How just a few days cost some small businesses thousands on their PPP forgivable loans

For some of the smallest businesses that applied for forgivable loans through the Paycheck Protection Program, waiting just a few days or weeks would've gotten them thousands of dollars more.

But they had no way of knowing what was coming.

The Biden administration in late February announced a slew of changes to the loan program, which offered forgivable loans in return for keeping employees on a company's payroll, after it reopened in January with $284 billion in funding. Those amendments included an adjusted loan formula that would mean larger amounts for sole proprietors as well as expanded eligibility for small business owners with certain criminal records, were delinquent on student loan debt or were non-citizens.

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In addition, a priority application window was announced for businesses with fewer than 20 employees from Feb. 24 through March 9, assuring money would reach those that had difficulty accessing the program, including women and minority-led businesses.

However, the timing of that priority window was misaligned with the other changes, which didn't go into effect until the first week of March, just weeks before the program's deadline at the end of this month.

Sole proprietors had to wait even longer for the new loan formula.

The Small Business Administration didn't release final guidance until March 3 and wasn't ready to accept applications under the rule until March 5, just a few days before the priority window ended. Lenders also had to scramble to update their systems in the middle of the process, leading to further delays.

Missing out on thousands of dollars

The change was critical for the self-employed. In the updated calculation, the SBA uses gross income, or line 7 of IRS Form 1040 Schedule C, as a substitute for payroll costs for sole proprietors, who often have no employees. Previously, the loan formula used net profit, or line 31 on Schedule C, even though that included deductions that meant some got very small loans or were ineligible.

In many cases, the difference amounts to thousands of dollars.

For Sarah Foster, 49, who runs a jewelry and design store in Prescott, Arizona, the new calculation would've meant nearly $9,000 more in forgivable funding. Foster applied for a second PPP loan as soon as she could this year and got about $5,250 the first week of March.

That amount was calculated from line 31 on her schedule C. If it had been calculated using line 7, it would've been about $14,000, she said.

"That's huge," said Foster, of the difference, adding that she was frustrated when she heard about the new rules that changed things midstream. "It would make up for what I was losing, whereas $5,250 doesn't."

Some could go back and reapply

Through March 7, the PPP has funded more than 2.4 million loans totaling nearly $165 billion, about 60% of the money allocated this time. Borrowers and lenders have said it's taken longer to get loans approved, because of increased SBA security measures to prevent fraud.

Some are hoping that the slower process means they still have some wiggle room to go back and apply for larger loans under the new formula.

The SBA told lenders that applications that had been submitted but not approved could be withdrawn so that borrowers could reapply. If borrowers had a loan that was approved but had not yet been disbursed, lenders could cancel it and the borrower could re-apply.

Even if a loan had been disbursed, lenders could cancel the loan and borrowers could repay the money and re-apply with the new applications, but only if the lender had not yet submitted Form 1502, which includes payment and loan information, to the SBA. Lenders are required to submit these forms to the SBA on a monthly basis, but many send them in more frequently.

If the form has been filed, the SBA said that there is nothing borrowers or lenders can do to take advantage of the new calculation. Loan amounts cannot be increased for sole proprietors in this situation, per the SBA.

This rule isn't quite fair, said Chris Hurn, chief executive of Fountainhead Commercial Capital, a non-bank lender. The Covid relief bill passed in December made it possible for some borrowers who hadn't yet received forgiveness, returned all or part of PPP loans or didn't take the full amount they were eligible for to request that their loan be modified for the difference.

"Why we aren't doing that for the smallest borrowers is baffling to me," said Hurn, adding that the rule seems to be favoring larger, more sophisticated businesses. "It's going to be heartbreaking, frankly, to some of these business owners."

Mike Kelly, 39, who runs a personal fitness training studio in Springfield, New Jersey, just heard that his lender has not yet filed Form 1502 for the loan he got in February.

That means he could cancel his loan, repay it and re-apply under the new rules. That step would lead to a larger amount. In 2019, his gross income was nearly $140,000, but his net profit was about $34,000.

Under the new calculation, Kelly could get the maximum amount for sole proprietors, which is $20,833. That's nearly three times the $7,100 loan he got under the old formula.

If he does that, though, he may be cutting it close to the program deadline of March 31. He'd need to have a loan approved by the SBA by that date to make sure he gets the money.

What might change

To be sure, there is a chance that the PPP will be extended. The American Rescue Plan signed into law by President Biden Thursday includes an additional $7.25 billion for PPP, and expands eligibility for the program.

And, on Thursday, bills were introduced in the House and the Senate that would extend the deadline two months to May 31 and give the SBA an additional 30 days to process loans.

If the legislation passes, it could open the door for further changes to the program that may help sole proprietors.

But until that happens, borrowers like Peggy Russo are out of options. Russo, 53, applied for a second PPP loan in February to support the childcare business she's run for 18 years in Eldridge, Iowa.

She was awarded $5,340 – roughly the same amount as her first draw – on Feb 22. Just days later she found out about the updated rules, including the better loan calculation.

Under the new formula, she'd be eligible for a nearly $20,000 loan, roughly four times the amount she was given. She called her lender and her local SBA office to see if there was anything that could be done but found out that her lender had already sent Form 1502, meaning that she can't go back and re-apply for a larger loan.

"It's very hard to accept," said Russo. "I can't sleep at night – it's not that I did anything wrong."

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