The Paycheck Protection Program (PPP) has come under some scrutiny over the last few months. Many business owners felt that the program didn’t give them enough flexibility to use the funds productively while maintaining their right to have the loans forgiven.

The government listened and the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law on June 5, 2020. It contains some much-needed changes to the original program.

Only 60% of the funds need to be used for payroll

The original PPP loans required businesses to use 75% of the funds for payroll. Most businesses found that to be way too restrictive. The issue was that PPP assumed that most businesses had payroll costs that were about four times their rent and other costs. However, that is not true for businesses in expensive areas. And many businesses had laid off their workers due to the closing. PPP required that they be rehired before June 30, 2020, but in the meantime, many businesses had very low payroll costs. Therefore, businesses were concerned that they wouldn’t hit that 75% requirement.

Business advocate groups were asking for 50% to be spent on payroll (article), but reducing the required percentage to 60% should give most businesses the breathing room they need. Frankly, the funds were meant to protect paychecks (hence the name), not keep businesses open, so requiring that a portion be spent on payroll makes sense.

The funds must be spent in 24 weeks

The PPP required all funds be spent in eight weeks. Businesses complained that they would prefer to use the funds when the economy reopened rather than use them on idle workers. This extension gives everyone until the end of 2020 to use the funds, which is hopefully enough time for the economy to reopen.

Though, even if the economy does not reopen entirely by the end of 24 weeks, these loans were not huge so most businesses should have no trouble using the funds on approved sources (like payroll) given that timeframe.

Businesses must rehire employee by December 31, 2020

Originally, businesses that took PPP funds had to rehire any lost full-time staff by June 30, 2020. I had some issues with this requirement because it ignored whether there was any demand for products or services. Meaning, a business would have to staff back up without any demand. Why would that make sense? My concern was that businesses would just shed those employees by the end of July. There would be no reason to keep them.

Now businesses have till December 31, 2020, to rehire employees. That seems like plenty of time to me. It also addresses the other problem: workers don’t want to return. This is partly due to the fact that workers on unemployment are making more money than if they were working. That additional unemployment incentive is fading away in August, but I’ve heard talk that there may be an additional payment of $450/week being offered to help phase people back to work.

The time frame allowed by PPPFA should be long enough to get past these incentives to stay home.

There have also been changes to the requirements to rehire the same number of full-time employees. Under PPP, a business had to return to the number of full-time employees that it had as of February 15, 2020. There were essentially no exceptions, other than the employees didn’t have to be the same employees you had previously.

Now PPPFA states that if you can’t get back to your previous number of employees, your loan can still be forgiven if you can show one of three things:

  1. You were unable to rehire an employee that worked for you before February 15, 2020;
  2. You are able to demonstrate an inability to hire a similarly qualified employee(s); or
  3. You are able to demonstrate an inability to return to the same level of business activity as before February 15, 2020.

It’s not clear how one would demonstrate that any of the above requirements have been met. The first could be shown pretty easily, but the other two will be challenging for some businesses. A restaurant will have little trouble showing that they haven’t been open, but what if they’ve been open for outdoor service? That could get tricky.

The loans are extended to a five-year term

The original loans were to be repaid over two years. The term has now been extended to five years. The first payment is also deferred until six months after a determination of forgiveness is made.

To be honest, I don’t know if they are even considering forgiveness applications, yet. The first payments will likely not be due for a long time.

PPP was only designed to cover 4-8 weeks

The main issue with PPP was that it was designed to be a stop-gap measure. Politicians at the time did not know how long this pandemic would stretch. I remember the good ol’ days when we debated whether the closures would last four weeks or six weeks. At more than double that time, the closures have taken a much bigger toll on small businesses. PPP just didn’t (and couldn’t) foresee the depth of this problem. It’s great to see some changes are being made to ease the strain on small businesses.

One other thought, businesses who got funding in the first round of the PPP loans have probably spent their money, or at least most of it. How does this benefit them? Well, the rehiring rules are relaxed, for sure, but these changes would have been better had we seen them earlier.