Businesses impacted by the coronavirus pandemic need additional help.
For some business owners affected by the coronavirus pandemic, the Paycheck Protection Program is a source of both hope and confusion. It’s a financial lifeline that also threatens to add extra debt and stress.
That’s because, as generous as the stated terms of the “PPP” are, it’s clear that the government created the program as a one-size-fits-all solution. We’re seeing that many small businesses have payroll needs and other vital expenses that don’t match up to what the federal government has delivered.
That dichotomy is most obvious when it comes to the topic of PPP loan forgiveness. One of the central tenets of this program is that the SBA can forgive your PPP loan—turning it into a grant—if you spend at least 75% on payroll costs and the other 25% or less on rent, utilities, and/or mortgage interest.
There are other rules around loan forgiveness. As of this writing, you need to use the entirety of your loan within an eight-week “covered period” to qualify for full forgiveness. Also, if you lay off employees or reduce their wages due to the pandemic, you have until June 30, 2020, to rehire them or restore their wages—otherwise, you may not receive full forgiveness.
Now, many business owners are approaching the end of their covered periods and will apply for forgiveness. With these rules in place, some worry about whether they’ll qualify for full forgiveness. Other small businesses have avoided applying for this emergency funding altogether for this same reason.
In watching the PPP loan process play out over the past two months, speaking with small business owners, and seeing what progress has—and hasn’t—been made by the federal government to address these issues, I would recommend some alterations. These three proposed changes to the PPP forgiveness process would make the program more amenable to the needs of America’s small business owners.
Lengthen The Covered Period
As of this writing, the covered period for using your PPP loan sits at eight weeks from the day it’s deposited into your bank account. Thanks to updated guidance issued by the SBA, you can also use an “Alternative Payroll Covered Period” that aligns your covered period with the first day of your next payroll schedule.
Even as some states begin to reopen, sometimes on a regional or industry-by-industry basis, many businesses remain involuntarily shuttered or must deal with reduced demand. If a business isn’t beginning to recover—if, in fact, little has changed for that business since the beginning of the pandemic—then there is no appropriate opportunity to utilize this funding to cover payroll.
By essentially paying employees to, in some cases, not generate revenue for eight weeks, only to have to let them go or reduce their wages at the end of that covered period, many business owners could end up back where they started.
There has been much discussion in Congress about this—how long to extend the covered period by, if at all. As a starting point, Congress should lengthen the covered period from eight to at least 16 weeks. The flexibility to use a loan that is equal to 2.5 times their monthly average payroll over 16 weeks would provide them the opportunity to better match their expenses with their recovering revenues, and consequently, it would give them greater odds of achieving 100% forgiveness.
The PPP is supposed to keep employees on employers’ payroll, but no one should argue that this change wouldn’t improve the chances of long-term small business survival as well.
Push Back The ‘Safe Harbor’ Date
The safe harbor date of June 30, 2020, refers to the deadline that PPP borrowers have to either rehire employees that were laid off, or to restore pay levels, if they want to receive full forgiveness.
This date was reasonable when the PPP first began lending on April 3, 2020. That round of funding ran out within two weeks. A second round of funding was released on April 27, 2020, and the program has continued to lend throughout May and will do so into June.
At this point, any business that receives a loan (and any business that did after May 5, 2020) will have that safe harbor date fall within their eight-week period. Logistically, this creates something of a nightmare scenario as borrowers, lenders, and government officials scramble to clarify how business owners can meet this deadline without having to hire back or restore pay levels before they are ready.
A simple solution would be to combine pushing back this date in conjunction with the extension of the covered period, as detailed above. The new safe harbor date could be tweaked to better fit the loans and needs of each business, by making the date relative to that borrower’s loan details. (For example, “14 days after the end of the borrower’s covered period.”)
Reduce The ‘75% Rule’
One of the biggest sticking points of the PPP is how forgiveness is primarily based on the business owner using at least 75% of their loan proceeds on payroll costs, while allocating 25% (or less) to other essential expenses like rent, utilities, and/or mortgage interest.
The PPP was designed to help businesses maintain payroll and not default on major expenses, so this original breakdown is understandable. Upon further inspection, however, many business types—most notably consumer-facing businesses with physical locations—have had to maintain fixed expenses like rent while closed. These businesses would benefit from increased forgiveness for non-payroll expenses.
Some have called for Congress to do away with the percentage breakdown of loan expense uses. Others believe that no restrictions may result in misuse by larger companies that have no intention of passing this capital on to their employees.
A solid compromise would be to reduce the amount of a PPP loan that businesses must spend on payroll to receive full forgiveness. Reducing this number to even 60% of the total loan would help brick-and-mortar businesses to weather the shutdown, and still have funds left to pay employees when they safely reopen.
Like the program itself, these changes won’t address every concern, or save every small business impacted by the pandemic. There is political momentum around some of these proposed changes (namely, the relaxing of the 75-25 rule) more so than for others. And certainly, any changes made to the program as it was designed opens up new loopholes that some larger companies might be able to exploit.
Total inaction on PPP loan forgiveness, however, would be problematic for many of the nation’s small businesses. This program was intended to be a short-term solution for what has turned into a long-term economic problem. Adjusting the terms so small business owners aren’t left saddled with extra debt, or in the same position they were in two months ago before their loan, is an obvious next step for Congress and the White House to take.
If you’re a small business owner who agrees that these changes would make the PPP more effective in helping save your business, call your representatives and urge them to support these changes. You can also contact your lender and ask them to lobby Congress on your behalf as well.