Small businesses struggling during COVID-19 are getting another round of the Payment Protection Program. Congress recently passed a bill approving $900 billion in COVID-19 relief, with $284 billion earmarked for the third round of PPP funding. Applications are estimated to open sometime in the second week of January.
The third round includes several new requirements:
- The business was operating before February 2020
- There must be fewer than 300 employees
- Income must have dropped 25% or more from 2019 to 2020
- Loans are capped at $2 million
The new loans are tax deductible and applicants who previously applied for PPP loans are still eligible.
Applications must be submitted by March 31st.
***Eligibility Requirement Updates***
The Biden-Harris administration recently announced several important changes to how the Paycheck Protection Program works to better serve the smallest of small businesses. The first key change is that small businesses now have priority access to PPP loans. Starting Wednesday, February 24th, only businesses with fewer than 20 employees are eligible to apply for a PPP first- or second-draw PPP loan. This priority period will last two weeks, until March 10th, and then PPP loan applications will open to all eligible businesses.
Additional rules are set to take effect on Monday, March 1st. One change expands eligibility for PPP loans to non-citizen US residents and to small business owners with prior felony convictions or delinquent student loan debt. Another rule change alters the way that PPP loan amounts are calculated for sole proprietors. Loans to these small business owners will be based on gross income rather than net income.
If your business is not eligible for a PPP loan under the new rules, there are alternatives. SBA 7(a) loans can be used for a wide variety of business expenses or expansions. The Main Street Lending Program is also expected to become active soon and could be an option for businesses looking to borrow at least $250,000. Your business can also seek a traditional business loan from an online lender.
The first $349 billion package in late March ran dry within weeks as numerous publicly traded companies exploited loopholes to access the program, locking SMBs out in the process. A second $310 billion package launched in late April with tighter provisions to protect genuine small businesses.
Here is our guide to how to qualify for what could be the final round of the Paycheck Protection Program, as well as alternative business loan options if you decide the PPP isn’t for you.
Paycheck Protection Program is still a (somewhat) viable option
The Paycheck Protection Program hasn’t entirely re-invented the wheel. What it has done is to expand the scope and terms of regular SBA loans – government-backed loans offered by private lenders – to incentivize small businesses to keep employees on the payroll during Covid-19. The program is open to businesses with fewer than 300 employees including sole proprietors, independent contractors, and self-employed individuals.
Here are the up-to-date rules governing all new PPP SBA loans:
- Funds may be spent on payroll costs, employee salaries, interest payments on any mortgage, rent and utility payments, costs related to the continuation of group health care benefits, and interest payments on other debt obligations;
- Loan amount is for up to 2.5 times your average monthly payroll costs, up to a $2 million limitation;
- Interest rate is 1% (previously lenders could charge up to 4%);
- Maturity is five years for loans (previously it was two years);
- Loan payments are automatically deferred for six months;
- No collateral or personal guarantee required;
- No fees or prepayment penalties involved;
- The covered period for loan forgiveness is 24 weeks (previously it was 8 weeks). To qualify for full or partial forgiveness, the borrower must prove that at least 60% of the proceeds and 60% of the loan forgiveness amount were spent on payroll costs during the forgiveness period (previously it was 75%).
As mentioned, many SBA-approved lenders have chosen to end their participation in the Paycheck Protection Program. To find out which lenders are still participating, apply through a small business loans marketplace such as Fundera or view the SBA’s updated list of lenders here.
Other Government-backed programs to assist you during Covid-19
Aside from the Paycheck Protection Program, the SBA and now Federal Reserve have several other programs to assist small and medium businesses during the Covid-19 pandemic.
1) Economic Injury Disaster Loans and Advance. This is a permanent program under which SBA-authorized private lenders provide small businesses with working capital loans of up to $2 million to overcome temporary loss of revenue. As part of the EIDL, applicants can apply for an advance of up to $10,000 ($1,000 per employee, up to 10 employees) that does not have to be repaid. On June 15, the SBA announced the reopening of EIDL applications after halting the program on April 15 due to a lack of funds.
2) SBA Express Bridge Loans. This program allows small businesses that currently have a business relationship with an SBA Express lender to access up to $25,000 with less paperwork. If you have an SBA Express loan and need an extension, we recommend contacting your lender directly for information.
3) SBA Debt Relief Program. As part of the initial stimulus package passed in March, the SBA is providing relief for small businesses with existing SBA 7(a) loans, 504 loans, and microloans. The SBA will cover principal, interest, and fees, for six months. This relief is also available to new borrowers who take out loans before the end of September.
4) Main Street Lending Program. In June, the Federal Reserve created this $600 billion program to support lending to SMBs that were in sound financial condition before the Covid-19 pandemic. The program involves three types of facilities offered through eligible lenders. Under changes made to the program at the start of July, the minimum loan amount is $250,000 and maximum is $300 million. All three facilities mature after five years.
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Conventional Business Loans and Programs to Get You Through COVID-19
As we have seen, many small businesses have been left out in the cold by the PPP or have found the terms too confusing. If you decide a government-backed program isn’t for you, it may be worth considering a conventional business loan.
Short-term business loan. Also known as a “bridge loan”, this provides funding when you need quick access to capital. Some private lenders can provide the funds in as little as 24 hours. Most private lenders charge the prime interest rate plus an additional percentage based on the borrower’s risk profile. With the prime interest rate now at a record-low 3.25%, the average business loan is cheaper today than at any other time in history.
Business line of credit. A line of credit gives your business breathing room. It lets you borrow as much as you want and as often as you want, up to a predetermined credit limit. Funds are usually made available within 24 hours, making this another good option for covering immediate costs. The best thing is you only pay interest on what you use. Like business loans, business lines of credit are typically based on Prime, meaning they are quite affordable right now.
Invoice factoring. This is an alternative loan product where you sell your invoices to a lender (also called a factor) at a discount. If you’re worried about your customers paying you in time, then invoice factoring is an option to consider.
Home Equity Loan. A home equity loan allows homeowners to borrow against the equity in their property. Although this is technically a type of mortgage and not a business loan, a HEL (or home equity line of credit, HELOC) is often a simple way to access a large sum at a decent interest rate. Given this involves putting your personal property up as collateral, a HEL should only be reserved as a last option.
The Bottom Line
The federal government is still pushing stimulus for now, but that doesn’t mean it can be relied upon. As we have seen, the PPP first suffered from a backlog of applications, then a drying up of funds, and finally a series of confusing rule changes – all of which have created uncertainty for borrowers. If, like millions of other American small businesses, your business needs to borrow funds to survive, then it pays to know and compare your options.