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Millions of self-employed and working workers received good news this week.
The Biden government on Monday changed the way the Small Business Administration’s Payment Check Protection Program calculates forgivable loans for smaller businesses and individual owners.
But there is a problem. The updated formula – which is likely to result in larger loans to non-employers, including individual owners and independent contractors – will not take effect until the first week of March.
Although the SBA has provided some information on how the loan formula will change, it has not yet communicated to lenders the details of how to calculate loans under the new rules.
This means that business owners who want to apply for the two-week priority window for the smallest companies with less than 20 employees starting today may want to postpone to ensure that their applications are subject to the most up-to-date rules.
“Loans sent before changes to the official rules are subject to the rules in force at the time of application, ” said Carol Wilkerson, a spokesman for the SBA.
To ensure that individual owners receive the benefit of the changes, it is recommended that creditors do not submit their orders to the system until SBA’s written guidance is issued, according to management.
Just a few days can make the difference between a loan that keeps the sole owner afloat and one that doesn’t get very far.
What is known about the formula change so far
For companies with employees, maximum PPP loans are 2.5 times the average monthly payroll costs, according to the SBA. As a substitute for payroll costs for individual workers, the SBA used net income information from tax returns, although payroll and profit are different measures.
In addition, the net profit line includes deductions, which reduced or eliminated the profit figures of some, generating small loans or making them ineligible for the program.
Instead, the updated formula will use gross revenue as a substitute for payroll costs, a higher number than net revenue, meaning that many companies will get more money on forgivable loans.
“It’s a tremendous change,” said Keith Hall, president and CEO of the National Association for the Self-Employed.
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The change is important, as sole proprietorships are the most common business structure in the United States. The IRS says there are about 41 million self-employed workers in the country and, in 2018, more than 27 million people filed an IRS 1040 Form C declaration for sole proprietors, according to the agency.
Many of these companies were particularly affected by the coronavirus pandemic. About 70% of these companies without employees are owned by women and people of color, and 95% of companies owned by blacks and 91% of Latin companies are sole proprietors, according to SBA data.
But so far, very little forgiving funding from the SBA has gone to individual companies – according to a recent NASE survey, almost two-thirds of its members said they had not received any money from the program.
Much of this was due to confusion in the early days of the program on eligibility and forgiveness, which we hope will be clearer today, Hall said. “Many of the reasons why these small business owners did not apply or were not approved for a PPP loan – I think many of those barriers have been removed,” he said.
Loans submitted prior to changes to the official rules are subject to the rules in force at the time of application.
Carol Wilkerson
SBA spokesperson
Questions remain
Small businesses other than individual homeowners may also want to proceed with caution when applying for a PPP loan, even during the two-week priority window.
The changes that make student borrowers, non-legal residents and those with a criminal record eligible for loans also take effect in the first week of March, according to the SBA.
And, there are other questions about application timing for individual owners, especially those who have already approved a loan but would get more from the new formula – there is no process for changing a scattered loan or withholding an order that is pending.
“All the unknowns now,” said Alex Cohen, CEO of Liberty SBF.
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