The smallest businesses are getting extra PPP help. What to know before you apply

Personal finance

The smallest businesses that have had the most trouble accessing forgivable loans from the Paycheck Protection Program will soon get extra help.

The Biden administration on Monday announced changes for the pandemic aid program focused on helping small and minority owned firms as well as sole proprietors.

For two weeks, starting Wednesday, the Small Business Administration will only accept applications for PPP loans from firms with fewer than 20 employees.

The administration is also making several changes to the program, including increasing loan amounts for sole proprietors and individual contractors, eliminating restrictions around delinquent student loan debt and non-fraud felony convictions as well as allowing some non-citizen business owners to apply.

Goal is to expand access

The changes will help even the playing field for firms that make up most of the small business community – 98% of small businesses employ fewer than 20 people but have received only 45% of PPP funding thus far, according to the SBA. They also aim to address racial disparities that have been seen in loans as earlier iterations of the program left out many minority-owned businesses.

“It’s a great idea to make sure that we’re prioritizing small and minority owned business owners because we saw that they were left out of the process,” said Marvin Owens, the chief engagement officer of Impact Shares and former senior director of economic development at the NAACP. “What you saw in the beginning of PPP was really a revealing of the disparities around access to capital.”  

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Supporting these firms is extremely important to the U.S. economic recovery, as small businesses employ nearly half of all working Americans, according to the SBA.

“This is one of our country’s main economic drivers,” said Awesta Sarkash, government affairs manager at Small Business Majority, a left-leaning advocacy organization. “Our main employers are hurting, and so you see a ripple effect.”

Here’s what small business owners need to know before the application window opens on Wednesday.

1. Businesses can apply for either a first or second draw of funds

If you are self-employed or own a business with fewer than 20 employees, lenders will prioritize your PPP loan applications starting Wednesday.

Eligible businesses can apply for either a first or second draw PPP loan, depending on their individual circumstances. To qualify for the second round of forgivable loans from the SBA, businesses must have spent or plan to spend all of their first loan and show they had a 25% or more drop in revenue in any quarter of 2020.

2. The self-employed can now get more forgivable funding

One of the biggest changes to PPP is how lenders will calculate loans for millions of self-employed workers, including sole proprietors and independent contractors.

For businesses with employees, PPP loans are generally 2.5 times payroll costs. But for one-person firms that don’t have a payroll, lenders used the net profit number from the IRS 1040 Schedule C, which includes deductions. Because of this, some workers saw very low loan amounts in previous rounds of the program.

To fix the issue, the SBA is revising the formula to match what it uses for farmers. This basically means that they will instead calculate loan amounts from gross income instead of net profit, said Chris Hurn, chief executive of Fountainhead Commercial Capital.

“It makes tremendous sense,” said Hurn, adding that it will get needed money out to people faster.

What you saw in the beginning of PPP was really a revealing of the disparities around access to capital.

Michael Owens

chief engagement officer, Impact Shares

3. Apply as soon as possible

Experts aren’t sure if two weeks will be enough for all the smallest businesses that need help to apply for PPP loans, and since there is a limited amount of funding available, businesses should apply as soon as possible.

If you’d like to apply, this means that you should gather your tax documents including Schedule C – either from 2019 or 2020 – and have them ready to submit on Wednesday. It may also be a good idea to get in touch with a lender in your community or one that you have an existing relationship with to submit your paperwork.

In addition, if you’re able to apply for a first round PPP loan right away, there’s possibly time to allocate the money and apply for a second draw, according to Hurn.

What may be next

To be sure, these changes are late in the game for the program, which was first established by the CARES Act in response to the coronavirus pandemic and is currently set to expire at the end of March. That gives only a few weeks with the changes in place before the program ends.

And, it’s not year clear if some of the changes made will be retroactive. This would be especially important for the sole proprietors that got small first draw loans.  

“If they don’t extend the program beyond March 31, I’m afraid they’re not really going to be as effective as they’d like to be,” Hurn said.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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