Sba Stops Accepting New Ppp Applications From Most Lenders As General Funds Run Out
The U.S. Small Business Administration has stopped accepting new Paycheck Protection Program applications from most lenders almost a full month before the $292 billion programs application deadline.
The SBA informed lenders Tuesday afternoon that the PPP general fund was out of money and that the only remaining funds available for new applications are $8 billion set aside for community financial institutions , which typically work with businesses in underserved communities. The agency also has set aside $6 billion for PPP applications still in review status or needing more information due to error codes.
This and other PPP issues will be addressed during an AICPA Town Hall at 3 p.m. ET on Thursday.
Congress in late March extended the PPP application deadline two months to May 31, in part to give the SBA and lenders time to resolve error codes that were holding up nearly 200,000 applications in the SBAs PPP platform. The unresolved error codes were related to validation checks instituted by the SBA to help prevent fraudulent applications from being funded.
The PPP Extension Act of 2021, P.L. 117-6, did not include any additional funding for the current round of the PPP, which Congress provided with more than $290 billion to make forgivable loans to small businesses and not-for-profits suffering economic loss related to the COVID-19 pandemic.
Jeff Drew is a JofA senior editor.
Will There Be Another Round Of Ppp
There has been no substantial discussion of another round of PPP loans, and that decision is up to Congress. The New York Times noted some lawmakers are open to the idea of more PPP funding, though these were all Democrats. Maryland senator Ben Cardin told the Times he remains open to a bipartisan agreement to add funds to the program.
Your business can no longer count on PPP loans. But there are other types of SBA loans or general business loans to keep your small business hanging through what may be the end of the COVID-19 economic disaster.
Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.
The Good The Bad And The Ugly Of Focusing On Payrolls
In May, the progressive pollster Data for Progress conducted a poll on behalf of Recode in an effort to gauge public perception of the PPP and how Americans feel about it. It surveyed 1,235 likely voters online.
The poll revealed some dissonance in how Americans think about small business and who is and isnt deserving of help. When asked whether all businesses should get help to keep workers paid, 70 percent of respondents said yes. But when asked whether support should be capped at businesses with 500 employees, 76 percent said yes. And when asked about whether the Los Angeles Lakers NBA team, which got a loan and then returned it after public outcry, should have given the money back, 75 percent said it was the right thing to do.
When asked what the goal of federal assistance to businesses should be, 58 percent of respondents said it should be to keep workers paid, while 24 percent said it should be to keep businesses afloat and that explains, at least partly, why the program has attracted controversy. It hasnt been possible for many businesses to accomplish both of these goals at the same time, so they didnt get what they needed to truly survive the pandemic, especially sole proprietorships or ones with just a few employees. Yes, covering paychecks is important. So is paying utilities and rent.
The focus on payrolls has caused other wrinkles as well.
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The Nearly $670 Billion Ppp Program Is Down To About $9 Billion Reserved For Community Financial Institutions
11:12 AM on May 12, 2021 CDT
The Paycheck Protection Program was seen as a limitless treasure chest when it launched a year ago to help small businesses weather the economic catastrophe brought on by the COVID-19 pandemic.
But struggling businesses have finally hit the bottom.
Last week, the Small Business Administration, which runs the program, said loan money for traditional banks had been exhausted before the planned cutoff date of May 31.
We didnt expect to spend that money in that amount of time, said Herbert Austin, district director of the Dallas-Fort Worth SBA office.
Texas lenders ranked third in the country for PPP loans given out, with 460,000 loans totaling $20.5 billion. The state trailed only California and New York.
Small businesses that missed out have other options.
First, theres still about $9 billion in the PPP chest that the SBA set aside for minority depository institutions and community development financial institutions to lend to businesses.
The program is not fully over, Austin said. Its still open to some extent.
Also, the Economic Injury Disaster Loan program, meant to help businesses harmed by the pandemic, is continuing, with its deadline extended to Dec. 31. Those loans are less popular because they arent forgivable, as PPP loans are.
Ideally, you would apply for PPP to cover payroll and then apply to the EIDL program to cover the cost of running the business, Austin said.
Loan Forgiveness Not Coming Easily For Some Ppp Borrowers
Andrew Songs restaurant and karaoke bar is a ghost of what it used to be. The shuttered business in Manhattan still has an outdoor dining structure up and a menu posted by the door. A phone sits on the dusty host stand inside.
After eight years in business, Song shut down Le Midi last summer, during the pandemic. Now, hes left with debt.
The business got nearly $250,000 through the federal Paycheck Protection Program. His lender, Citibank, told him he has to pay back more than $25,000.
Song cant figure out why. Was it something in his application? Did he not follow the programs guidelines? Is he even liable for the money since his business closed?
I couldnt get a clear answer, and no one picks up phone calls, no emails are returned, Song said. It feels like you are dealing with a faceless organization.
More than $790 billion has been given out through the Paycheck Protection Program, the pandemic aid that helped small businesses with payroll costs and more. The promise was that if business owners used the funds correctly, the loans would be fully forgiven.
But so far, 6% of borrowers who have applied for forgiveness have been told they must pay back some portion of their loans, according to the Small Business Administration adding up to more than $27 billion. Meanwhile, half of borrowers have yet to finish the forgiveness process.
And because of that, it was more like a framework was offered than a full, robust program, Anthony said.
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He Gave Back A Ppp Loan Hoping For More Money Then The Program Ended
Carmelo Ramos gave back his $11,458 PPP loan because he qualified for more money. He ended up with nothing when the program ran out of funding as he was reapplying.
When Carmelo Ramos, 36, got his second-draw loan from the Paycheck Protection Program in February, he was grateful.
The $11,458 loan was more than the roughly $6,200 he got in the first round of the program in 2020. Though it didnt cover all the business his training consultancy lost due to the coronavirus pandemic, it helped.
Then, his personal business banker at Capital One notified him that he could get even more money an additional $7,000 if he gave back his loan and reapplied.
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He decided to go for it but was left with nothing when the program ran out of money in early May, weeks ahead of the deadline.
The money I wouldve received would have made a difference, said Ramos, adding it would have covered his pay. He was also planning on investing some of the loan into new marketing materials.
How Does Ppp Loan Forgiveness Work
The new PPP authorization creates a simplified forgiveness process for borrowers who received loans less than $150,000.
PPP funds used on payroll costs, rent, utilities and mortgage interest in the 8 to 24 weeks after receiving the loan are forgivable. This means you wont be required to repay that portion of the loan. But you must have spent at least 60% on payroll costs and no more than 40% on nonpayroll costs in order to receive full forgiveness.
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How Does The Paycheck Protection Program Work
The PPP emergency loan program was created as part of the $2 trillion CARES Act in March 2020 and was authorized to distribute more than $600 billion in forgivable loans to small businesses. The program originally had just $350 billion allocated, but another $320 billion was added by Congress in April in order to help more businesses. Congress extended the PPP application deadline once more to August and then closed applications for the rest of 2020.
In late December 2020, Congress passed the $900 billion Coronavirus Response and Relief Supplemental Appropriations Act in order to help more businesses impacted by COVID-19. The CRRSAA fixed issues with PPP and put more money behind the program so businesses can apply for first-time and second-draw PPP loans. It also altered the criteria businesses needed to meet in order to be eligible for first-time and second-time loans and made forgiveness a little easier.
PPP loans are issued by private lenders and credit unions, and then they are backed by the Small Business Administration . The basic purpose of the PPP is to incentivize small businesses to keep workers on payroll and/or to rehire laid-off workers that lost wages due to COVID-19 disruptions. As long as businesses spend their loan money correctly, the full amount can be forgiven.
Application Process For A Round 3 Ppp Loan
New first- and second-draw loans followed a pattern similar to that followed with previous PPP loans. Business owners could download and fill out the loan application from the SBA website. The first-draw application was five pages long, including instructions, and the second-draw application was six pages, including instructions.
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Report From Sba Inspector General
Hannibal Ware, the Inspector General of the Small Business Administration, said that the Small Business Administration had set stricter rules than were stated in the law establishing the program, which is causing an “unintended burden” on businesses.
The Small Business Administration requires 75% of a PPP loan be used for payroll costs, which is a rule not found in the law. The Small Business Administration stated all PPP loans would have a maturity date of two years, while the law allowed for up to ten years. The Small Business Administration has also not complied with all of the requirements stated in the law. The law required the Small Business Administration to issue guidance to lenders about the loan deferment process, but it did not do so. The law required lenders to prioritize businesses in underserved and rural areas, but the Small Business Administration did not issue any such guidance to lenders. The law required the Small Business Administration to register each PPP loan using the Taxpayer Identification Number of each business within 15 days after each loan was made, but it did not do so.
A group of software and information technology companies has sued the Small Business Administration and the Department of the Treasury, alleging that the two agencies had improperly added restrictions to the program that were not present in the original law.
Loans Made To Other Entities
On April 23, the Small Business Administration released guidance stating that it is unlikely that a publicly traded business with substantial and access to capital markets would be eligible for a PPP loan. Such a business would not be able to certify in good faith that the PPP loan is necessary to support its ongoing operations because of the current economic uncertainty. While a lender does not need to require a business to demonstrate the basis in its certification, the Small Business Administration may do so. The Small Business Administration said it would not pursue action against any such business that applied for a PPP loan prior to April 23 and repays the loan proceeds by May 7, later extended to May 14 and then extended again to May 18. On April 28, the guidance was extended to businesses owned by private companies with similar situations.
On April 28, Treasury SecretarySteven Mnuchin said that the Small Business Administration would do a “full review” of each PPP loan exceeding $2 million.Treasury SecretarySteven Mnuchin warned that businesses would held be “criminally liable” if they receive a loan exceeding $2 million and do not follow the rules.
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Do I Qualify For A First Or Second Ppp Loan
For first-time PPP loans, the majority of small businesses with fewer than 500 employees and select types of businesses with fewer than 1,500 employees are able to apply if they experienced revenue declines in 2020. Many 501 non-profits, 501 veteran organizations, tribal business concerns and self-employed workers/sole proprietors are eligible to apply. As of December 2020, 501 nonprofits, local news media companies and housing cooperatives were added to the list of organizations that could apply. All publicly traded companies are prohibited from receiving PPP loans.
Businesses can apply for a PPP loan as long as they were operational on February 15, 2020, and had paid employees at that time . The SBAs 500-employee threshold includes all types of employees: full-time, part-time and any other status.
Lenders will also ask for a good faith certification that 1) the uncertain economic conditions make the loan request necessary to support operations, and 2) the borrower will use the loan proceeds for specific purposes like payroll and approved expenses.
Changes Came Last Minute
In February, the Biden Administration made changes to PPP, including updating the loan formula for sole proprietors, leading to bigger loans.
Maximum PPP loans for businesses with employees were calculated by using 2.5 times average monthly payroll costs. For businesses without employees, such as sole proprietors and independent contractors, the SBA was using net profit as a stand-in for payroll costs. Because this measure included deductions, it led to smaller loans and even made some ineligible for funding.
The new formula instead used gross income as a stand-in for payroll costs, a larger number that doesnt include deductions. That meant firms that applied under the new rule got more money in forgivable loans.
For Ramos, the additional $7,000 seemed worth the risk to cancel his existing loan and try again. Plus, when he started the cancellation process, it was March months ahead of the extended May 31 program deadline.
The reason why I decided to go for it is because, you know, thats the difference between me being able to trek along for another five to 10 months, he said.
But the process took longer than expected. First, Ramos was sent a promissory note for his new loan, but it was the old amount meaning it hadnt been calculated with the new formula.
While he was trying to sort out what to do with Capital One, the program ran out of money, leaving him with no loan at all.
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The $500 Billion Question That Might Never Be Fully Answered
Beyond the controversies about who did and didnt get loans and how the program was implemented, theres another problem with it: a lack of transparency. A total of $521 billion in loans was given out through the PPP, and we might never know where all the money ended up.
The federal government initially resisted calls for more transparency into whos receiving PPP loans, saying that the information is proprietary and confidential. After intense public pressure, the government relented and released information in July on nearly 700,000 PPP loans of $150,000 or higher. Among the recipients: businesses connected to President Donald Trumps son-in-law Jared Kushner, and Kanye Wests fashion brand, Yeezy.
Reflexively, we rely on market mechanisms to solve problems. We chose this way to do this that is market-driven and market-mediated, and its hugely problematic.
As the Washington Post notes, the data release is just 15 percent of all the loans issued and leaves out the majority of sole proprietorships and independent contractors. And the data released was riddled with errors some businesses listed as receiving loans hadnt actually gotten them, and some amounts were incorrectly reported.
The fact that we are not getting the same level of transparency for the program is that much more problematic given the Small Business Administration knows how to do this and lenders know how to do this, Harrington said.
How Does Companies Get Forgiven
According to the SBA, companies must contact their lender and send their application form to the financial institution that initially gave them the PPP loan.
Businesses who have employees will have to submit information like payroll and nonpayroll costs, adjustments for salary reductions, along with possible PPP loan forgiveness amounts.
The initial deadline to send in a PPP loan forgiveness application form is ten months from the conclusion of the covered period.
This is somewhere between 8 and 24 weeks. Because of this deadline, businesses need to ensure they submit their PPP loan forgiveness application to the lender quickly.
After the submission of the forgiveness application form, theyll have to wait some time to find out if it has been approved or not.
If your PPP loan is completely forgiven, you wont need to make any further payments on it.
If its only partially forgiven , youll need to pay the loan entirely before the maturity date.
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