, and while few doubt that such a package will eventually pass, much confusion exists as to whether, and under what conditions, it will contain another round of funding for the Paycheck Protection Program (PPP).
The PPP stopped taking applications on August 8, having disbursed over $500 billion to more than five million applicants in its first four months. But even though over $125 billion in PPP-earmarked funds remain undisbursed, nearly half of PPP borrowers anticipate requiring additional support over the next year, according to a survey conducted by the National Federation of Independent Business (NFIB) Research Center. The survey found that over 70% of borrowers have used their entire loan, and the remainder are presumably not far behind. The survey also found that 23% of small business owners claimed they would have to close if economic conditions did not improve over the next six months, and another 22% predicted they would suffer the same fate during the following six months under current economic conditions.
The PPP’s first round began with a bang but ended with a whimper. After $349 billion were disbursed in the program’s first two weeks, the public grew outraged after learning that large publicly traded corporations had received huge loans and that commercial banks tasked with distributing the money had prioritized their existing customers, leaving small businesses lacking strong banking relationships to struggle with the program’s red tape. Moreover, confusion plagued the program’s rollout as rules governing how funds could be spent changed weekly, and at times daily, casting doubt on what conditions borrowers would have to meet to have their loans forgiven. Demand for PPP loans plummeted, and the program’s extension in June failed to renew interest among borrowers. Many small businesses which needed funds opted not to apply – and, instead, to close or lay off workers – because they believed they would be rejected and/or, even if approved, they would have to repay the funds.
Fortunately, while still fighting over other aspects of the next major stimulus bill, Republicans and Democrats appear to agree both that additional PPP funding is necessary and that the program should focus more on smaller businesses, with priority to very small and minority-owned businesses, in order to restore its initial popularity and usefulness. Shortly before Congress recessed, the Chairman of the Senate Small Business and Entrepreneurship Committee, Republican Senator Marco Rubio of Florida, said, “I think we’ve got a pretty good package, and I’ve worked hard on it with [Democratic] Senator [Benjamin] Cardin [of Maryland]. I’m not saying he’s signed off to our package, but it reflects a lot of our joint priorities, and we’re pretty close.” And Senator Cardin agreed, saying, “I don’t think we need a lot of time to resolve our differences, and our staffs are working very closely together.”
Indeed, the Republican and Democratic proposals both feature the same types of changes to the PPP, with remaining disagreements focused on numbers. For example, Republicans want to reduce the maximum number of employees that eligible businesses can employ from 500 to 300, whereas Democrats want to reduce the number to 100; both parties also want to set aside up to $25 billion for businesses with fewer than 10 employees. Additionally, Republicans want to limit eligibility to businesses whose revenues declined by 50% compared to the prior year’s quarter, whereas Democrats proposed a 35% decline in revenues. Further, Republicans want to require that borrowers spend at least 60% of new loans on payroll, while increasing flexibility to spend funds on virus-related protective equipment (e.g., masks and sanitizers) and updated ventilation devices, whereas Democrats do not specify strict spending uses. Finally, Republicans want to establish a new long-term, government-backed loan program through private banks, while setting aside $10 billion for community and rural banks, whereas Democrats want to modify the existing Economic Injury Disaster Loan (EIDL) program, by which the government issues loans directly to small businesses.
And significantly, Republicans and Democrats appear to agree that small businesses which already received a PPP loan may be able to get a second PPP loan, an option not permitted in the program’s original rules. Because PPP loans were originally capped at two and a half times a business’s monthly payroll costs, such second loans could be a lifeline for businesses that have already expended their initial PPP funds.
In addition to being eligible for more PPP funding, small businesses which previously received a loan were allowed, starting last week, to apply to have their initial debt forgiven. The rules regarding loan forgiveness have continued to evolve since the program began last spring. Initially, businesses needed to spend 75% of their proceeds on payroll to qualify for forgiveness, but that threshold was later reduced to 60%. Businesses were also given more time to spend their funds as the program progressed, and other forgiveness-related provisions were clarified over time; for instance, it recently became clear that employer payments towards dental and vision benefits qualified as forgivable payroll costs. And there has been some speculation that all PPP loans falling below a certain dollar threshold might ultimately be forgiven without the need for applying for forgiveness.
Even without forgiveness, PPP loans carry extremely affordable borrowing terms. PPP loans prescribe just 1% interest, with loans issued before June 5 repayable in two years and loans issued after that date repayable in five years. Borrowing does not come any cheaper than that.
This past weekend, the administrator of the Small Business Administration, Jovita Carranza, expressed “hope there is a second round of PPP” and confidence that small businesses will come through the pandemic largely intact: “Pre-pandemic, small business were thriving. Post-pandemic, what you don’t read in the news is we have businesses that are doing quite well. A smarter small business ecosystem has been developing during the pandemic. There’s a lot of pent-up energy. I’m very encouraged by the small business recovery I’ve seen.”
Carranza’s optimism may well be inflated, if not unrealistic. Congress needs to pass another round of PPP funding now.
Lauren Irwin-Szostak is the President of Business Processes Redefined, LLC, a call center solutions management firm headquartered in Fairfield, New Jersey which is certified as a woman-owned business enterprise by both the New Jersey Woman-Owned Business Enterprise (NJWBE) and the Woman’s Business Enterprise National Council (WBENC).