Federal PPP Loans Now Have More Business-Friendly Terms
Congress has passed, and President Trump has signed, a bill that reforms the Paycheck Protection Program. This large expenditure of federal money has provided funds to small businesses to help them stay afloat during the economic uncertainty caused by COVID-19. The primary purpose of the bill was to ensure that these businesses did not lay off their workers. However, smaller businesses faced uncertainty about the program as only some of the funds provided to them were able to be used for expenses other than payroll. Now, the PPP Reform Act has loosened some of these rules, making it easier for small businesses to obtain loan forgiveness.
To summarize, the PPP involved loans to small businesses made by the government through banks. The program had certain rules that businesses needed to follow. In the event that they complied, some or all of the funding provided to the business would be forgiven. In other words, a loan would be converted to a grant. However, many loan recipients were finding the rules very restrictive, making it more difficult for them to obtain loan forgiveness for the funds that they received.
The Timeline for Using the Money Was Extended
One of the biggest challenges that businesses faced was the accelerated timeline that loan recipients had to spend the money. The original PPP required loan recipients to expend all of the funds received within eight weeks in order to qualify for loan forgiveness. The intent behind this rule was to get hundreds of billions of dollars out into the economy in short order. Congress wanted to protect workers who were in immediate jeopardy of losing their jobs.
This presented a challenge to businesses because the economy was simply closed for much of this time. Due to the stay-at-home orders, many businesses had to remain physically shut and the companies simply could not spend the money in such a short period of time. Small businesses felt that the accelerated timeline penalized the businesses and made it more likely that they would need to pay back the government.
The PPP Reform Bill has now lengthened this timeline to 24 weeks. This gives businesses more of an opportunity to spend the money after the economy has reopened. This should make the terms of the program less restrictive for businesses.
Businesses Are Not Required to Spend as Much on Payroll
The other rule that made life very difficult for small business recipients was the requirement that businesses spend 75% of the loan amount on the payroll. One of the challenges faced by businesses is that the additional $600 of additional unemployment benefits made it more profitable for workers to not work during this time. In general, businesses were finding it difficult to meet this 75% requirement, especially since they have many other major expenses that could take up more than one-quarter of their bottom line.
The PPP Reform Bill changed the "75-25" rule to "60-40." This means that now, the business can spend 40% of their PPP loan on things such as rent and utilities and still be able to qualify for loan forgiveness. The rule change gives businesses more flexibility and reduces some of the restrictiveness of the terms of the PPP loans.
Another way that Congress has stepped in to help small businesses is by lengthening the amount of time that the loan recipient has to pay the money back to the government. For the part of the loan that is not forgiven, businesses previously had two years to repay the loan. There is still much economic uncertainty and it may take businesses more than two years to get back on their feet. As a result, Congress has now given companies five years to pay the money back to the government at a 1% interest rate.
In addition, Congress also lengthened the period that businesses have to rehire workers who were let go and still be able to qualify for loan forgiveness. Now, small businesses have through the end of December 2020 to hire back their employees. The previous deadline was June 30, 2020. This also reflects the fact that current COVID-19 conditions do not allow for an immediate reopening of many businesses. The hope is that all of the above changes will improve the operation of the PPP. Before the reform bill was passed, the program was only effective on a limited basis because it was so restrictive. Now, the flexibility may mean that keep companies keep and use the money.
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