Who’s down with PPP?

Congress considers tweaks to small business loan provisions

By Quincy Enoch and Carolyn Coda

Two months ago, in the CARES Act, Congress created the Small Business Administration’s Paycheck Protection Program (PPP) to help provide small businesses liquidity in the form of forgivable loans. Launched on April 3, the PPP was funded at $349 billion and ran out of funds within two weeks. In response to calls for further relief and unmet demand, lawmakers approved an additional $310 billion on April 23.

A cornerstone of the PPP is the ability to apply for loan forgiveness if proceeds are used to maintain payroll and keep Americans on the job during the COVID-19 crisis. The CARES Act gives significant flexibility to the Treasury Department and Small Business Administration to implement and administer the program. The agencies, through interim final rules and guidance, narrowed the focus of the program to ensure loans are predominantly used to cover payroll. Regulations stipulate that to qualify for loan forgiveness 75 percent of the loan must be used for payroll and only 25 percent can be used for other operational costs.

While many expected the second round of PPP funding to be gone quickly, the additional funds are being dispersed at a much slower rate than in the first round. It appears the restrictions on loan forgiveness are giving pause to many small businesses. For example, businesses have until June 30, 2020 to restore full-time employment and salary levels to have loans forgiven. Given the state of the economy, few businesses expect to be able to meet this requirement. In addition, for many businesses expenses such as rent and inventory costs are far in excess of the 25 percent threshold allowed for loan forgiveness. Also troubling for businesses is that the agencies’ regulatory guidance continues to change and the growing public scrutiny associated with accessing the PPP.

Proposed Changes

Many policymakers on Capitol Hill envisioned more flexibility in the program’s requirements than what was implemented. As a result, there is bipartisan, bicameral support for statutory changes to allow small businesses to more easily access the program and receive loan forgiveness.

House Democrats included a broad expansion of the PPP in the Heroes Act passed by a party-line vote on May 15. However, with the Heroes Act dead on arrival in the Senate, the House returns this week to vote on the slimmed-down Paycheck Protection Program Flexibility Act, introduced by Representatives Dean Phillips (D-MN) and Chip Roy (R-TX).

The legislation:

• Extends minimum maturity of the PPP loans to five years
• Extends the PPP covered period from June 30, 2020 to December 31, 2020
• Extends the forgiveness limitation of 8 weeks of payroll costs after origination to 24 weeks after origination or December 31, 2020
• Eliminates restrictions limiting non-payroll expenses to 25 percent of loan proceeds
• Provides an exemption from loan forgiveness reduction based on a decrease of employees for businesses unable to rehire employees before the end of the covered period or businesses that can demonstrate an inability to hire similarly qualified individuals

Early indications are that the Senate is supportive of the Phillips-Roy bill and that senators may move to pass it when they return next week. An effort last week by Senators Marco Rubio (R-FL), Susan Collins (R-ME), Ben Cardin (D-MD), and Jeanne Shaheen (D-NH) to pass their Paycheck Protection Program Extension Act by unanimous consent met with opposition and was unsuccessful. That bill would have extended the deadline to apply for a PPP loan from June 30 to December 31; allowed borrowers 16 weeks to use funds instead of eight (borrowers would not lose forgiveness eligibility if they maintain payroll for the original eight weeks); allowed funds to be used for the purchase of PPE and adaptive investments to reopen safely; and clarified the hold harmless provisions for lenders.

We expect PPP loan demand to spike if these changes become law as expected given that small business owners will no longer fear they will not be able to meet the eligibility for forgiveness. As more small business owners receive relief and clear rules of the road, hopefully the cloudy economic forecast will see an uptick in optimism.