Aiming to put its own stamp on the Paycheck Protection Program, the Biden administration abruptly changed the program’s crucial rules Monday to help needy, smaller businesses, which have sometimes struggled to get help. of the federal relief effort.
But the changes run the risk of throwing an already turbulent schedule into chaos, as banks and other lenders try to adapt to last-minute changes. With just five weeks until March 31, when the latest version of the program is scheduled to end, lenders were forced to adapt to new rules that won’t even be fully explained to them until the end of this month.
The changes include a new way to calculate freelance loans and a dedicated 14-day window for applications from companies with fewer than 20 employees. The adjustments are aimed at increasing aid to smaller businesses, 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 getting our small businesses back,” Biden said in brief remarks Monday afternoon. The changes, he said, “will bring much-needed and long-awaited help to small businesses that really need help staying open, keeping jobs and making ends meet.”
The Paycheck Protection Program was a signature effort by the Trump administration, which disbursed $ 523 billion in forgivable loans to small businesses last year. However, the program was criticized for its fickle rules and hasty implementation, which often meant that the best-established and best-connected small businesses, including law firms, political lobbyists, and companies backed by private equity investors, got loans. while more vulnerable companies struggled.
In December, Congress provided $ 284 billion in new funding to restart the program. The Small Business Administration, which runs it, began approving applications last month in the final days of the Trump administration. So far this year, around $ 140 billion has been distributed to 1.9 million companies.
But with a wide range of eligible businesses, from freelancers to businesses with 500 employees, there has been a huge disparity in how they have done well in obtaining loans. One-person operations, such as sole proprietorships and independent contractors, have had a particularly difficult time. And those who were successful often made small amounts, as low as $ 1.
To help these companies, the Biden administration is reviewing the way their loans are calculated. Previously, your loans were based on earnings that were reported on your annual taxes. That disqualified unprofitable businesses, a restriction that did not apply to larger businesses, and limited the size of loans available to business owners trying to report as little taxable income as possible (as most companies do. Business).
Sole proprietorship loans will now be based on gross income, a figure that excludes many expenses. That will allow unprofitable businesses to qualify and many applicants to get much larger loans.
But the lenders don’t yet have details on how to process the change, which Small Business Administration officials say will take place early next month. That leaves them in a bind: Should borrowers looking for loans now be told to pause their applications and wait for bigger loans? And what about those who have already received loans but would now be eligible for larger loans?
Rohit Arora, CEO of Biz2Credit, the program’s largest lender this year, let out a deep breath when faced with those questions. “We just don’t know at this point,” he said.
More than 100,000 of the 140,000 loans his company has made this year have been for sole proprietors. He fears the reaction of those who have already received loans.
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“Customers will be very, very upset and all of them are going to call us to inform us,” Arora said.
Those customers are out of luck: The SBA will not retroactively change loans that have been disbursed, and it will not allow existing borrowers to repay and reapply, according to an agency official familiar with the plan, who was not authorized to speak. . in public.
Even those lenders who hope their clients will benefit are wary of another rule review on the fly. Randell Leach, CEO of Beneficial State Bank in Oakland, California, said it was frustrating when lenders tried to help borrowers understand their options, only for them to keep changing.
“We’re going to have as much access to people as possible, but the constant changes really complicate delivery,” he said.
The 14-day freeze for the largest companies also stumped lenders.
Businesses with fewer than 10 employees have collected 80 percent of the loans made this year and have received a total of $ 42 billion in loans, about 30 percent of the money the program has distributed. More than half of the funds allocated by Congress are still available.
The biggest challenge, lenders said, has been a plethora of bugs preventing applications from going through new and stricter fraud checks imposed by the Small Business Administration. Those checks are incorrectly disqualifying some applicants and exposing errors that went unnoticed last year. Both problems require time-consuming intervention.
“This two-week window will not fundamentally alter the hurdles that businesses face,” said Richard Hunt, executive director of the Association of Consumer Bankers. “It’s like giving everyone a train ticket on an unfinished railroad.”
There were three other notable changes. Those with recent non-fraud felony convictions will now be able to apply, as will those who are delinquent or delinquent on federal student loan debt. The agency also updated its guidance to clarify that business owners who are not citizens of the United States but who are legal residents are eligible for loans.
Officials in the Biden administration interpreted the changes as a response to long-standing disparities 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 homeowners. color business.
Officials said the two-week hiatus would focus government officials, lenders and other stakeholders exclusively on reaching the kinds of companies that do not have relationships with Washington banks or lobbyists and may not be aware of the ability to apply for the loans. . A senior administration official, who was not authorized to speak for Biden on the matter, said the goal of the hiatus was for everyone to focus on this type of business.
The White House is confident that the program will have a significant amount of money left for other loans after the two-week period ends. Biden and his team have not asked Congress to push back the March 31 deadline.
Small business advocacy groups generally praised the changes. Shaundell Newsome, co-president of Small Business for America’s Future, called it “a victory for America’s smallest businesses and those owned by people of color, many of which were left behind due to ill-conceived rules that favored companies. larger companies. “
Daniel Betancourt, CEO of the Community First Fund in Lancaster, Pennsylvania, which works on loans for some 300 businesses, most of them minority-owned, was also enthusiastic. But Betancourt would like the March 31 deadline to be delayed by at least 60 days.
“We need time for historically disenfranchised business owners to know what is available now,” he said.
For sole proprietors like Elisha Trice, who have been plagued by delays, the formula change is a glimmer of a painful process.
Trice, an independent contractor in Florida that makes computer games, took out a $ 2,000 loan last year and applied for a second loan last month. Your application has been stagnant for weeks and now you can suspend it until the new formula takes effect.
Trice, who lost his job at the start of the pandemic and relies on self-employment 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.