Congress Replenishes Paycheck Protection Funding
After a chaotic start that saw the initial $349 billion in funding for the Paycheck Protection Program exhausted in just 13 days, Congress authorized new funding for the program. President Donald Trump signed the funding package worth more than $480 billion on April 24. The package includes $310 billion for the Paycheck Protection Program and $60 billion for the Economic Injury Disaster Loan (EIDL) program. Previously, the Senate approved the funding on April 21. The House of Representatives followed suit on April 23, voting in support of the measure 388 to 5, with one member voting “present.” However, questions remain as to how far the additional funding would go, and to whom.
Additional funding delivered to Paycheck Protection Program
According to the U.S. Small Business Administration (SBA), the first round of funding for the Paycheck Protection Program was exhausted after more than 1.6 million loans were approved by about 5,000 lenders, amounting to a total of $342.2 billion. However, many applicants were left with little information regarding their outstanding applications when the SBA made the announcement.
On April 21, the Senate approved the additional funding for the Paycheck Protection Program, along with guidelines for how the funding should be disbursed. Of the $310 billion earmarked for the program, $250 billion would be open to all lenders, while $60 billion would be reserved specifically for small lenders.
The funding for the Paycheck Protection Program comes as part of a larger $480 billion relief package, called the Paycheck Protection Program and Health Care Enhancement Act. That package also includes $60 billion in funding for emergency relief grants through the EIDL program, $75 billion for hospitals and $25 billion for COVID-19 testing.
While the additional funding is much needed and sought after, the second round of funding is likely to go even more quickly than the initial round, said Gerri Detweiler, education director for lending marketplace platform Nav.
“This money will go quickly. No question,” Detweiler said. “There are so many applications pending and so many people who didn’t apply before funds ran out – and there are more lenders able to process these loans.
“If we thought round one was fast, round two will be very fast,” she added.
According to Clint Coons, founding partner of Anderson Advisors, the second round of funding is likely to go significantly faster than the first, because banks have queued up applicants since the initial round was exhausted.
“The question for me is if they funded mainly the larger employers and then you got a lot of smaller ones, maybe it will last a week to 10 days,” Coons said. “But if you still have a lot of large businesses in the pipeline that didn’t have their act together [it could go even more quickly].”
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What Paycheck Protection Program loan applicants can expect
Many small business owners and self-employed individuals were left with a great deal of uncertainty when the SBA first announced the Paycheck Protection Program had exhausted its initial round of funding.
According to Detweiler, small business owners with outstanding applications should not have to reapply for a Paycheck Protection Program loan. However, she recommended that small business owners submit applications through multiple lenders, including local banks and online lenders, to improve their odds of being approved and funded before the new funding is exhausted.
“It’s impossible to know where you are in a lender’s queue,” she said. “We don’t know how specific lenders will prioritize applications.”
Will very small businesses be prioritized in the second round of lending?
Under the program, employers with up to 500 employees could qualify for a Paycheck Protection Program loan. The Paycheck Protection Program has been plagued by criticism that loans to larger companies were prioritized by many lenders, rather than the very small businesses in need. That criticism led to fast-casual burger chain Shake Shack returning a $10 million loan it received under the program.
The new round of funding includes $60 billion earmarked specifically for small lenders, a move intended to improve the delivery of funds to small businesses and independent contractors. Additionally, several alternative lenders were approved by the SBA to approve loans under the Paycheck Protection Program during the first round of funding, which could improve access to funds for applicants without an existing business banking relationship.
“I certainly hope [the new guidelines] impact the new funding round,” Detweiler said. “We also now have fintech lenders on board to serve businesses that are traditionally not served by banks. These lenders could approve lower dollar amounts or businesses with less documentation …”
“I’m hopeful this round will work its way to more very small businesses, but it remains to be seen,” she added.
Many lenders, however, have thus far been focused on the larger loan applicants, said Coons, who has been helping clients apply for multiple relief programs. Community banks offer the best opportunity for very small businesses, he said, but many lenders are simply focused on larger loans.
“My understanding is they’re picking the larger loans; they don’t want to work with small guys,” Coons said. “It’s really frustrating for me. Our clients need this help.”
What should independent contractors and self-employed individuals expect?
Contractors and self-employed individuals were particularly hard-pressed during the first round of funding because they were unable to apply for a loan through the program until April 10, a week after the application period opened for businesses.
“This round could capture more applicants who are just applying on their own, Detweiler said. “Self-employed individuals, 1099 contractors – that’s a lot of people. The dollar amounts could be smaller, but the sheer numbers are very large.”
However, independent contractors and sole proprietors often face an uphill battle beyond the delayed application period, Coons said. The way many of these applicants structure their finances precludes them from providing needed documentation to lenders, he said.
“We’ll see the same challenges we saw in the first round,” Coons said. “The application process is not set up for a sole proprietor and the way he accounts for his income … If you don’t run payroll, you don’t have a 941; you don’t have a W3.”
Still, Coons added, independent contractors and sole proprietors – especially those with pending applications – should be as proactive as possible in seeking funding through the Paycheck Protection Program. In addition to applying for the Paycheck Protection Program, Coons suggested sole proprietors consider filing for unemployment as well.
“If you are a sole proprietor and you’re out of business right now, you can apply for unemployment,” he said.
What to do if you’re waiting for Paycheck Protection Program loan approval
For applicants who are awaiting approval and funding under the Paycheck Protection Program, it is important to stay proactive. In addition to applying through multiple lenders, Detweiler recommended applicants review their existing applications and documentation to ensure their lender has all the required information.
“This funding will go very, very fast in all likelihood. If you submitted an application earlier, review that information so the lender is ready to process your application, and you know you’re relying on the right information,” Detweiler said.
She added that not only could that help expedite processing and approval, but it may also better position borrowers for the maximum available loan forgiveness down the line if they are funded through the program.
For independent contractors and sole proprietors, Coons offered the following recommendations:
- Meet with a CPA to obtain tax returns and profit/loss statements for 2019.
- Contact a community bank regarding a PPP loan application.
- Apply through an online lender as well, such as Inuit or PayPal.
“If you’re a sole proprietor, you need to work diligently with banks and lenders,” he said. “Hit up as many as you can if you want access to these funds.”
Once you’ve applied through multiple lenders (and frequently followed up with them regarding your application,) consider your other options, Coons said. While the Paycheck Protection Program is a useful tool for those applicants who do get approved and funded, it is not the only resource available.
Coons recommended small businesses and sole proprietors take advantage of the following resources:
- The EIDL program: The EIDL program provides grants of $1,000 per employee to applicants, as well as an additional loan of up to $200,000, with no collateral or personal guarantee required for approved applicants. You can apply for an EIDL loan here.
- Retirement fund access: Certain retirement fund restrictions and fees have been relaxed, depending on your plan’s administrator. Some businesses might be able to borrow money from their retirement funds without the typical drawbacks in order to sustain operations in the near-term.
- SBA Express bridge loans: Finally, SBA Express bridge loans are more conventional loans that would have to be paid back. While they could provide some immediate liquidity, it is important to consider your business’s viability prior to applying for an SBA Express loan.
What is the Paycheck Protection Program?
The Paycheck Protection Program provides government-backed, forgivable loans to businesses with 500 employees or less. If your business needs short-term funding to cover payroll and facilities costs, the Paycheck Protection Program is designed to provide fast, low-cost financing with the potential for full loan forgiveness.
Under the CARES Act, small businesses could qualify for loans up to 2.5 times their normal monthly payroll costs, with a cap of $10 million per loan. In addition, Paycheck Protection Program loans include the following terms:
- No application fees
- No personal guarantees or collateral requirements
- Fixed 1% annual percentage rate
- Deferment on the first six months of loan payments
- Partial or full loan forgiveness opportunities
Borrowers could provide documentation of the use of funds to their lender, who then forward it to the SBA. If the usage of the funds is approved by the government, the borrower is eligible for partial or full loan forgiveness.
According to Coons, the forgiven amount of the loan does not translate to taxable income due to provisions included under the CARES Act. Additionally, the qualified expenses that the forgiven amount was used to cover can be written off as a tax deduction.
“There’s a lot of opportunities through this program if a business knows how to plan for them,” Coons said.
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