Refurbishing the Paycheck Protection Program (PPP)
The PPP was a foundational element of the CARES Act, which became law in March 2020. The program, managed by the Small Business Administration (SBA), made funds available to small businesses to cover mainly payroll costs and associated benefits, but it also could cover utility bills, mortgage payments, and rent.
Rollout of the first round of $522 billion was beset with problems. Funds went mostly to larger businesses with many smaller ones missing out. Only businesses with less than 500 workers should have been eligible to receive loans, but some had a lot more employees. Shake Shack, which got $10 million, has over 8,000 on its payroll. Other approvals stretched the definition of small. The Los Angeles Lakers basketball team, the eighth-most valuable sports team in the world worth an estimated $3.7 billion, got its request for $4.6 million approved.
Since its debut, the PPP has been subject to a great deal of administrative and legislative fine-tuning. It’s been modified by the Paycheck Protection Program Flexibility Act (PPPFA) which extended the “forgiveness period” of loans. Before, a PPP borrower could only ask to be forgiven amounts spent on eligible expenses during the 8-week period after receiving the loan. With the passage of the PPPFA, that period has been tripled to 24 weeks.
Again, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) signed into law on December 27, 2020, as part of the Consolidated Appropriations Act of 2021, authorized the $284 billion second round of the PPP. The second round opened on January 15. It’s too soon to say if it’s going any better than the first round. To be eligible, a business making a second request must have experienced a decrease in gross receipts of 25% or more in any quarter of 2020 compared to the same quarter in 2019.
Looked at another way, this round is actually the third. The first release of funds authorized by the CARES Act totaled $349 billion. The second, made possible by the Paycheck Protection Program and Health Care Enhancement Act, amounted to $310 billion. The third release of funds, under the purview of the Economic Aid Act (see above), totals $284 billion.
Building on those initiatives, the bill extends eligibility to “internet publishing organizations,” which it defines as an entity that is an “internet only news publisher or Internet-only periodical publisher, and is engaged in the collection and distribution of local or regional and national news and information.”
Easier Access to Credit for Sole Proprietors, Independent Contractors, and the Self-Employed
Most small businesses are sole proprietorships, many without employees. While there are less than two million traditional C corporations, there are around 23 million sole proprietorships, says the Tax Foundation. (Independent contractors and other self-employed individuals (freelancers) are generally also sole proprietors. Although, of course, an individual can set up an LLC or C corporation). The Biden plan will make it easier for these establishments to access PPP funding by changing the way that loan amounts are calculated.
Under the present system, the maximum PPP loan amount for a business with employees is equal to 2½ times one month’s payroll. For businesses without employees, the loan amount is 2½ times an average month of “net income” or gross revenue minus taxes and expenses. It is now believed that these previous methods have short-changed many small businesses.
Going forward, the loan calculation formula for these applicants will be revised so that it offers more relief. In addition, $1 billion will be set aside for sole proprietorships, without employees, which are located in low-income and moderate-income (LMI) areas.
Assistance for restaurants is included in the Biden plan for economic recovery. The proposals have been welcomed by industry groups. Further details are forthcoming but some broad brushstrokes of the proposed $25 billion scheme have been revealed. They include “the creation of a dedicated grant relief program for restaurants.” Grants are non-repayable.
The Restaurant Relief Fund would distribute grants up to a maximum of $5 million per operation or up to $10 million for multi-unit operations. The Fund will place special emphasis on smaller restaurants. For restaurant chains, no more than 20 locations will be eligible for aid.
The grants are meant to compensate restaurants for their loss of business due to the pandemic. Accordingly, the size of the grant is calculated as the difference between the restaurant’s sales for 2019 and 2020. Few restrictions will be placed on how the funds may be used. They may be expended on food and beverage supplies as well as other routine operating expenses.
Certain classes of applicants will be given preferential treatment. Restaurants run by women, veterans, and “socially or economically disadvantaged individuals” will get a place at the front of the queue. For the first three weeks, after disbursements begin, only applications from those classes of applicants will be processed. Restaurants that did less than $500,000 in 2019 would also get special treatment. For these smaller establishments, around $5 billion (a fifth of the fund) will be reserved for their support.
The restaurant relief package amounts to just 20% of the funds the industry had pleaded for back in April 2020, citing its importance in the small business sector. Independent restaurants and bars employ around 11 million people.
Economic Injury Disaster Loans (EIDL) and Grants
Small businesses can also turn to the Economic Injury Disaster Loan (EIDL) program for assistance. EIDL is a form of aid, designed to aid the victims of natural disasters such as hurricanes or earthquakes. Many businesses took advantage of the program by taking out a loan, after the pandemic was declared a disaster under the law. For those that did, there is no possibility of a second loan, as in the PPP. However, the relief law passed in December, allows a seriously affected business access to further financial support through a Targeted EIDL Advance grant.
The CARES Act made it possible for businesses to apply for an EIDL Advance grant of up to $10,000. The amount of the grant depended on the size of the workforce. Second time applicants who already received funding will receive the difference between $10,000 and the amount of their first grant, while those applying for the first time will get $10,000.
The proposal on the table is to provide $15 billion for the EIDL program. The additional funds would be earmarked for “severely impacted small businesses” or ones that have suffered a loss of over 50% of revenues and are finding it difficult to pay 10 or fewer employees. It’s not clear at this stage, if the disbursed funds will be loans or grants.
For a business to qualify for an EIDL grant, it must be situated in a low-income community and have suffered a fall in revenues of at least 30% over any eight-week period since early March (relative to the same period in 2019).
A recent White House release detailed the outlook for the future: The Biden-Harris administration has made delivering equitable relief to hard-hit small businesses a top priority. After a month in office, that equitable relief seems well on its way to being legally authorized. Presently, the prospect of economic recovery is much improved, compared to six months ago. The economy took a hit, but not as hard as first expected. In 2020, gross domestic product (GDP) fell by 2.3% to $20.93 trillion. Thus, in 2020, economic activity slowed by $500.6 billion. In 2019, it had increased by 821.3 billion. The result is a net GDP gain over 2019 and 2020 of $320.7 billion.
Economic activity in 2021 should accelerate as normal life returns. Naturally, the return to normality will hinge on vaccine availability. Consumers are, no doubt, eager to start spending once again. They have a lot of cash in their pocket to do so. At the end of 2020, American households had accumulated $2.38 trillion in personal savings. As a result, the way ahead for America’s small businesses looks bright.
About the Author
Anthony is the owner of Kip Art Gifts, an ecommerce store that specializes in art-inspired jewelry, fashion accessories, and other objects. Previously, he worked as an accountant and financial analyst. He enjoys writing on small business, financial intermediation, and economics. Anthony was educated at Wilson’s School and the London School of Economics and Political Science.