Aiming to make its own mark on the Paycheck Protection Program, the Biden administration abruptly changed crucial program rules on Monday in ways meant to help the smallest and neediest businesses, who have at times struggled to get help from the federal assistance.
But the changes threaten to throw an already turbulent program into chaos as banks and other lenders try to absorb the last-minute shifts. With just five weeks to go before March 31, when the last iteration of the program would end, lenders had to hurry to adjust to new rules that won’t be fully explained to them until later this month.
The changes include a new way to calculate self-employed loans and an exclusive 14-day time limit for applications from companies with fewer than 20 employees. The adjustments are designed to increase aid to the very smallest businesses, many of which are run by women, blacks and members of other minority groups, and which have so far received a disproportionately small portion of the emergency money.
“To get our economy back, we have to bring our small businesses back,” Mr Biden said briefly Monday afternoon. The changes, he said, “will provide much-needed, long-awaited help to small businesses that really need help to stay open, keep jobs and make ends meet.”
The Paycheck Protection Program was a signature effort by the Trump administration, which paid out $ 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 established and well-connected small businesses – including law firms, political lobbyists and those backed by private equity investors – got loans, while more vulnerable companies had it difficult.
In December, Congress provided $ 284 billion in new funding to restart the program. The Small Business Administration, which runs it, began approving applications in the closing days of the Trump administration last month. This year, about $ 140 billion has been distributed to 1.9 million companies to date.
But with a wide variety of eligible businesses – from the self-employed to those with 500 employees – there is a big difference in the way they got loans. Sole proprietorships, such as sole proprietorships and self-employed contractors, have had a particularly difficult time. And those who succeeded were often given small amounts – just $ 1.
To help these businesses, Biden’s administration is reviewing 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 limitation that didn’t apply to larger businesses – and limited the size of loans available to entrepreneurs trying to report as little taxable income as possible (as most businesses do).
Loans for sole proprietorships are now based on gross income, a figure that excludes many expenses. As a result, unprofitable businesses can qualify and many applicants can collect much larger loans.
But lenders don’t yet have details on how to handle the change, which will be implemented early next month, according to Small Business Administration officials. That leaves them troubled: should they tell borrowers who are now seeking loans to interrupt their applications and pay off larger loans? And what will happen to those who have already received a loan but are now eligible for larger loans?
Rohit Arora, the CEO of Biz2Credit, the program’s largest lender this year, breathed a deep breath when confronted with those questions. “We just don’t know now,” he said.
More than 100,000 of the 140,000 loans his company took out this year have gone to sole proprietorships. He fears the reaction of those who have already received loans.
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“Customers are going to be really upset, and they’ll be calling all of us about it,” said Mr. Arora.
Those customers are out of luck: The SBA will not retroactively amend loans that have been paid out, and it will not return and reapply those who have already obtained loans, according to an agency official familiar with the plan and who is not authorized was to speak publicly.
Even those lenders who expect their customers to take advantage of this were suspicious of yet another on-the-fly rule overhaul. Randell Leach, the chief executive of Beneficial State Bank in Oakland, California, said it was frustrating when lenders tried to help borrowers understand their options just to make them shift.
“We’re getting as much access to people as possible, but constant changes really complicate delivery,” he said.
The 14-day freeze for larger companies also confused lenders.
Companies with fewer than 10 employees collected 80 percent of the loans this year and received a total of $ 42 billion in loans – about 30 percent of the money the program distributed. More than half of the funding allocated by Congress remains available.
The bigger challenge, according to lenders, is a plethora of errors preventing filings from going through new, tougher fraud controls imposed by the Small Business Administration. Those checks falsely disqualify some applicants and expose errors that went unnoticed last year. Both problems require time-consuming intervention.
“This two-week period will not fundamentally change the roadblocks businesses face,” said Richard Hunt, CEO of the Consumer Bankers Association. “It’s like giving everyone a train ticket on an unfinished railway.”
There were three other notable changes. Those with recent convictions for crimes not tied to fraud can now apply, as can those who are in arrears or default on the federal student loan debt. The agency has also updated its guidelines to clarify that business owners who are not citizens of the United States but are legal residents are eligible for loans.
Biden administration officials pitched the changes in response to long-term differences in the types of businesses that applied for and received loans – and a specific response to complaints from groups representing black, Hispanic, and other business owners of color.
The officials said the two-week hiatus would focus government officials, lenders and other stakeholders solely on reaching out to the types of businesses that have no relationships with Washington banks or lobbyists and may not be aware of the ability to raise the loans. questions. . A senior government official, who was not authorized to speak on the subject on behalf of Mr. Biden, said the purpose of the break was to get everyone to focus on these types of businesses.
The White House remains convinced that the program will have a significant amount left over for other loans at the end of the two-week period. Mr. Biden and his team have not called on Congress to extend the March 31 deadline.
Small business advocacy groups generally praised the changes. Shaundell Newsome, co-chair of Small Business for America’s Future, called them “a victory for America’s smallest businesses and those of people of color, far too many of whom were left behind by ill-designed rules favoring larger companies.”
Daniel Betancourt, the general manager of the Community First Fund in Lancaster, Pennsylvania, which works on loans for about 300 companies, most of which are minority-owned, was also enthusiastic. But Mr. Betancourt would like to see the March 31 deadline extended by at least 60 days.
“We need time to let historically disenfranchised business owners know what’s available now,” he said.
For sole proprietors like Elisha Trice who suffer from slowdowns, the formula change adds silver lining to a painful process.
Mr. Trice, an independent Florida video game contractor, got a $ 2,000 loan last year and applied for a second loan last month. His application has been on hold for weeks and now he can put it on hold until the new formula takes effect.
Mr. Trice, who lost his job at the start of the pandemic and relies on his freelance work to support himself and his daughter, said the change could mean his next loan is more than $ 7,000.
“The fact that I can get more this time is amazing,” he said.