The Paycheck Protection Program is now more accessible — but it’s still flawed

A sign on Newbury Street in Boston reads “We are open” and “Masks required” during the Covid-19 pandemic in October 2020. | David L. Ryan/The Boston Globe/Getty Images

The latest changes to the Paycheck Protection Program, briefly explained.

The Paycheck Protection Program — a forgivable loan effort designed to help small businesses cover costs during the Covid-19 pandemic — is now more accessible than ever, though it still doesn’t meet the needs of many firms.

The White House announced a new set of changes on Monday that aim to prioritize the smallest businesses — and to bolster support for Black and Latino business owners who were left behind in the earlier waves of the program. These tweaks attempt to make the program’s loans more useful for people who are self-employed, and to clarify how non-citizens can apply. They also try to clear the queue for very small businesses by forcing banks and other lenders to only process applications from businesses with fewer than 20 employees, for a two-week period.

The updates are in response to major disparities in PPP loan allocation — and they solve some longstanding issues. Thus far, sole proprietors and independent contractors — 70 percent of whom are women or people of color — have been shortchanged by the program because of how loans are calculated: Last year, some received as little as $15 after applying for the program. Those who run smaller businesses with fewer employees are also among those that haven’t gotten as much support as their larger counterparts. (As CNBC notes, 98 percent of small businesses have 20 employees or fewer, but they’ve received 45 percent of PPP funding.)

The latest modifications aim to address such gaps, with over a month left to go in the current PPP application process and $150 billion remaining in the fund allocated by Congress.

Small-business advocates welcome these changes, though they note that there’s plenty more that can still be done to improve the program, which has proved confusing and overwhelming for many people. Because PPP still has relatively rigid rules on how money can be spent, as well as a complicated loan forgiveness process, there has been hesitation from some small businesses about utilizing the program and risking taking on more debt.

“Because some of the parameters for PPP are so strict, we’d like to see small-business owners get direct grant access,” said Awesta Sarkash, government affairs manager for Small Business Majority, a small-business organization. Grants would offer businesses far more flexibility — and could be an important component of future Covid-19 relief.

What the changes would do

Despite concern from activists that PPP funding still won’t reach all the owners who need it, overall, the changes ensure that more people can get funding out of the program — and put pressure on lenders to help smaller organizations. Here’s a rundown of what the tweaks are:

• Sole proprietors can calculate their loans differently: Previously, self-employed people calculated their loans using net profits instead of gross income, which failed to capture the full costs sole proprietors and independent contractors faced. The new formula is intended to help both groups get more substantial loans, CNBC reports:

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.

By changing how sole proprietors and contractors determine their loan amounts, this new process is expected to enable them to receive support more closely aligned with their needs.

• People with non-fraud-related felony convictions in the last year can apply: Previously, people with felony convictions in the last year were barred from applying to the program. The new administration guidance changes this and ensures that anyone who has faced a non-fraud-related felony conviction is able to obtain PPP funding. It makes the same change for people who’ve defaulted on their student loans — opening up applications to those who had once been blocked from applying for that reason.
• There’s more clarity around loan applications for non-citizens: Non-citizens with lawful immigration status have been able to apply to the program since its inception, but there’s previously been confusion about the personal information that’s required to do so. The new changes note that people who hold green cards or visas are able to apply to PPP by using their Individual Taxpayer Identification Number.
• There’s a two-week period set aside for the smallest businesses to apply: Between February 24 and March 10, only small businesses with 20 employees or fewer will be able to apply to PPP — clearing the queues of lenders including banks and fintech companies. Although demand for PPP has waned since it first launched, this special set-aside helps make sure smaller businesses get the consideration they need from the program.
• The application is changing to help gather demographic data: Up until now, roughly 75 percent of applicants have not provided demographic information, making it tough to formally track who has been able to access these loans. To better understand the reach of PPP, the administration is supporting a revamp of the application form so people are more encouraged to submit self-identifying information.

What could make the program still more accessible

While these tweaks help significantly with accessibility, they do little to solve some of the larger issues with the program, including complications around loan forgiveness.

As designed, business owners are able to apply for loan forgiveness after receiving the funds and demonstrating that they’ve been used to cover payroll costs and operational needs. The current formula requires that business owners spend 60 percent of the loan funds on payroll costs in order for the loan to be forgiven, with the option of spending the other 40 percent on non-payroll costs like utilities and rent.

Those limitations, however, don’t match up with the financial needs of many small businesses, which may have much larger operational expenses than they do payroll. Plus, businesses must complete a loan forgiveness application in order to guarantee that they don’t incur debt from the program, which makes the entire effort more burdensome on organizations that are already strained.

For months now, advocates have argued that PPP should simply come in the form of grants, instead of forgivable loans — a demand that’s been echoed by 80 percent of small-business owners. As Sarkash said, one way of doing this could be dispensing any leftover PPP funds as grant money instead of loans, a change that would require new action by Congress. Currently, Democratic lawmakers intend to allocate nearly $50 billion to help small businesses in a new Covid-19 relief bill, some of which is grant money.

“The Biden Administration’s updates to the PPP are a welcome recognition of the major gaps and challenges to the program.” said Main Street Alliance government affairs director Didier Trinh in a statement. “These updates will help expand access, but more is needed to support small businesses.”