The smallest businesses that have had the most trouble accessing forgivable loans from the Paycheck Protection Program will soon get extra help.
The new Biden administration on Monday announced changes for the pandemic aid program focused on helping small and minority owned firms as well as sole proprietors.
Starting Wednesday, the Small Business Administration will only accept applications for PPP loans from firms with fewer than 20 employees.
The administration is also making several changes to the program, including increasing loan amounts for sole proprietors and individual contractors, eliminating restrictions around delinquent student loan debt and non-fraud felony convictions as well as allowing some non-citizen business owners to apply.
Goal is to expand access
The changes will help even the playing field for firms that make up most of the small business community – 98% of small businesses employ fewer than 20 people but have received only 45% of PPP funding thus far, according to the SBA. They also aim to address racial disparities that have been seen in loans as earlier iterations of the program left out many minority-owned businesses.
Supporting these firms is extremely important to the U.S. economic recovery, as small businesses employ nearly half of all working Americans, according to the SBA.
Here’s what small business owners need to know before the application window opens on Wednesday.
1. Businesses can apply for either a first or second draw of funds
If you are self-employed or own a business with fewer than 20 employees, lenders will prioritize your PPP loan applications starting Wednesday.
Eligible businesses can apply for either a first or second draw PPP loan, depending on their individual circumstances. To qualify for the second round of forgivable loans from the SBA, businesses must have spent or plan to spend all of their first loan and show they had a 25% or more drop in revenue in any quarter of 2020.
2. The self-employed can now get more forgivable funding
One of the biggest changes to PPP is how lenders will calculate loans for millions of self-employed workers, including sole proprietors and independent contractors.
For businesses with employees, PPP loans are generally 2.5 times payroll costs. But for one-person firms that don’t have a payroll, lenders used the net profit number from the IRS 1040 Schedule C, which includes deductions. Because of this, some workers saw very low loan amounts in previous rounds of the program.
To fix the issue, the SBA is revising the formula to match what it uses for farmers. This basically means that they will instead calculate loan amounts from gross income instead of net profit, said Chris Hurn, chief executive of Fountainhead Commercial Capital.
3. Apply as soon as possible
Experts aren’t sure if two weeks will be enough for all the smallest businesses that need help to apply for PPP loans, and since there is a limited amount of funding available, businesses should apply as soon as possible.
If you’d like to apply, this means that you should gather your tax documents including Schedule C – either from 2019 or 2020 – and have them ready to submit on Wednesday. It may also be a good idea to get in touch with a lender in your community or one that you have an existing relationship with to submit your paperwork.
In addition, if you’re able to apply for a first round PPP loan right away, there’s possibly time to allocate the money and apply for a second draw, according to Hurn.
What may be next
To be sure, these changes are late in the game for the program, which was first established by the CARES Act in response to the coronavirus pandemic and is currently set to expire at the end of March. That gives only a few weeks with the changes in place before the program ends.
And, it’s not year clear if some of the changes made will be retroactive. This would be especially important for the sole proprietors that got small first draw loans.