Paycheck Protection Program, Round 2: Can Your Business Receive Any of This Money?

Neil Hare
Wed, 29 Apr 2020 12:21:38 +0000

Updated May 18, 2020: The U.S. Treasury has just provided guidance on a safe harbor for PPP Loans. See New Treasury Guidance Provides Safe Harbor for PPP Loans.

On Friday, April 24, President Trump signed into law a new bill providing a much needed additional $310 billion into the Paycheck Protection Program (PPP), created under the CARES Act (Coronavirus Aid, Relief and Economic Security Act) to help small businesses keep employees on the payroll, and Economic Injury Disaster Loans (EIDL).

Out of the $310 billion, $60 billion is to replenish the EIDL program and $250 billion for the PPP loans, with $60 billion set aside for community banks and community development financial institutions (CDFIs). The initial round of funding under the CARES Act of $349 billion lasted about a week before it dried up and this round is projected to only last four to six days.

Can your business apply for and receive any of this money?

The reality is most American businesses will not receive any of these relief funds. In the first round, 1.6 million businesses received approval with most still awaiting the funds. The process remains the same for PPP and you can access frequently asked questions in Newly Available CARES Act Loans: 10 Things Small Businesses Need to Know.

Here are the top three things you need to look at to determine if you will receive funds and increase your odds of success:

1. If you received an SBA certification number in Round 1, you will receive funds. Your bank is going through the underwriting process and you should receive funds within 10 to 14 working days.

2. If you didn’t receive an SBA certification number, but your application was accepted by your bank, you remain in the queue to receive funds. The program remains on a first-come, first-served basis. You should reach out to your bank and see if they can push your certification through the SBA.

3. If you didn’t apply in Round 1, you should apply as soon as possible for both the PPP and EIDL loans. Unfortunately, many banks are not taking new applications because they already have so many in the pipeline. You can research participating lenders on the SBA website, or try fintech companies like PayPal, Intuit, Square, and OnDeck.

Smaller community banks seem to have better luck with faster processing than the large national banks so you may want to start there. You can still apply for the EIDL loans at www.sba.gov/disaster once the application is back up and running as it was shut down due to overwhelming demand.

What is different in this new relief bill?

The most significant change in this new round came in updated Treasury guidelines, requiring borrowers to certify in “good faith” that they have no access to additional sources of capital and that, as the law provides, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

This clarification, while still somewhat blurry to truly define, was due to the public backlash caused by large chains and publicly traded companies like Shake Shack, Ruth’s Chris Steak House, and Sweetgreen obtaining major funding in PPP Round 1. These companies and others have pledged to return these funds.

The new guidelines state that any borrower who returns funds by May 7, 2020, will be deemed by the SBA to have made their certification in good faith and avoid any future scrutiny or penalties. The SBA reserves the right to audit loan applications, and the penalties for making false statements on SBA lending forms can be harsh, including material fines and criminal charges.

It should be noted that the CARES Act specifically waived the traditional requirement for SBA loans that the applicant show they do not have access to additional forms of credit. Congress believed, rightfully so, this would cause major delays in distributing funds to businesses. However, under the law of unintended consequences it let many large companies with access to capital apply for these loans.

Other than publicly traded companies, it would be hard to imagine the SBA finding bad faith on behalf of a business that was forced by the government to shut down due to COVID-19 and kept employees on the payroll, even with other sources of credit.

In addition to this change, the new law also attempts to address claims that the distribution of Round 1 was inequitable and disproportionately rewarded larger companies to the detriment of businesses owned by women, minorities, veterans, and Native Americans. As the PPP loans were and remain based on a first-come, first-served basis, they inherently favor companies with more resources, such as internal CFOs and bookkeepers, CPAs, and lawyers, and have a strong personal relationship with a bank. These companies were able to understand the process, quickly compile the necessary documentation, and submit applications for approval much faster and get to the front of the line.

To address this issue, the new law provides $60 billion for smaller lenders, including community banks and CDFIs, which serve lower income and disadvantaged communities. The $60 billion will be split evenly between institutions with less than $10 billion in assets and those with between $10 billion and $50 billion. To be clear, it does not set aside any funds for underserved or disadvantaged businesses; it only sets aside funds for the lending institutions that serve these markets. These businesses must still apply and get in line.

Related Articles:

Newly Available Cares Act Loans: 10 Things Small Businesses Need to Know

Financial Help for Freelancers and Independent Contractors Affected by the Coronavirus Crisis

How to Get Your $1,200 Stimulus Payment Direct Deposited to Your Bank Account

What Advice Are Venture Capitalists Giving to Startups in Light of the Coronavirus Crisis?

The additional $60 billion for the EIDL program provides $10 billion for grants and $50 billion for loans. The program initially offered a $10,000 grant and up to $2 million in loans to fund business expenses during a disaster (the entire country has been certified as a disaster zone due to COVID-19).

For now, the rules on loan forgiveness remain the same, although more regulations are sure to come. The hope is to provide bright-line tests for lenders to evaluate what portion of the loan should be forgiven, so fastidious record keeping for the eight weeks after the funds arrive is critical. Again, the forgivable part of the loan includes payroll, rent and mortgage payments, and utilities. Anything not included and approved by the lender will have to be repaid over two years at 1% interest with the first payment deferred for six months.

If your business is shut out again in Round 2, there could be a Round 3, despite Treasury Secretary Steve Mnuchin claiming this is it, so apply no matter what to get in the queue. One thing for sure is the coronavirus and its economic impact are uncertain.