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How the new rules for the Paycheck Protection Program help small-business owners

There’s now more flexibility around how the loans can be used.

Small Business Administration Administrator Jovita Carranza before a Paycheck Protection Program announcement in the East Room at the White House on Tuesday, April 28, 2020, in Washington, DC.
Jabin Botsford/The Washington Post/Getty Images
Li Zhou is a politics reporter at Vox, where she covers Congress and elections. Previously, she was a tech policy reporter at Politico and an editorial fellow at the Atlantic.

The Paycheck Protection Program, a loan program designed to help small businesses weather the economic downturn during the pandemic, has some new rules. These changes — approved by Congress via the Paycheck Protection Program Flexibility Act earlier this month — are designed to make it easier for business owners to get their loans forgiven and increase the program’s utility.

Vox is here to help small-business owners navigate these changes.

Among the updates: Business owners now have more leeway when it comes to spending the loan money. Previously, recipients were required to use 75 percent of the PPP loans for payroll in order to have the full loan forgiven, a limitation that wound up posing a problem for thousands of business owners, who needed a significant chunk of the funds for other costs, like rent and utilities.

This rule was in line with the original goal of the program, which was to help businesses keep employees on payroll: The strict 75 percent cutoff, however, is something that the Small Business Administration (SBA) had put in place, not lawmakers. Additionally, since the program has taken off, lawmakers have received significant feedback from small-business owners calling for more flexibility around the loans because they need just as much help with other costs in order to stay afloat. For smaller businesses especially, their operational costs could be comparable to their payroll expenses.

The new policy lowers the original SBA threshold and would require recipients to use 60 percent of the loan specifically on payroll. Additionally, it would give business owners more time to spend the loans: Before, the money had to be used within an eight-week time frame, but now it can be used within 24 weeks of obtaining it.

There’s a lot the new law doesn’t fix, including the lack of transparency around the demographics of business owners receiving PPP loans. But at their core, these changes help small-business owners better address the shortfalls they’ve been experiencing as a result of the coronavirus. Had these updates not been implemented, a report from the Small Business Administration’s Inspector General found that the program’s limitations, particularly its rules on loan forgiveness, could lead to more recipients taking on debt.

Here’s a rundown of what the new law changes

Congress passed the Paycheck Protection Program Flexibility Act earlier this month in response to concerns that many business owners had expressed about restrictions on the loans, and President Donald Trump signed it into law shortly afterward.

“For months, we have heard from thousands of small businesses that PPP’s rigid structure does not meet their needs, and 80 percent of business owners in our network fear that under current rules their loan may not be forgiven,” says John Arensmeyer, the CEO of Small Business Majority, an advocacy group for small businesses.

Concerns about loan forgiveness have likely even contributed to business owners’ reluctance to apply for PPP support: While the first wave of funding for the program ran out within two weeks, the second tranche of money Congress approved has yet to be used in full.

All updates to the law apply to businesses receiving new PPP loans on or after June 5; only some of them apply to those who had already received PPP support. Here’s a rundown of what the law changes in the program and who benefits:

  • More time to spend PPP funds: Business owners originally had eight weeks to use PPP money, a time frame that’s been expanded to 24 weeks. The cutoff to spend the funds is now either December 31, 2020, or 24 weeks from the receipt of the loan, an update that reflects the enduring nature of the economic downturn, which is expected to last beyond the initial months of the pandemic. This change applies to both new and existing PPP loan holders.
  • Less restrictive loan forgiveness requirements: Business owners were required to spend 75 percent of their PPP loans on payroll in order for them to be fully forgiven and now they’re only required to spend 60 percent of the funds on such costs. That means that businesses now have the ability to spend more money on other operational needs, including rent. This change applies to both new and existing PPP loan holders.
  • More flexibility around rehiring employees: Small businesses had to rehire “full-time equivalent” employees they had laid off by June 30, 2020, in order to qualify for full loan forgiveness, according to the original law. Because many businesses are still not operating at the same levels as before the pandemic, and some employees may not want to resume their old jobs due to health concerns, the deadline for rehiring full-time employees has been changed to December 31, 2020.

The law also exempts business owners from having to satisfy the rehiring requirement if they could demonstrate that they’ve made attempts to fulfill it and been unable to rehire past employees or new employees qualified for the role, or if they’re operating at a different level financially due to their adherence to coronavirus-related policies. This change applies to both new and existing PPP loan holders.

  • More time to repay the loans: For business owners who do not have their full loans forgiven, the law extends the amount of time they have to repay these loans. The original maturity date of the PPP loans started at two years, a time frame that’s now been changed to five years. This change automatically applies to new PPP recipients who obtained their loans on or after June 5, but existing PPP loan holders can try to work out an agreement with their lenders as well.
  • An additional option for tax deferrals: The bill ensures that business owners who have benefited from PPP loans can defer payroll tax obligations this year. This change applies to both new and existing PPP loan holders.

In the recent implementation of this legislation, the Small Business Administration’s rule also makes the program more accessible to people who have in the past been convicted of a crime. The program had originally barred individuals convicted of a criminal felony during the last five years from obtaining a loan, and that time window has now been reduced to one year, depending on the felony.

There’s a lot the law doesn’t fix

One of the central problems of the PPP has been the lack of access that many small businesses have faced throughout its implementation, particularly those run by minorities and women.

According to an estimate from the Center for Responsible Lending, which was released after the first wave of PPP funding was exhausted, as many as 90 percent of businesses run by minorities and women would potentially be excluded from the program. As CRL noted in a recent statement, the new PPP fix does not address gaps in data collection about the demographics of borrowers using the program.

Another bill approved by Congress, the Paycheck Protection Program and Health Care Enhancement Act, has attempted to tackle these disparities by allocating more money to community-based financial institutions, which have a better track record of serving business owners of color.

There are still concerns that some of the smallest businesses aren’t being fully served by the program, however. Sens. Kamala Harris, Cory Booker, and Steve Daines are among those who have proposed legislation that would further target additional funding to smaller businesses, particularly those run by underrepresented groups, including black Americans.

The HEROES Act, a stimulus bill approved in the House, would also address this issue by establishing a carve-out in funds for businesses with 10 employees or fewer. The Senate, however, has stalled the passage of additional stimulus, which it now isn’t expected to consider until after lawmakers take a July Fourth recess.

Arensmeyer, the head of Small Business Majority, stressed the urgency of approving more aid for small businesses in the coming months as the economic effects of the pandemic persist.

“The next phase of assistance must include a bold direct grants program for businesses with under 100 employees and automatic PPP forgiveness for all loans under $150,000,” he emphasizes. “Simply thinking a one-time loan program will be enough is shortsighted and will leave America struggling well beyond 2030.”

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