MoMo Productions | Getty Images
Millions of self-employed workers have received good news this week.
The Biden administration on Monday changed the way the Small Business Administration’s Payroll Protection Program calculates unsecured loans for smaller businesses and individual homeowners.
But there is a problem. The updated formula, which is likely to lead to a larger loan amount for non-business companies, including sole proprietors and independent contractors, will not take effect until the first week of March.
Although the SBA has given some information on how it will change the loan formula, it has not yet communicated to lenders details on 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 starting today may want to hold back to ensure their applications are subject to the most up-to-date standards.
“Loans submitted before the official changes to the standard are subject to the rules in force at the time of application, ” said Carol Wilkerson, a spokeswoman for the SBA.
To ensure that sole proprietors receive the benefit of the changes, it is recommended that lenders do not submit their application to the system until the SBA’s written guide is published, according to the administration.
Just a few days could make the difference between a loan that keeps the sole owner afloat and one that doesn’t go very far.
What is known about the formula change so far
For companies with employees, the maximum PPP loans are 2.5 times the monthly payroll costs, according to the SBA. As a substitute for payroll costs for solo workers, the SBA used net profit information from tax returns, even though payroll and profit are different measures.
In addition, the net benefit line includes deductions, which reduce or eliminate benefit figures for some, giving small loans, or making them ineligible for the program.
The updated formula will use gross income as a substitute for payroll costs, a number greater than net income, which means many companies will get more money in forgivable loans.
“It’s a tremendous change,” said Keith Hall, president and CEO of the National Association of Self-Employed Workers.
More than Invest in yourself:
Smaller businesses that receive additional PPP help. What do you need to know before applying?
Black small business owners are left behind in a pandemic, according to the survey
Black leaders offer several key steps to help bridge the racial gap
Change is important, as individual business firms are the most common business structure in the United States. The IRS says there are about 41 million self-employed people in the country, and in 2018, more than 27 million people filed a return with an IRS 1040 Form C program for homeowners, according to the agency.
Many of these companies have been particularly affected by the coronavirus pandemic. Approximately 70% of these companies without employees are owned by women and people of color, and 95% of black-owned companies and 91% of Latino companies are sole proprietors, according to SBA data.
But so far, very little forgivable funding from the SBA has gone to exclusive companies, according to a recent NASE poll, with nearly two-thirds of its members saying they did not get money from the program.
Much of this was due to the confusion of the early days of the program about eligibility and forgiveness, which we hope will be clearer today, Hall said. “Many of the reasons those small business owners did not apply for or get approval for a PPP loan, I think many of those barriers have been removed,” he said.
Loans submitted prior to official rule changes are subject to the rules in effect at the time of application.
Carol Wilkerson
SBA spokesman
Questions remain
Other small businesses other than sole proprietors may want to proceed with caution when applying for a PPP loan, even during the two-week priority window.
The changes that make some student loan borrowers, non-legal residents, and those with a criminal record eligible for loans also go into effect the first week of March, according to the SBA.
And, there are other questions about when to apply for exclusive owners, especially those who already got an approved loan but would get more under the new formula; there is no process for modifying a scattered loan or withholding an application that is currently pending.
“All the unknowns right now,” said Alex Cohen, CEO of Liberty SBF.
REGISTER: Money 101 is an 8-week learning course on financial freedom, delivered weekly to your inbox.
TO CHECK: Here is the credit score you need to buy a home It grows with Acorn + CNBC.
Disclosure: NBCUniversal and Comcast Ventures are investors Glans.