Millions of self-employed and concert workers received good news this week.
The Biden administration on Monday changed the way the Small Business Administration’s paycheck protection program calculates forgivable loans for smaller businesses and sole proprietors.
But there is a catch. The updated formula – which will likely lead to larger loan amounts for businesses without an employer, including sole proprietors and independent contractors – does not take effect until the first week of March.
While the SBA has given some information on how the loan formula will change, it has yet to communicate to lenders the details of how to calculate loans under the new rules.
This means that business owners who want to apply in the two-week priority window for smaller businesses with less than 20 employees that starts today may want to wait to make sure their applications are subject to the most recent rules. .
“Loans submitted before official rule changes are subject to the rules in force at the time of application, ” SBA spokesperson Carol Wilkerson said.
To ensure sole proprietorships benefit from the changes, lenders are recommended not to submit their application into the system until written SBA guidelines are issued, according to the administration.
Just a few days can be the difference between a loan that keeps a sole proprietor afloat and one that doesn’t go very far.
What we know about the change of formula so far
For businesses with employees, the maximum PPP loans are 2.5 times the average monthly salary costs, according to the SBA. As a replacement for wage costs for individual workers, the SBA has used information on net profits from tax returns, even though payroll and profits are different measures.
In addition, the net profit line includes deductions, which have reduced or eliminated the number of profits for some, resulting in small loans or making them ineligible for the program.
Instead, the updated formula will use gross income as a surrogate for labor costs, a higher number than net income, meaning many businesses will get more money in the form of forgivable loans.
“It’s a huge change,” said Keith Hall, president and CEO of the National Association for the Self-Employed.
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The change is significant because sole proprietorships are the most common business structure in the United States. Form C for sole proprietorships, depending on the agency.
Many of these companies have been particularly affected by the coronavirus pandemic. About 70% of those unemployed businesses are owned by women and people of color, and 95% of black-owned businesses and 91% of Latino-owned businesses are sole proprietorships, according to SBA data.
But so far, very little repayable funds from the SBA have gone to individual businesses – according to a recent NASE survey, nearly two-thirds of its members said they received no money from the program.
This was due in large part to the confusion in the early days of the program around eligibility and forgiveness, which hopefully is clearer today, Hall said. “Lots of reasons these small business owners haven’t applied for or been approved for a P3 loan – I think a lot of those hurdles have been removed,” he said.
Other small businesses beyond sole proprietorships may also want to proceed with caution when applying for a P3 loan, even during the two week priority window.
The changes that make some student loan borrowers, legal non-residents and those with criminal records eligible for loans also come into effect the first week of March, according to the SBA.
And, there are other questions regarding the timing of applications for Sole Proprietorships, especially those who have already obtained loan approval but would get more with the new formula – there is no process to amend a scattered loan or to withhold a currently pending application.
“All unknown at this time,” said Alex Cohen, CEO of Liberty SBF.
If you are a small business with a story to share on PPP, email Carmen Reinicke at [email protected]
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