Biden changes federal Paycheck Protection Program rules to help small businesses
Aiming to put its own stamp on the Paycheck Protection Program, the Biden administration on Monday abruptly changed crucial program rules in ways intended to help the smallest and neediest companies, which have sometimes struggled to obtain aid from the federal relief effort.
But the changes risk throwing an already turbulent program into chaos as banks and other lenders try to accommodate the last-minute shifts. With just five weeks to go before March 31, when the latest iteration of the program is scheduled to end, lenders were left scrambling to adapt to new rules that won’t even be fully explained to them until later this month.
The changes include a new way to calculate loans for self-employed people and a 14-day exclusive window for applications from businesses with fewer than 20 employees. The adjustments are intended to increase aid to the very smallest businesses, many of which are run by women, Black people and members of other minority groups and have so far received a disproportionally small share of the relief money.
“Getting our economy back means bringing our small businesses back,” President Joe Biden said in brief remarks Monday afternoon. The changes, he said, “will bring much-needed, long overdue help to small businesses who really need help staying open, maintaining jobs and making ends meet.”
The Paycheck Protection Program was a signature effort of the Trump administration, disbursing $523 billion in forgivable loans to small businesses last year. However, the program was criticized for its haphazard rules and hasty implementation, which often meant that the most well-established and well-connected small businesses — among them law firms, political lobbyists and companies backed by private equity investors — got loans, while more vulnerable businesses struggled.
In December, Congress provided $284 billion in fresh funding to restart the program. The Small Business Administration, which manages it, began approving applications last month in the waning days of the Trump administration. So far this year, about $140 billion has been distributed to 1.9 million business.
But with a wide range of eligible businesses — from self-employed workers to 500-employee enterprises — there has been a great disparity in how they’ve faired getting loans. One-person operations, like sole proprietorships and independent contractors, have had a particularly hard time. And those that succeeded often got tiny amounts — as little as $1.
To help these businesses, the Biden administration is overhauling the way their loans are calculated. Previously, their loans were based on the profit they reported on their annual taxes. That disqualified unprofitable businesses — a restriction that did not apply to larger companies — and limited the size of the loans available to business owners who try to report as little taxable income as possible (as most businesses do).
Loans for sole proprietors will now be based instead on gross income, a figure that excludes many expenses. That will allow unprofitable businesses to qualify and allow many applicants to collect much larger loans.
But lenders don’t yet have details on how to process the change, which Small Business Administration officials said will be carried out early next month. That leaves them in a bind: Should they tell borrowers seeking loans now to pause their applications and hold out for larger loans? And what happens to those who already received loans but would now be eligible for bigger ones?
Rohit Arora, CEO of Biz2Credit, the program’s largest lender this year, let out a deep sigh when confronted with those questions. “We just don’t know right now,” he said.
More than 100,000 of the 140,000 loans his company has made this year have gone to sole proprietors. He’s dreading the reaction from those who have already received loans.
“Customers will be very, very upset, and all of them are going to call us about it,” Arora said.
Those customers are out of luck: The SBA will not retroactively change loans that have been disbursed, and it will not let those who already got loans return them and reapply, according to an agency official familiar with the plan, who was not authorized to speak publicly.
Even those lenders who expect their customers to benefit were leery of yet another on-the-fly rule overhaul. Randell Leach, CEO of Beneficial State Bank in Oakland, California, said it was frustrating when lenders try to help borrowers understand their options, only to have them keep shifting.