Small businesses struggling to remain afloat during the economic upheaval caused by the coronavirus pandemic received some relief with the passing of the Paycheck Protection Program (PPP) as part of the historic Coronavirus Aid, Relief, and Economic Security (CARES) Act. The program provides eligible businesses with unsecured loans to help them cover payroll, rent and other ongoing business expenses, with the possibility of partial or complete loan forgiveness.
On June 5, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law, making significant changes to the PPP program. Here’s what you need to know about these changes.
More time to spend the funds
Under the previous guidelines, borrowers were required to spend the loan amount within eight weeks and to use at least 75% of the funds for payroll expenses. This was especially challenging for businesses that were not operating in their usual capacity during this time due to coronavirus lockdowns and business closures.
With the passing of the Flexibility Act, borrowers now have 24 weeks to use their funds from the day they receive them, but not beyond Dec. 31, 2020.
Less money required for payroll
The original loan program required borrowers to spend 75% of a PPP loan on payroll costs. The Flexibility Act lowers this threshold to 60% of the loan amount, with the remaining 40% permissible for mortgage interest, rent or utility payments to obtain full loan forgiveness.
The new guidelines also offer the option of partial loan forgiveness if the borrower can maintain the same 60/40 ratio for the forgiven amount. This change comes as welcome relief for businesses located in high-rent areas, as well as businesses that have seen a reduction in payroll costs due to coronavirus-related layoffs and furloughs.
More time to restore business to normal operations
Under the previous guidelines, business owners were required to maintain the average number of employees they had on staff as of Feb. 15, 2020, and to pay them at the same rate. If this was impossible due to coronavirus-related restrictions, the business had until June 30, 2020 to meet this requirement. The Flexibility Act extends this deadline to Dec. 31, 2020.
There is also the possibility of full forgiveness for businesses that are unable to rehire their entire staff due to COVID-related restrictions that require them to operate at partial capacity, or the inability to find qualified employees.
More time to repay
Under the old rules, any portion of the loan that was not forgiven had to be paid back within two years. This date has been extended to five years for loans made on or after June 5, while retaining the original 1% interest rate. Borrowers who received their loans before June 5 can make an agreement with their lender to extend their repayment period as well.
According to guidance issued by the SBA on June 8, the payment deferment period is now extended from six months after the end of the covered period to the date the Small Business Association sends the borrower’s loan forgiveness amount to the lender. If the borrower does not apply for forgiveness, the deferral period lasts until 10 months after the end of the covered period
Looser restrictions for ex-felons
Under the previous guidelines, individuals who have had felony convictions within the last five years were not allowed to apply for PPP loans. The Flexibility Act changes that timeline to just one year, with the exception of charges for fraud, robbery, embezzlement or a false statement on a loan application or an application for federal financial assistance.
Payroll tax delay
The Flexibility Act allows businesses that took out a PPP loan to delay paying their payroll taxes.
The deadline for PPP loan applications is August 8, 2020. Businesses that have not yet availed themselves to these funds and wish to do so, should take action quickly.