SBA Improves PPP Lending With Changes That Help Small Business Owners

The newly issued guidelines on Paycheck Protection Program (PPP) lending overseen by the SBA and the U.S. Treasury Department will better target truly small businesses, particularly those owned by minorities and companies located in low income areas.

The law, now referred to as the Economic Aid Act, makes it possible for hard-hit businesses to get second loans from the program. It also places restrictions on the types of companies that can obtain PPP loans. For instance, new limitation have been put into place to reduce the incidences of public companies taking money designed for small businesses that don’t have access to capital markets in the way that corporations do.

Under the latest guidelines released late on Wednesday, Jan. 6, eligible companies may have no more than 300 employees, and no business or corporate group can receive more than $20 million combined across all loans under the new rules. No more than $4 million can go to a corporate group in the second round of PPP lending.

Business owners that previously received PPP funding (“1st Draw” loans) now are able to obtain another infusion of capital (“2nd Draw” loans).  The SBA’s new guidelines attempt to clarify details that were not totally clear before. However, the rules from the 1^st Draw largely remain in effect.

An important change is designed to help the struggling businesses in Accommodation and Food Services industries (NCIS Code 72). In the second round of PPP funding, restaurants, bars, hotels, and others in the accommodation industry can get funding for 3.5 times their payroll, as opposed to 2.5 times the payroll for companies in other industries.

PPP2 comes at a critical moment for struggling restaurants. While many of them saw their revenues go up in September and October once COVID restrictions were eased, the second wave of the coronavirus in November led to tighter restrictions in December, which is usually a month when restaurants do very well. Restaurateurs are holding out for an infusion of cash that will ensure survival until a time when the vaccines help the country get somewhat back to normal and people have the confidence to go out to eat again.

The SBA has wisely put in place new rules designed to prevent fraud. Applicants for PPP funding now must submit the following documents as proof of a 25% or more revenue reduction in 2020:

•                    2019 tax returns (since 2020 returns have not been filed)

•                    Quarterly income statements

•                    Bank statements

Business owners should also provide:

•                    Payroll summary report

•                    Payroll tax filings – IRS 940 (or 990), IRS 941 for applicable quarters

•                    Identity documents: driver’s license or passport for principals

The SBA Administrator has released a statement affirming the agency’s commitment to small and underserved businesses and has announced that the SBA will start opening the loan portal to only small lenders for at least the first two days of program reopening. Fintech lenders that prove they are working with the smallest businesses should be included in this segment.

Set asides providing $15 billion for lenders with less than $1 billion in assets and another $15 billion for lending institutions with less than $10 billion of assets should provide incentives for banks and other lenders to make small loans. We saw during the initial stages of PPP in the spring that big banks preferred to work with larger companies with whom they had existing banking relationships.

The new law tries to address that flaw in the initial legislation, which was passed very quickly to help desperate small business owners. The government is also raising the fees that lenders can charge for approving PPP loans of $50,000 or less, which provides incentive to make small loans that often have helped minority business owners and firms in under-served areas.

One other important change should provide encouragement for small businesses to apply for the loans: the new EA Act allows businesses to deduct expenses for which the PPP loan was used. This will help lower tax burdens.

Further guidance is still expected from the SBA. The SBA will be releasing new forms (SBA 2483-SD) soon, and the online portal for loans to be processed by the SBA is expected to open soon as well — perhaps as early as next week.

The first round of PPP lending was a success. More than 5 million loans were approved totaling $525 billion (an average loan size of $100,729) by 5,460 lenders. The second draw can have similar impact, especially now at a time when coronavirus numbers are spiking.

It is of the utmost importance that borrowers prepare their applications now before the program opens. When the program opens, the funds could be used up in near-record time. Many companies across the United States are barely hanging on. If they do not receive funding soon, it is likely that thousands, if not millions, of companies will go bankrupt, which will have a devastating effect on the overall economy.