Expect a (Mostly) Better PPP in the Next Stimulus Package

As congress struggles to reach bipartisan agreement over the next stimulus package, one thing is clear: The Paycheck Protection Program will make a comeback. The forgivable loan program targeted at small businesses could get reauthorized as early as next week, should lawmakers coalesce around one of two proposals now making the rounds on Capitol Hill.

Heading into the weekend, lawmakers continued to clash over additional liability protections for businesses and over funding for state and local governments. Senate Majority Leader Mitch McConnell (R-KY) wants to cut both provisions from a prospective bill, while Speaker of the House Nancy Pelosi (D-CA) panned the idea of moving ahead without the $160 billion in state aid floated by a bipartisan group of negotiators last week. A separate, $916 billion proposal from the White House also contained aid for state and local governments, but didn’t include any funding for unemployment insurance–a must-have for Democrats, particularly as businesses in much of the country enter lockdown again. California governor Gavin Newsom issued stay-at-home orders for much of the state late last week, while New York’s governor Andrew Cuomo on Friday announced a cessation of all indoor dining in New York City, starting Monday, December 14.

The pressure to act now is boiling over. Not only are cases of Covid-19 reaching stark, recordbreaking numbers across the U.S., several crisis-era programs are due to expire at year end. That includes the loss of jobless benefits and protections for renters and student-loan borrowers. Plus, the only small-business aid programs still in effect–the Employee Retention Tax Credit, the Economic Injury Disaster Loan (EIDL) program, and the Federal Reserve’s Main Street Lending Program–expire on December 31.

“The urgency around this is extreme,” says John Lettieri, CEO of the Economic Innovation Group, a Washington, D.C., research group. “As a matter of commentary, it’s really remarkable that we’re sitting here in mid-December with relief having been expired for four plus months, and there still isn’t a rock-solid agreement on how to do–and at what level to do–small business relief.”

Still, they may find a way to extend these programs–and reauthorize the PPP. If so, here are nine key changes to note:

According to the framework on the $908 billion proposal, still being stitched together by the group of bipartisan lawmakers, the PPP would be available to small businesses with 300 or fewer employees that have sustained a revenue loss of 30 percent in any quarter in 2020. Other proposals have higher loss thresholds–as much as 40 to 50 percent in some cases. 

The bipartisan framework specifically allows  businesses that have already received a PPP loan to once again gain access to the program. It makes no mention of companies that didn’t get in on the first round–that is, those who haven’t yet received a first PPP loan.Even so, Ryan Metcalf, Funding Circle’s head of U.S. regulatory affairs, anticipates they’ll be allowed access. “We had a large queue of people who still didn’t get access to the first round,” he says, noting that lots of borrowers waited until the last minute to apply and some lenders stopped accepting applications before the program ended. It’s unclear if first-time borrowers would also be held to the same revenue loss standards as those taking a second draw from the program.

“There will without a doubt be set asides for PPP… ensuring some significant share of the overall pot of funding is reserved for community development financial institutions and other intermediaries that serve underserved communities and disadvantaged businesses,” says Lettieri. Without noting how much might get apportioned to these institutions, the bipartisan framework specifically singled out lenders working in underserved communities. It also noted that a set-aside would be made for businesses with 10 or fewer employees, as well as live-venue operators under stay-at-home orders. 

Originally, the PPP called for borrowers to spend 75 percent of their loan on payroll expenses, including the cost of benefits, while the remaining 25 percent could only be spent on eligible expenses like mortgage interest and some utilities. That ratio dropped to 60-40 percent in June. This time, various proposals included in the bipartisan framework, say personal protective equipment and investments in facility modifications like retrofitting an HVAC system should become eligible expenses.

Under the Cares Act, banks collected 5 percent loan processing fee on loans totaling $350,000 and under; 3 percent on loans greater than $350,000 and up to $2 million; and 1 percent on loans greater than $2 million. The next PPP will likely tweak these thresholds, which Metcalf notes had been criticized for making it less attractive for banks to service smaller loans. As proposed under the Continuing Small Business Recovery and Paycheck Protection Program Act, the PPP fee structure would become more of a rolling threshold. For instance, lenders would get 3 percent of the principal being financed up to $350,000. Past that amount, the fee would drop to 1 percent of the principal. A number of other proposals allow for lenders to get a flat fee of $2,500 for loans of $50,000 or less.

While the Treasury and Small Business Administration have mounted several attempts at helping ease the forgiveness process for smaller borrowers, it remains cumbersome for borrowers and lenders alike. Metcalf points out that lenders might be more inclined to issue PPP loans faster if they weren’t also dealing with a deluge of PPP loan forgiveness applications. As borrowers will start to see their first debt service payments come due at the end of this year, they’ll be increasingly interested in getting their loans forgiven–around the same time a new PPP will be coming online. Simply put: lenders will be besieged by PPP.

The bipartisan framework calls for “simplifying the loan forgiveness process for borrowers with PPP loans of $150,000 or less.” It’s unclear what that means, but several proposals have noted that blanket forgiveness for loans under this amount could be in the cards. Metcalf notes that he’d also expect the rules to change for those who’ve already received PPP loans under the Cares Act.

PPP money doesn’t count as taxable income, yet the Internal Revenue Service ruled that businesses can’t also deduct the cost of wages or other expenses if those expenses are paid for with forgiven PPP money. It would be viewed as double-dipping. But that’s not what many lawmakers had in mind when drafting the Cares Act. They wanted to ensure businesses could get the money and  take their normal deductions. The next round of PPP would clarify this point, but it’s unclear if the matter would also get resolved retroactively for those who have outstanding PPP loans.

If congress acts on another package, it’s also expected to reauthorize several small business aid programs, besides the PPP. The EIDL would get extended and the EIDL advances would make a comeback, for instance. The bipartisan framework also calls for funding for the SBA to halt the collection of fees and continue to offer 100 percent guarantees on its 7(a) flagship working capital loans. Traditionally, 7(a) loans up to $150,000 are 85 percent backed by the SBA. Loans greater than $150,000 are 75 percent backed. Lawmakers might also reauthorize the Employee Retention Tax Credit, a refundable tax credit of 50 percent up to the first $10,000 in annual wages for each eligible employee. That program is scheduled to sunset on December 31. Should it get extended, it’s widely expected to also become available to businesses that have PPP loans. Currently the two cannot overlap.