A new report from the Consumer Bankers Association dramatically illustrates just how much small businesses were impacted by COVID-19 during the latter part of the first quarter of the year. The report found that delinquency and utilization were stressed. This was likely due to short term business closures, especially in the Northeast, although other sections of the country were impacted early in the pandemic. Some key findings:
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— Delinquencies increased across credit types, including commercial card, line of credit, open ended/revolving, and term. The quarter marked the highest delinquency point since the start of the survey in Q1 2018.
— Both credit limits and balances declined to the lowest point since the start of the survey, with balances declining at a greater pace than limits. This led to an overall decline in credit utilization.
— Charge-offs increased for accounts extending open credit. but dipped for collateralized loans. Overall, however, charge-offs declined.
— Delinquency and credit utilization increased, which was likely was due to short term business closures impacting many industries, especially the Northeast region.
— As the coronavirus continues to spread across the country, I suspect that these numbers may climb even higher – especially in Q2 and Q3. (To view the full report, click here.)
Fortunately, the government got involved to try to help small businesses. By most accounts, the Paycheck Protection Program (PPP), Congress’s central policy for keeping workers in their jobs amid widespread firm closures due to COVID-19, has been a success. Implemented by the Treasury Department and Small Business Administration (SBA), the latest reported data shows that the scale of PPP is historic.
Since the launch of the program in April through to July 6, nearly 5,500 lenders made 4.9 million loans with an average of $106,000, totaling $521 billion in funding for small businesses that might have otherwise failed. According to the SBA, these loans went to companies and helped preserve over 51 million jobs nationwide. That is about 84% of the nation’s small business payroll.
This data proves that despite the chaotic initial implementation, the PPP did what it designed to do: it very quickly provided liquidity relief to a vast number of small businesses.
What made the lending program so attractive was the forgivable nature of the loans. If small business owners comply with the terms of the PPP, the loans essentially became grants of money that do not have to be paid back. If this holds true, there was little risk involved, but quite an important reward for small business owners. Companies need only to demonstrate that they used the money for the intended purposes as specified in the PPP guidelines.
A PPP loan will be fully forgiven if the borrower can prove that he or she used 60% or more of the funds for payroll costs, mortgages or rent, and utilities. If the small business owner did not comply with these requirements, and the loans therefore are not forgivable, and the money must be paid back at an interest rate of 1%. It is still a deal worth taking. Loans issued prior to June 5 have a maturity of 2 years, while loans issued after June 5 have a maturity of 5 years. Loan payments will be deferred for six months. No collateral or personal guarantees are required.
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. The PPP loan forgiveness form and instructions include measures to reduce compliance burdens and simplify the process, including:
• Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles
• Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the 24-week period after receiving their PPP loan
• Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness
• Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30
• Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.
Lender approval of a loan made to small business or non-profit organization does not reflect a determination by SBA that the borrower is entitled to loan forgiveness. All PPP loans are subject to SBA review and all loans over $2 million are automatically reviewed. The fact that a borrower received PPP funding does not guarantee that the loan will be forgiven.
Because the PPP was run by federal government agencies, the paperwork involved is more extensive that for other types of loans. It can be intimidating. To help smooth the process, the American Institute of CPAs (AICPA) and CPA.com have released a free online platform, PPPForgivenessTool.com, powered by Biz2Credit, to help small business owners submit their forms.
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The online tool, using advanced Biz2X technology, incorporates a PPP forgiveness calculator created by the AICPA in May and is available to any business approved for a PPP loan, regardless of the lender or bank they worked with to receive funding. Borrowers or their CPA advisors can log onto the platform to fill out the forgiveness application and the tool produces all government-mandated forms automatically.
PPP applicants will be able to electronically sign the 3508 or 3508 EZ forms, and all the required source documents will also be included in a downloadable file that can be provided to their lenders. The platform will likely save hours of manual work for any applicant going through the process.
“For the past three months, we have been very actively engaged in providing resources and tools to support the 44,000 CPA firms in the critical role they’ve played for the five million businesses that applied for PPP loans,” said Erik Asgeirsson, president and CEO of CPA.com. “We are now incorporating our PPP calculation and process recommendations into a dynamic PPP Forgiveness Tool to help drive a simple and effective forgiveness process. Our broader goal with this tool is to also to help drive a common approach to this process with the payroll and lender communities.”
PPP lending has been extended through August 8 in an effort to dole out the remaining $130 billion allocated to the program. Additionally, in Congress, future stimulus packages are being discussed. As the virus continues to threaten human lives and the economy, further federal assistance may indeed be necessary, especially as the southern and western parts of the country are now being hit hard by the pandemic.