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Should Self-Employed Business Owners Await Further Guidance Before Applying For PPP?

  • Biden administration will update formula used to calculate Paycheck Protection Program loans for non-employer companies
  • Guidance will not be provided to lenders until the first week of March, raising question of whether sole proprietors and other business owners should hold off on submitting an application
  • Today marks the start of a two-week period where PPP applications will only be open to borrowers with fewer than 20 employees

Summary by Dirk Langeveld

Owners of solo ventures stand to gain more substantial Paycheck Protection Loans under changes put in place by the White House. However, these business owners must also decide whether they should delay their application until specific guidance is in place.

Among the changes announced earlier this week by the Biden administration was a promise to update the PPP’s loan calculation formula to better serve non-employer companies, including sole proprietors, independent contractors, and self-employed workers. The White House says a disproportionate number of these companies are owned by women or people of color.

The administration is also setting aside $1 billion for loans to non-employer borrowers in low- and moderate-income communities, and establishing a two-week exclusive period (starting today) where only companies with fewer than 20 employees are able to submit PPP applications.

The U.S. Small Business Administration has shared some information on how the formula will be changed, but has not yet provided specific rules to lenders. These are set to be ready during the first week in March.

In particular, the SBA says non-employer borrowers will be able to calculate their loan amount based on gross income rather than net income. The net calculation included deductions for factors such as depreciation, healthcare costs, rent, and utilities. These deductions often resulted in tiny loans for solo ventures, as little as $1 in some cases, or made them ineligible for a loan.

This change puts non-employer firms on par with small farms and ranches, who experienced similar hurdles in their PPP applications. Revisions to the program now allow these agricultural businesses to use gross income to determine their loan amount if they file as sole proprietors.

In the interim, the SBA is reviewing a sample of applications from high-income non-employer companies to see if they are compliant with the “statutory attestation that the loan request is necessary due to the uncertainty of current economic conditions.” The SBA says this review is part of its effort to ensure that the new formula minimizes the risk of fraud, waste, or abuse.

Borrowers will be subject to any rules in place at the time their application is submitted, meaning they could receive a smaller PPP loan if their submission goes through before the formula is updated. The SBA is also recommending that lenders not submit applications from non-employer borrowers until the updated rules are in place.

The SBA is reportedly not planning to retroactively apply the updated formula to loans that have already been disbursed, and will not allow non-employer businesses to return funds they have received to reapply under the more generous formula. The administration will also need to address other questions raised by the change, such as whether solo ventures that have already had an application approved but have not yet received funding will be eligible to receive more money under the new formula.

According to the most recent data released on Friday, the SBA has approved 1.9 million loans totaling approximately $140.3 billion. This is roughly half of the money appropriated for PPP loans under the Economic Aid Act passed in December.

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