Congress approved a law last week that would extend the ability to repay the PPP loan (Paycheck Protection Program). At present, the country, and most of the world, are still in lockdown due to the Coronavirus pandemic. This means it’s challenging for small business owners who received money to use the funds in time according to the law.
Small business owners who received PPP funds initially worried the PPP loan repayment guidelines were too strict. Fortunately, Congress responded. As of June 5th, 2020 the government passed a law extending the time small businesses have to spend their PPP funds. The law also extends how the PPP funds can be used.
How Did We Get Here?
No, that’s not an existential question. However, with economic turmoil due the Coronavirus pandemic lockdown and recent civil unrest, one has to wonder. On March 27th, 2020, Congress passed the CARES Act, a revolutionary piece of legislation. The law was groundbreaking for numerous reasons. As a Solo 401k account holder and self-directed investor, maybe the law got your attention because it opened up the ability to tap into retirement funds.
Another element of the CARES Act was the Paycheck Protection Program, administered by the Small Business Association. The PPP loan aimed to bail out small business owners affected by the pandemic. With massive business closures, the government worried about unemployment spiraling out of control.
As a recap, the Paycheck Protection Program (PPP) launched in early April 2020 as a way to get stimulus funds into the hands of small business owners. Small business owners were severely affected the by Coronavirus lockdown. Many owners were forced to close and furlough or lay off a large number of their employees. They needed money to avoid shuttering their businesses. And due to the pandemic and resulting lockdown, the government had to step in.
PPP History So Far
The first round of PPP funding included $349 billion for small business owners. 75% of funds needed to be used for payroll, as away to stem massive unemployment. If funds were allocated according to the rules, the entire loan would be forgiven. This essentially equates to tax-free bailout money from the government right into the hands of the people. The legislation was a first for the US government and showed how dire things were economically.
That first round of funding dried up in less than two weeks and many businesses didn’t get funds. Business owners and their employees needed more. As a result, Congress approved a second round of funding for an additional $310 billion.
The funding helped and many small businesses received relief. However, countless businesses were concerned they wouldn’t meet the loan forgiveness requirements. To receive full loan forgiveness, the business owner needed to use the funds within 8 weeks of receiving them. Additionally, 75% of funds had to be used for payroll and the remaining 25% could be used for mortgage, interest, and utilities. Fail to meet those qualifications? You have to repay the loan.
Good News for Small Business Owners
It’s expected the new law and continued guidance on PPP loan forgiveness will help many small business owners who have been struggling. The challenge is that many businesses had reduced hours or were closed completely during the last 8 weeks. In that case, how could they use those funds per the stipulations of the law? Most couldn’t, and they worried they’d have to figure out how to repay a loan during the most severe economic crisis in recent memory.
Those who were concerned they wouldn’t be able to use the funds in time, or qualify for loan forgiveness may now breathe a bit easier. For the PPP loan to be extended and provisions expanded is a great thing for many entrepreneurs.
PPP Loan Extension Updated 8 Week Period to 24 Weeks
According to the new law, small business owners have up to 24 weeks to use their funds. That means funds must be used by December 31st, 2020 or 24 weeks, whichever is earlier. For those small business owners who have struggled to find a way to use funds, this will bring great relief. Additionally, if the business was forced to close over the last couple months due to the Great Lockdown, they may begin to reopen and have a chance to use those funds.
If you use PPP funds for non-qualified purposes, the loan is not forgiven. In this case, the small business owner will need to repay the loan. Repayment terms are set at 1%, with funds repayment required in 2 years.
Payroll Percentage Changed to 60%
One other element of the PPP Loan being extended is the change in how funds must be used. Previously, at least 75% of PPP funds had to be used for payroll expenses. Under the new law, only 60% of PPP funds are required to be used in payroll. This helps small business owners who may have higher overhead in their mortgage or rent for their storefronts.
Too Little, Too Late?
Unfortunately, the guidance on PPP loan extension and forgiveness may be too little, too late for some small business owners. Consider this: businesses who received the first round of funding got their money around April 10th. The President signed the law approving the extension on Friday, June 5th.
That means the new law and extension guidelines came out close to the end of the 8-weeks. That is the period after which most small businesses would have already used the funds for fear of not complying with the guidelines within the 8 weeks. One such example is your neighborhood small restaurant owner. He received PPP funds in early April and under the old law was required to use 75% of those funds on payroll within 8 weeks.
As a result, he overpays his employees (who might not be working many hours due to no “dine-in” service and curbside only restrictions). In using all those funds, he has kept his employees intact (one PPP loan provision requirement for forgiveness). But, he over paid those employees just to use funds on time. Only now is he learning he could have had more time to reopen safely, pay his employees fairly, and use some funds toward his rent or mortgage. But, the money is spent. And now, when the country slowly begins to reopen, he has to figure out how to stay afloat.
Have you received PPP funds? How do you feel about the PPP loan being extended? Let us know in the comments below!