President Trump signed a $900 billion stimulus bill into law in late December, renewing the Paycheck Protection Program and allocating $284 billion to it. This relief couldn’t come soon enough. Eight months after the passing of the original CARES Act, more than 90% of America’s small businesses had spent all of their relief money, according to a study by the
Driving the need for more PPP money isn’t just that most small businesses continue to suffer, but that new shutdowns and other restrictions threaten to put the nail in the coffin (e.g., indoor dining in New York City and even outdoor dining in COVID hot spots of California now prohibited). Limitations on other small businesses including retail could accelerate around the country as the virus surges in winter months.
The business federation's study highlighted a critical need for more assistance, with 75% of small businesses saying they’d consider a second round of PPP cash if it is made available.
And now that Congress has voted on the second round — will it be enough to meet the needs of small businesses? Not exactly.
The good news is that the Small Business Administration showed it was receptive to initial important feedback from recipients and lenders after the first round of PPP. For example, complaints that the payroll to utilities/rent ratio, originally mandated to be 75/25, was difficult to achieve, and the timeframe required to spend the funds (eight weeks) was unrealistic, were heeded.
Eventually, the ratio was amended so that payroll only needed to represent 60% of PPP use, and thetime required to spend the money went to a more manageable 24 weeks.
Over the past six months or so, more feedback came in from legislative and business leaders on how the next round of PPP could be improved.
For example, back in May, Sen. Marco Rubio, R-Fla., chairman of the Senate Committee on Small Business and Entrepreneurship, introduced bipartisan legislation to expand PPP eligibility to include personal protective equipment and other “adaptive investments needed to reopen safely” such as retrofitting HVAC systems—which has yet to pass.
And in early December, Marc Morial, president and CEO of the National Urban League, said it should be easier to use the loan proceeds for expenses other than payroll, such as financing inventory. Kevin Boehm, a co-founder of the Independent Restaurant Coalition, also said the PPP was not well designed for restaurants because they couldn’t get loan forgiveness for some critical expenses such as the costs of goods sold or legal and accounting fees to help them navigate the loan program.
The good news is this highly anticipated second wave of PPP does offer more flexibility in how the money can be used. Originally, the funds could be spent only on the aforementioned payroll and business utilities, rent or mortgage interest—as anyone familiar with the program well knows.
According to the new stimulus bill, borrowers may now spend up to 40% of any forgivable amount on non-payroll costs and will now cover operational expenses, property damage costs due to public disturbances that occurred during 2020 and aren’t covered by insurance, supplier costs, and worker protection expenditure for PPE (e.g., face masks) and adaptive investments to help borrowers comply with federal or state health and safety guidelines (e.g., air filtration systems or sneeze-guard barriers). (Source: UBS)
These new rules are certainly welcome additions to the program, but not broad enough to cover all the expenses businesses have incurred in their struggles to stay afloat. Small businesses need capital for inventory financing, equipment repair, expenses around remote working, heaters for outdoor dining, advertising and marketing, legal and accounting, even business expansion when that’s feasible.
With all these needs still unmet, it’s fair to say that the new bill only scratches the surface.
Small-business lenders will no doubt be eager to help disburse the next round of PPP, but it’s time to start thinking about the post-PPP world. Banks and other lenders need to be prepared to lend their own money—because PPP doesn't fully meet the capital needs of small businesses. Noone is better equipped to decide those needs than individual business owners themselves—and lenders should start listening to them and focusing on those relationships.
The first round of PPP wasn’t just a struggle for small businesses in terms of getting approved and understanding the forgiveness process, but it was also a challenge for lenders who faced overwhelming demand for the funds—compounded by a high volume of people stopping into branches at a time when social distancing was paramount. That isn’t going to change with the second round.
Luckily fintech companies have been stepping up to help small- business lenders automate the PPP loan application process to get capital into the hands of small businesses faster and more efficiently. There’s no reason for a small-business owner to visit a branch to fill out a loan application, and no need for bankers to have to chase documents and signatures, among other things. Of course, lessons learned from the first PPP round will only make the next wave of loan applications even easier to process.
Yes, more federal aid is poised to be released—but there still needs to be greater recognition of what small businesses really need to survive into 2021. There may still be some runway to amend the rules and provisions of the new bill as was done the first time around — and that would be welcome. Regardless, lenders should start gearing up to meet these unmet capital needs. And in preparation, the fintech industry and small-business lenders should be in lockstep to make the loan process more manageable and productive for all.
