Small Business Matters: It’s that time again: PPP revisited

  • Dennis Boyd

Last year’s extraordinary economic meltdown led to an extraordinary business lending program by the U.S. Small Business Administration. The Paycheck Protection Program (PPP) had the SBA processing more loan dollars in a matter of months than it had in its entire previous history. The program was also extraordinary in that the loans had the potential to be entirely “forgivable” if borrowers followed prescribed SBA ratios in expenses, meaning that the “loans” functioned more like “grants.”

There were undoubtedly glitches along the way, which is not unexpected given a ramp up of this proportion, and there has been significant criticism that some funding got into the hands of companies that didn’t need it and shouldn’t have gotten it. Those issues aside, there is general appreciation of the fact that a federal agency, embedded in a system not exactly noted for its alacrity, managed to pump more than half a trillion dollars into over five million U.S. businesses, through over 5,000 lenders, between April and August 2020.

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Eighty-seven percent of those businesses obtained loans of $150,000 or less, the average loan size was $101,000, and 70% of the loans went to businesses with less than 10 employees. For Hawaii, PPP translated into more than 25,000 business loans amounting to approximately $2.5 billion. It’s not an overstatement that many Hawaii businesses would not be here today without PPP funding.

But despite that funding, and the sparks of light we can see at the end of a long tunnel of economic and public health darkness, the pandemic still rages, more than ever at many mainland locations, and the economy is still wobbly, especially here in Hawaii. So finally, after what some would call avoidable political delays, the SBA is swinging into action again with an invigorated version of the PPP, courtesy of the recently passed Economic Aid Act (call it PPP rev 3.0 as we already had rev 2.0 early on last year after the initial PPP funding was exhausted).

The Economic Aid Act is another huge federal financing bill that, among other things, reopens the PPP to new and existing borrowers until March 31, 2021. And this time, in response to the above-noted criticisms, along with additional concerns that the program was monopolized by huge financial institutions, some additional set-asides and safeguards have been put into place.

There are two parts to PPP rev 3.0. A “First Draw Loan” section for brand new loans to borrowers who did not participate in last year’s program or for borrowers who returned some or all of a PPP loan they did obtain, and a “Second Draw Loan” section for borrowers who have already received and retained PPP funding.

First Draw borrowers must have less than 500 employees (or otherwise meet SBA size standards in certain industries) and can include non-profits, veterans’ organizations, self-employed individuals, and independent contractors. Loan proceeds can be used for payroll costs, including benefits, and for mortgage interest, rent, utilities, worker protections, and certain other operational costs. Full loan forgiveness can be obtained if borrowers maintain employee and compensation levels and expend at least 60% of the proceeds on payroll costs, during either an eight- or 24-week period after the money is received.

Second Draw borrowers can re-apply for PPP if they will or have used the full amount of their original funding per SBA prescribed uses, have no more than 300 employees and can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. Allowed uses for this funding are identical to those noted for First Draw loans. Second Draw borrowers are not required to have already obtained “forgiveness” on their first PPP loan.

Additionally, in efforts to assist borrowers in under-served communities, there is a set-aside, is a designated portion of the entire PPP funding amount, for borrowers with a maximum of 10 employees or for loans up to $250,000 in low or moderate-income neighborhoods. At the time of this writing, those neighborhoods have not been identified, but there is a good bet that they will include all the neighbor islands.

To avoid very large banks monopolizing this round of PPP funding, application was opened first last week to community-based financial institution customers; these institutions can be identified on the SBA website, search for “Lender Match”. Starting this week, application should begin being opened to all other participating financial institutions, and most of the local banks and some of the credit unions will be participating. Check with your financial institution for specifics on their participation. Online lenders were significant during the earlier stages of PPP, and it is anticipated that some of them will be participating in this go-round as well.

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For additional questions, check with your bank, the West Hawaii SBDC, or the Hawaii District SBA office, and best of luck in navigating these trying economic times.

Dennis Boyd is director of the West Hawaii Small Business Development Center. Hawaii SBDC Network is funded in part through Cooperative Agreement No. SBAHQ-13-B-0048/0001 with the U.S. Small Business Administration and the University of Hawaii at Hilo. All opinions, conclusions or recommendations expressed are those of the author and do not necessarily reflect the views of the SBA.

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