How just a few days have cost some small businesses thousands on their PPP loans

Matt Strickland, owner of Gourmeltz in Fredericksburg, Virginia, at his restaurant on February 12, 2021. Strickland continues to operate his restaurant despite saying his license has been revoked by health officials for failing to comply with Covid-19 restrictions.

Kevin Fogarty | Reuters

For some of the smallest businesses that have applied for loan credits through the Paycheck Protection Program, waiting just a few days or weeks would have added thousands of dollars.

But they had no way of knowing what was coming.

The Biden administration announced a series of changes to the loan program in late February, which, after reopening in January, offered $ 284 billion of forgeable loans to keep employees on a company’s payroll. These changes included a modified loan formula that would mean larger amounts for sole proprietorships, as well as expanded eligibility for small business owners with certain criminal records who were criminal or non-national in relation to student loan debt.

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In addition, a priority application window for companies with fewer than 20 employees was announced from February 24 to March 9 to ensure the money reaches those struggling to access the program, including women and minority-run businesses.

However, the timing of this priority window was inconsistent with the other changes that didn’t go into effect until the first week of March, just weeks before the program deadline ended that month.

Sole proprietorships had to wait even longer for the new loan formula.

The Small Business Administration did not publish the final guidelines until March 3rd and was only ready a few days before the end of the priority window to accept applications under the rule by March 5th. Lenders also had to struggle to update their systems midway through the process, adding further delays.

Missing thousands of dollars

The change was critical for the self-employed. In the updated calculation, the SBA uses Gross Income, or line 7 of the IRS Form 1040 Schedule C, as a replacement for labor costs for sole proprietorships who often have no employees. Previously, the credit formula used net income or line 31 in Appendix C, although this included deductions that meant that some very small credits were received or ineligible.

In many cases the difference is thousands of dollars.

For Sarah Foster, 49, who runs a jewelry and design business in Prescott, Arizona, the new calculation would have meant almost $ 9,000 more in forgivable funding. Foster applied for a second PPP loan as soon as possible this year and received about $ 5,250 in the first week of March.

Sarah Foster applied for a second PPP loan as soon as possible. If she had waited, new rules could have increased her loan by $ 9,000.

Sarah Foster

This amount was calculated from line 31 in their schedule C. If it had been calculated using line 7, it would have been about $ 14,000, she said.

“This is huge,” said Foster of the difference, adding that she was frustrated when she heard about the new rules that were changing things in the Middle Stream. “It would make up for what I lost while $ 5,250 doesn’t.”

Some could go back and reapply

As of March 7, the PPP has funded more than 2.4 million loans totaling nearly $ 165 billion, roughly 60% of the money allocated this time. Borrowers and lenders have indicated that loan approval takes longer due to the increased SBA security measures to prevent fraud.

Some hope the slower process means they still have some leeway to apply for larger loans under the new formula.

The SBA advised lenders that submitted but unapproved applications could be withdrawn to allow borrowers to reapply. If the borrowers had a loan that had been approved but not yet paid off, the lenders could cancel it and the borrower could apply again.

For some of these business owners, it’s honestly going to be heartbreaking.

Chris Hurn

Managing Director of Fountainhead Commercial Capital

Even if a loan had been paid off, the lenders could cancel the loan and the borrowers could repay the money and reapply for the new applications, but only if the lender did not already have Form 1502, which contains payment and loan information, with the SBA would have submitted. Lenders are required to submit these forms to the SBA monthly, but many submit them more frequently.

When the form was submitted, the SBA said there is nothing borrowers or lenders can do to take advantage of the new calculation. According to the SBA, sole proprietorship loan amounts cannot be increased in this situation.

That rule isn’t entirely fair, said Chris Hurn, executive director of Fountainhead Commercial Capital, a non-bank lender. The Covid Relief Act, passed in December, allowed some borrowers who have not yet received forgiveness, had returned all or part of the PPP loans, or had not drawn the full amount they were eligible for, to change their loan for the difference to apply .

“Why we don’t do this for the smallest borrowers is confusing to me,” said Hurn, adding that the rule seems to favor larger, more sophisticated companies. “For some of these business owners, it’s honestly going to be heartbreaking.”

Mike Kelly may be able to reapply for a larger PPP loan using the recently updated sole proprietorship calculation formula.

Mike Kelly

Mike Kelly, 39, who runs a personal fitness training facility in Springfield, New Jersey, has just heard that his lender has not yet submitted Form 1502 for the loan he received in February.

That means he could cancel his loan, repay it and apply again under the new rules. This step would result in a larger crowd. In 2019, his gross income was nearly $ 140,000, but his net income was around $ 34,000.

According to the new calculation, Kelly could get the maximum amount for sole proprietorship, which is $ 20,833. That’s almost three times the $ 7,100 loan he got under the old formula.

If he does, however, he could cut it shortly before the March 31st program date. By that date, a loan would need to be approved by the SBA to make sure he gets the money.

What could change

Of course, there is a possibility that the PPP will be extended. The American bailout plan signed by President Biden on Thursday provides an additional $ 7.25 billion for PPP and extends eligibility for the program.

And bills were introduced in the House and Senate on Thursday that would extend the deadline by two months to May 31, and give the SBA an additional 30 days to process loans.

If the bill is passed, it could open the door for more changes to the program that could help individual entrepreneurs.

Peggy Russo could have received almost four times more forgivable funds if her last PPP loan had been calculated using new rules.

Peggy Russo

But until that happens, borrowers like Peggy Russo have run out of options. Russo, 53, applied for a second PPP loan in February to support the childcare business she has run in Eldridge, Iowa for 18 years.

On February 22nd, she received $ 5,340 – roughly the same amount as her first drawing. Just days later, she found out about the updated rules, including better credit calculation.

Under the new formula, she would be eligible for a loan of nearly $ 20,000, which is roughly four times the amount she received. She called her lender and her local SBA office to see if something could be done, but found that her lender had already sent Form 1502, which means she can’t go back and apply for a larger loan again .

“It’s very difficult to accept,” said Russo. “I can’t sleep at night – it’s not that I did anything wrong.”

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