- The goal of this latest PPP update is to give small businesses with PPP loans more flexibility and make it easier for their loans to be forgiven
- More than $130 billion is still available for small businesses who have not yet applied for PPP funding
- The deadline for applying is June 30, 2020
- Effective June 8, 2020, the Mainstreet Lending Program has been enhanced to soon include opportunities for small and medium businesses; these loans are not yet available and not forgivable
The Story: The two rounds of funding made available through the Paycheck Protection Program (PPP) have provided numerous small businesses with highly welcomed influxes of cash. Companies that meet certain guidelines can have their loans forgiven, meaning that they wouldn’t have to pay the money back.
Many businesses receiving this funding, though, have found some rules to be confusing or difficult to stick to. So, the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) was signed into law on Friday, June 5 to help address these challenges and concerns.
How the Flexibility Act Amends PPP
- In the original legislation, which was part of the $2.2 trillion CARES Act of March 27, 2020, employers receiving funds would need to use 75 percent of them to meet payroll costs, which could include: salary and wages, health insurance, and leave/severance pay.
- The Flexibility Act has modified that—and now only 60 percent of the funds must go towards payroll. The rest can go towards other operating costs, including rent and utilities.
- Businesses who receive funds can spread their use of them over 24 weeks, rather than over the two-month period that was listed in the original Act.
- The loan funds usage period is now ending on December 31, rather than June 30.
- Employers won’t have to make payroll tax payments during the entire year of 2020.
- Principal and interest were originally supposed to be deferred for six months from the loan’s issue date. Now, a borrower must apply for loan forgiveness within ten months of the end of the covered period.
If you’re a small business owner who has already received PPP funds, this gives you more flexibility into how and when you can use the money to meet your expenses. If you have an application in process or plan to apply while there are still funds from round two of PPP funding, this flexibility can help with any funding you receive.
Important note: on June 7, the U.S. Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza clarified that the deadline for applying for the $130+ billion still available in forgivable PPP funding is June 30, 2020. In other words, the application deadline has not changed and the remaining time frame is short.
Small Business Challenges and Flexibility Act Responses
Although no new funding was provided for businesses who want to apply for PPP, it’s hoped that the Flexibility Act will help small businesses navigate through the challenging COVID economy while providing clarity about confusing parts of PPP.
The Act also tries to address another problem many small businesses are facing. As described in a May 2020 paper written by University of Chicago’s Becker Friedman Institute economists, about two-thirds of people on unemployment right now are earning more than they did on their jobs. That’s because the unemployment benefits provided for in the CARES Act allow for an extra $600 per week. This is applicable in states that choose to participate in the Emergency Increase in Unemployment Compensation Benefits program.
So, some employees may be reluctant to come back to work for two reasons: concerns about the virus and a reduction in pay once back on the payroll.
From the perspective of a small business owner who received PPP funds, this can be doubly alarming. First, this means that it may be hard to get their employees back to work. Second, to get the loan amount forgiven, employers must keep their workforce employed—and, when employees are reluctant to come back, that could be a problem. The Flexibility Act addresses this challenge in two ways; businesses will not lose their forgiveness eligibility if it can be shown that:
- The workforce needed before COVID-19 is no longer needed OR
- Employees who are not working declined to return to work
In addition, if a business ultimately doesn’t qualify for loan forgiveness—or doesn’t request to have this—then the repayment period on this 1% loan has been extended from two years to at least five.
Note that this term extension does not automatically go into effect for existing loans. So, if you already have a two-year PPP loan, talk to your lender if you’d like to extend your term to the new minimum of five years. The lender does not need to agree to this but may do so. Note that the CARES Act places a maximum of ten years as a term.
Each of these aspects of the Flexibility Act may help to ease the worries of small business owners, including those concerns shared in a National Federation of Independent Business (NFIB) survey in May 2020. In that survey, it was discovered that the majority of small businesses that received funds want them to be forgiven. That’s not surprising.
And, the specific relief measures in the Flexibility Act seem to dovetail well with what small business owners wanted to happen in multiple ways. For example:
- Nearly half (46%) of borrowers said that spending PPP funds in just eight weeks was either “very difficult” or “somewhat difficult”; that period has now been extended to 24 weeks.
- Nearly half of them found it challenging to maintain the same number of workers as in pre-COVID because of business slowing down or activities suspended. More specifically, nearly 20% found this “very difficult” while 28% found it “somewhat difficult.” The Act now provides two ways for employees to be exempt from this requirement.
- More than three quarters (76%) of small business borrowers find it “somewhat difficult” to “very difficult” to use 75% of the funds on payroll; this has been changed to 60%.
Although there is no single source of information to answer additional questions that borrowers and potential borrowers might have about PPP funding and the Flexibility Act provisions, there is a Small Business Administration (SBA) FAQ page that can be helpful.
A Deeper Look at Payroll Costs
The Flexibility Act reduced the percentage of the loan that needs to go towards payroll from 75% to 60%. After the CARES Act was put into law, the SBA explained that this meant that no more than 25% of the amount to be forgiven could be used for reasons other than payroll costs. If this did not happen, the SBA clarified, then only 75% of the loan could potentially be forgiven.
When the percentage was lowered to 60% of the loan amount, the language also changed. It now reads as follows: “to receive loan forgiveness, a borrower shall use 60% of the loan amount for payroll costs.”
This could be interpreted to mean that, if 60% isn’t used for payroll, then none of the loan could be forgiven. Plus, if a business received PPP funds before the Flexibility Act was enacted, and they choose to use the funds in eight weeks as the CARES Act stated, it isn’t clear how the 60% rule would be applied.
Here’s another challenge to prepare for. Filing for forgiveness will require some detailed information and documentation, so it’s important to keep especially careful records.
Overall, though, the Flexibility Act seems to provide small business owners with more opportunities to use the funds in a way that can help them get their loans forgiven.
Mainstreet Lending Program Expansion
On June 8, 2020, the Mainstreet Lending Program was expanded to include loan opportunities for small and medium businesses (SMBs). Although these loans are not forgivable, there is now $75 billion available through the CARES Act for SMBs, with a non-profit program soon to be announced. This loan program was previously only available to large corporations.
This amendment to the Mainstreet Lending Program opens up eligibility to companies that have fewer than 15,000 employees and lowers the minimum loan amount in some cases from $500,000 to $250,000. Principal payments, previously delayed by one year, can now be delayed for two years, with interest payments deferred for a year.
If that sounds like it might help your business, the Federal Reserve Board said that lenders should be able to register to participate in this SMB program soon.
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