In a bid to put its own stamp on the Paycheck Protection Program, the Biden government abruptly changed key program rules on Monday to help the smallest and most needy businesses that sometimes struggled to get help from federal relief efforts.
However, the changes could wreak havoc on an already tumultuous program as banks and other lenders try to handle the last minute postponements. With just five weeks to go until March 31, when the final iteration of the program is due to end, lenders have had to adapt to new rules that won’t be fully explained to them until later this month.
The changes include a new credit calculation method for the self-employed and a 14-day exclusive window for applications from companies with fewer than 20 employees. The adjustments are intended to increase aid for the smallest companies, many of which are run by women, blacks and members of other minority groups and have so far received a disproportionately small share of the aid money.
“Getting our economy back means bringing our small businesses back,” Biden said in brief remarks on Monday afternoon. The changes, he said, “will bring much-needed, long-overdue help to small businesses that really need help to stay open, keep jobs and make ends meet.”
The Paycheck Protection Program was a signature of the Trump administration, which disbursed $ 523 billion in unsuccessful loans to small businesses last year. However, the program has been criticized for its arbitrary rules and hasty implementation, which often resulted in the most established and well-connected small businesses – including law firms, political lobbyists, and private equity investor-backed firms – receiving credit while more vulnerable companies fought.
In December, Congress allocated $ 284 billion in new funding to restart the program. The Small Business Administration that manages it began approving applications in the last few days of the Trump administration last month. So far this year, around $ 140 billion has been distributed to 1.9 million companies.
However, across a wide range of eligible companies – from self-employed to 500-employee companies – there were wide variations in the ways in which they received credit. One-person businesses such as sole proprietorship and independent contractors have had a particularly difficult time. And those who did succeed often got tiny amounts – only $ 1.
To help these companies, the Biden administration is revising the way they calculate their loans. Previously, their loans were based on the profit they had posted on their annual taxes. This disqualified unprofitable companies – a restriction that didn’t apply to larger companies – and limited the amount of credit available to business owners trying to report as little taxable income as possible (as most companies do).
Sole proprietorship loans are now based on gross income instead, a number that rules out many expenses. This allows unprofitable companies to qualify and allows many applicants to take out much larger loans.
However, lenders do not yet have details of how to process the change, which Small Business Administration officials say will be carried out early next month. That gets them in trouble: Should they tell borrowers who are now seeking loans to pause their applications and take out larger loans? And what happens to those who have already received loans but are now eligible for larger loans?
Rohit Arora, the executive director of Biz2Credit, the program’s largest lender that year, sighed deeply when faced with these questions. “We don’t know right now,” he said.
More than 100,000 of the 140,000 loans his company made this year went to sole proprietorships. He fears the reaction of those who have already received credit.
“Customers will be very, very upset and everyone will call us about it,” said Mr Arora.
These customers are out of luck: the SBA will not retrospectively change disbursed loans and not return and reapply those who have already received loans, according to an agency official familiar with the plan who was not allowed to speak publicly.
Even those lenders who expect their customers to benefit have been suspicious of another on-the-fly revision of the rules. Randell Leach, the executive director of Beneficial State Bank in Oakland, Calif., Said it was frustrating when lenders try to help borrowers understand their options only to change them further.
“We’re going to get as much access to people as possible, but constant changes really make delivery difficult,” he said.
The 14-day freeze for larger businesses has also confused lenders.
Companies with fewer than 10 employees have raised 80 percent of the loans granted this year and received total loans of $ 42 billion – about 30 percent of the money the program distributed. More than half of the funds allocated by Congress remain available.
The bigger challenge, according to the lenders, was a host of bugs that prevented applications from going through new, more stringent fraud checks imposed by the Small Business Administration. These reviews falsely disqualify some applicants and reveal mistakes that went undetected last year. Both problems require time-consuming interventions.
“This two-week window is not going to fundamentally change barriers to business,” said Richard Hunt, executive director of the Consumer Bankers Association. “It’s like giving everyone a ticket for an unfinished train.”
There were three other notable changes. Individuals with recent convictions of non-fraudulent offenses can now file a petition, as can individuals who are in default or are in default if they have a federal student loan debt. The agency also updated its guidelines to make it clear that business owners who are not United States citizens but are legal residents are eligible for loans.
Biden administrators cited the changes in response to long-standing differences in the types of businesses that have applied for and received loans – and a specific response to complaints from groups representing Blacks, Hispanics and other color business owners.
Officials said the two-week hiatus would focus government officials, lenders and other stakeholders solely on reaching the kind of businesses that have no ties to banks or lobbyists in Washington and who may not know if they can apply for loans. A senior administration official who was not authorized to speak for Mr Biden on the matter said the goal of the break is to keep everyone focused on this type of business.
The White House remains confident that the program will have a significant amount of other loans left after the two-week deadline. Mr. Biden and his team have not asked Congress to postpone the March 31 deadline.
Small business stakeholders generally praised the changes. Shaundell Newsome, co-chair of Small Business for America’s Future, called her “a win for America’s smallest businesses and for businesses of color, far too many of whom have been left behind by ill-conceived rules that favored larger businesses.”
Daniel Betancourt, the executive director of the Community First Fund in Lancaster, Pennsylvania, which works on credit for about 300 companies, most of which are minority owned, was also delighted. But Mr Betancourt would like the March 31 deadline to be postponed by at least 60 days.
“We need time to let historically disenfranchised business owners know what is available now,” he said.
For sole proprietorships like Elisha Trice who have been plagued by delays, the formula change is a silver lining to a painful process.
Mr. Trice, a Florida independent contractor that makes computer games, received a $ 2,000 loan last year and applied for a second loan last month. His application has been stalled for weeks and now he can put it on hold until the new formula goes into effect.
Mr Trice, who lost his job at the beginning of the pandemic and is relying 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 do more this time is amazing,” he said.
