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The PPP Won't Save the Economy As-Is, But This Bill Could Fix It

The PPP Won't Save the Economy As-Is, But This Bill Could Fix It

The bipartisan effort of Congressmen Chip Roy (R-Texas) and Dean Phillips (D-Minn) to simplify how loan forgiveness works for the Paycheck Protection Program (PPP) is one of the smartest moves that I’ve seen legislators take over the last few weeks. Rigidly tying loan forgiveness to payroll and the short eight-week window after PPP funds are disbursed isn’t going to help many of the smaller small businesses that need these funds to survive—and may even make matters worse.

The Paycheck Protection Flexibility Act proposes extending PPP loan forgiveness for approved expenses beyond the eight weeks currently allotted and allowing businesses to utilize more than 25% of loan proceeds for purposes other than those directly related to payroll — that’s a major improvement that gives business owners some freedom to use the funds in ways that sustain their business. As the CEO of a fintech company that connects business owners to financing, I know the working capital needs of a restaurant owner in NYC are different than the accountant in Boise. With so much out of these businesses’ control, they need more flexibility to make the right choices for their business.

Another provision of the proposed legislation I’m in favor of is extending the loan terms beyond two years, because those businesses with only a handful of employees (79% of small businesses in the U.S. have fewer than 10 employees) will likely not be able to meet the requirements to have their PPP loan completely forgiven. And, the addition of this unexpected short-term debt and cash flow burden could force these businesses to permanently shut their doors.

If passed, this legislation will help resolve many of the flaws within the PPP and make it possible for the 79% of small businesses that aren’t served very well by the current iteration of the program. Here is a list of the primary objectives of the Act:

Allow Forgiveness of Covered Expenses Beyond the Current 8-Week Deadline

Small business owners need more flexibility in how and when they use these funds to help their businesses survive. Tying forgiveness to an arbitrary time frame of eight weeks following the disbursement of funds ties their hands and doesn’t allow them to make decisions about the best way to keep their doors open once the health and financial crisis caused by COVID-19 is over. This crisis will have an economic impact beyond when businesses can re-open—even the Federal Reserve’s own experts are warning of that. We can’t leave small businesses out to dry because the crisis lasts longer, it’s nonsensical.

By giving business owners the flexibility to determine when to use PPP funds, we increase the odds of keeping these businesses viable.

Eliminate Restrictions Allowing Non-Payroll Expenses to Only 25% of Loan Proceeds

No business owner enjoys laying people off and most of the small business owners we talk to at Nav are doing everything they can to keep their employees during this difficult time. Nevertheless, tying PPP funds to payroll may not be the best way to help these small businesses remain viable—which ultimately eliminates jobs once the crisis is over.

For many of these businesses, payroll represents a smaller percentage of their monthly expenses—meaning many of these loans will become unforgivable to one degree or another. Restricting non-payroll expenses to 25% doesn’t give small business owners the ability to make decisions about the best way to utilize these funds.

Extend the Loan Term Beyond 2 years

I think it’s safe to say that a 1% interest rate is likely the lowest rate on a business loan most of us will ever see in our lifetime, but the 2-year term is too short.  Even if it’s a low rate, business owners don’t want to worry about starting high monthly debt payments.  If we learned anything from the financial crisis of 2008 and the Great Recession, we learned that recovery sometimes takes longer than a few short months and access to borrowed capital will likely be a challenge for these very small businesses. It certainly was in the years following 2008.

When we begin to climb out of one of the worst financial and health disasters our country has ever faced, it might be overly optimistic to assume businesses will be back on their feet and able to successfully service such a short-term debt. A longer loan term of 4-5 years would better meet their needs. What’s more, the loan term was not outlined in the original CARES Act legislation, but determined by SBA Administrator Carraza and Treasury Secretary Mnuchin, so this modification is well within the scope of what Congress can do.

Allow Full Access to Payroll Tax Deferment for Businesses that Take PPP Loans

Receiving both a PPP loan and the payroll tax deferment should not be considered double-dipping. These could both be potentially important sources of cash flow that can help businesses weather the next few years of recovery, rebuild healthy and thriving businesses, and keep more people on the payroll. Many businesses right now are cash poor. This is something the federal government can do (payroll tax deferment is something the states should do too) that will provide immediate relief to many of these small businesses.

Extend the Hiring Deadline Beyond June 30, 2020

Because the enhanced Unemployment Insurance introduced in the CARES Act is higher than the median wage in 44 of the 50 states, there will be many businesses that won’t be able to rehire employees because their employees are making more on Unemployment than they were working. Extending the deadline to rehire employees under the PPP to align with the expiration of enhanced Unemployment benefits will help both business owners and the workforce.

The Paycheck Protection Program as it stands right now isn’t the full solution small business owners need. They need a plan that helps with more than just payroll concerns. What they need is the Small Business Protection Program.

The modifications being offered in the new legislation are a solid step toward having a comprehensive piece of legislation that takes into consideration businesses of all sizes and simplifies a very convoluted part of the PPP.

Now is the time to ensure that we are keeping all business owners alive and thriving.