The SBA has Updated the Paycheck Protection Program to Encourage More Aid to the Smallest Businesses
On March 3, 2021, the Small Business Administration (SBA) released an interim final rule detailing several changes to the Paycheck Protection Program (PPP).
The interim final rule comes in the wake of President Biden’s announcement that until March 10, 2021, only businesses with fewer than 20 employees can apply for both first and second draw PPP loans. Ninety-eight percent of small businesses have fewer than 20 employees, and this exclusivity period, which began on February 24, is intended to allow lenders to focus on serving businesses in this category.
The SBA’s interim final rule, which is also focused on helping the smallest businesses, includes the following changes to the PPP:
- The loan calculation formula has been revised for sole proprietors, independent contractors and self-employed individuals. The interim final rule provides that self-employed individuals may calculate their maximum loan amount using gross income rather than net profit. The calculation change, which is not retroactive, will allow these businesses to access higher loan amounts moving forward.
- The loan necessity safe harbor for self-employed borrowers has been removed. The SBA had previously provided a safe harbor for borrowers that, together with their affiliates, receive PPP loans with an original principal amount of less than $2 million. Per the safe harbor, such borrowers were automatically deemed to have made the statutorily required certification as to the necessity of their loan request in good faith. To mitigate the risk of fraud, the SBA has removed the safe harbor for self-employed individuals that elect to use gross income to calculate their loan amount and report over $150,000 in gross income for the period used to calculate the loan amount.
- The restriction on business owners with non-fraud felony convictions has been eliminated. Previously, a business was ineligible for a PPP loan if it was at least 20% owned by an individual with either (1) an arrest or conviction for a felony related to financial assistance fraud within the previous five years, or (2) any other felony conviction within the previous year. The SBA has eliminated the second restriction (the one-year look-back) unless the applicant or owner is incarcerated at the time of application.
- The restriction on business owners with federal student loan delinquencies has been removed. Previously, a business was ineligible for the PPP if it was at least 20% owned by an individual who is delinquent or has defaulted within the last seven years on a federal debt, including student loan debt. The SBA has eliminated this eligibility requirement.
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