The new statute offers small businesses a bunch of useful new planning options. And, most importantly, it gives small business owners and their employees hope.
In this short post, therefore, I want to summarize the new law’s details. The new PPP Flexibility Act makes five gigantic changes to PPP loans.
And then, after that discussion, I want to offer up three business planning notions for you to gnaw on over the next few days. Some big issues appear once you dig into the details. You’ll want as much time as possible to work through your thoughts.
PPP Flexibility Act Change #1: Deadline Moves to Year-end
A first important change to note. The act changes the June 30, 2020 deadline for reversing reductions in employee headcounts and pay rates which otherwise reduce forgiveness. The new date? December 31, 2020.
As you maybe know, a borrower loses forgiveness if it fails to reverse earlier reductions in employee headcount or earlier reductions in employee pay rates.
Note: For more information about how reductions in head counts or pay rates matter, peek at our earlier blog post: Losing PPP Loan Forgiveness.
PPP Flexibility Act Change #2: Bigger 24 Week Spending Window
Perhaps the biggest change in the PPP rules? The act expands the window for spending PPP money from 8 weeks to 24 weeks.
You probably know this: To get forgiveness of the PPP loan, a firm needs to spend the PPP money on payroll, rent, utilities and interest within a set interval.
The old interval ran 8 weeks. Now, firms get 24 weeks.
One other thing to be alert to… Borrowers who received their PPP loans before June 5 get the option of continuing to use the old 8 week spending window if they want. But surely most borrowers should use the longer 24 week window.
Note: The 8 week option is discussed in the June 11, 2020 revision to the first Interim Final Rule the SBA published.
PPP Flexibility Act Change #3: More Money for Rent, Utilities and Interest.
A related and imminently practical tweak.
The act slaps down the SBA’s rule that limited forgiveness for spending on rent, utilities and interest to 25%. This 25% limit was just something the SBA made up in its rule making, by the way. (Thanks guys.)
Congress fortunately looked at that rule and then at the economy and the pandemic and said, “No, we’re not going to limit forgiveness for such spending to 25%. Rather, let’s say 40% and give everybody a little more breathing room. And flexibility.” (Thank you, Congress!)
PPP Flexibility Act Change #4: Worst-case Scenario Addressed
A change to address a small business’s worst case scenario…
The PPP flexibility act explicitly addresses the awkward situation where a firm can’t return to its previous employment level. In a nutshell, the new law says if you really can’t resurrect your business because of the pandemic or the economy, we’re not going to withhold forgiveness.
But let me quote the actual language because if this bit of the law matters, its details matter.
Specifically, for a firm to not lose forgiveness due to a drop in headcount it needs
to be able document an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020…
Or, alternatively, the firm needs to be able
to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
Okay, scary to think about. But good to know…
PPP Flexibility Act Change #5: Longer Loan Term
The PPP flexibility act makes one other significant change to the PPP loan program. It extends the two year loan repayment term to five years.
This tweak may not matter to many folks. Surely many more borrowers get full forgiveness given the changes to the paycheck protection program. But this last change provides further cushioning for small businesses who borrowed PPP funds.
Note: A related point, too. A borrower needs to begin repaying a PPP loan within 10 months after the 24 week loan forgiveness covered period ends.
Three Quick Business Planning Notions
We all need time to process what the new Paycheck Protection Program Flexibility Act means.
And obviously, a sober reality permeates the new law: Congress thinks you need more time and flexibility to ramp up your business and rehire employees.
But quickly, the three thoughts pin balling around in my head…
First, if you haven’t yet applied for a PPP loan and you need one? Or if your bank bungled your PPP loan application and you need funds to continue or restart normal operations? You need to apply. Or apply again. Today if possible.
Note: The revised Interim Final Rule mentioned above says the Small Business Administration will only provide SBA loan numbers to lenders through June 30, 2020, making that a critical deadline for borrowers.
Second, as painful and awkward as it is to contemplate, you need to reexamine your business plan and consider a slower restart. A more gradual ramp-up and return to normality. That may mean furloughing employees in some industries. Or slowing hiring. (Sorry.)
A third final comment…
While the Covid 19 crisis counts as catastrophic, good reasons exist for optimism about the future and the economy. The infection fatality rate falls dramatically short of what people feared. (See the CDC’s updated Covid-19 guidance, for example. Or the Covid-19 research summary paper from Stanford University professor John Ioannidis.) As that reality percolates through our collective consciousness, the economy surely will improve.
And then the other thing? Congress has shown unprecedented support for the economy and especially for small businesses. Case in point? The proposed PPP legislation discussed here. This matters. A lot.