What The Paycheck Program Flexibility Act Means For Small Businesses

On Friday, June 5, President Trump signed into law legislation aimed at loosening up some of the Paycheck Protection Program's (PPP) restrictions on its small business-targeted loans. Called the Paycheck Program Flexibility Act (PPPFA), it gives borrowers more time to spend their PPP money -- and, therefore, to qualify for loan forgiveness -- and, true to its name, more flexibility in using the funds.

But how much do the new PPP loan rules really help small business borrowers? The answer: That depends. A variety of factors, such as whether a company has remained open or has spent the money already, plays a role in determining how impactful the changes will be for individual enterprises. "I see some companies breathing a sigh of relief," says John McFarland, senior vice president of client development at VensureHR, a Chandler, Ariz.-based human resources outsourcing firm. "But that's by no means true for everyone."

The New Rules

Established by the CARES Act late last March, the PPP gave loans to businesses, primarily to help them continue to pay their employees. Under the original terms, at least 75% of proceeds had to go towards payroll expenses; the rest could be used for such costs as rent and utilities. Loans wouldn't have to repaid if companies spent that money over an eight-week period -- turning the financing into an outright grant, in effect. If they didn't spend the funds in the approved ways or time frame, it remained a loan, to be paid back at a 1% interest rate over two years. Companies also had the option to return the unused money, receiving forgiveness for the portion they used.

Trouble is, many small businesses that got loans haven't been able to spend the money fast enough, often because they've had to shut down operations partially or entirely. With that in mind, the new law gives borrowers 24 weeks to use the funds or until December 31, 2020, whichever date is earlier. In addition, the amount of proceeds that must be spent on payroll is now 60%. And borrowers choosing to turn the money that's not forgiven into a loan now have five years to pay it back.

Shuttered Businesses

According to many small-business experts, the biggest impact will be on companies, like cafes and beauty salons, that had to close up shop. Many are still not allowed to open in certain areas; in others, they can operate at a limited capacity. "It's a godsend for these small companies," says Nancy McClelland, who runs an accounting firm in Chicago that works with many small businesses.

In April, for example, Hannah Nyhart, owner of Build Coffee, received a $23,700 PPP loan for her cafe, which is located near the University of Chicago. But unable to open and with revenues down to zero, she couldn't provide any work for her seven employees. Plus, according to Nyhart, she was hamstrung by the slow pace of official guidance; it wasn't until late May that the SBA came out with its Interim Final Rules, 26 pages of details about forgiveness eligibility and other issues. "There were moments when it seemed so difficult to spend the money in ways that would help the shop, I wondered about returning the loan and filing for unemployment," she says.

The upshot: Nyhart hasn't spent any of her loan. In the meantime, her staff either filed for unemployment compensation or found work elsewhere. "We need the money to help us have a fighting chance once it makes sense to re-open," she says. "I feel grateful we have that chance now."

Too Little, Too Late

For some companies, however, the matter of stretching out the loan amount for a longer period of time is moot. They've just about used up the funds. Take Matthew Meier, CEO of MaxTour in Las Vegas. In mid-March, he laid off his seven employees when he had to close down operations. Several weeks later, with his PPP money in hand -- he declined to discuss the amount -- he hired them back, assigning them to work on developing new marketing tactics. Almost all of the money went to payroll, with the rest used to make payments on loans and insurance for his four vans.

Now, however, he's spent almost the entire loan. "These changes have come too late for us," Meier says. He fears he might have to furlough his employees again.

Meier, like many PPP recipients, also would have used the money differently had he known from the beginning that the terms would change -- stretching the funds directed toward payroll expenses to last for as long as 14 weeks and using some of the loan for other costs. "We would have paid less for payroll and more for equipment expenses," he says. "But we had to take them at their word."

Similarly, Shayna Norwood, who runs Steel Petal Press, a Chicago six-employee wholesaler and retail store selling locally made greeting cards and gifts, received a $37,000 loan in April. Thinking she had to spend it all in eight weeks, she, too, has used up almost all the money. But she only just opened the shop for business with limited capacity and fears she'll have to lay off staffers or reduce their hours.

The Lucky Ones

Businesses that have remained entirely or partially open say the new rules won't affect them that much. Mostly, the extended terms mean they know with certainty they'll be able to spend all the money and receive 100% forgiveness. It's especially important for companies that received their loans early on and, therefore, were coming up on the end of their eight weeks when the new rules went into effect.

John Lacy, president and COO of Idea Grove, a Dallas-based digital marketing and public relations company, for example, had his 26 employees start working from home in mid-March. After he lost two big clients and another cut its retainer in half, Lacy decided to apply for a PPP loan, which he received in early April. Since then, he's been able to attract some "significant" project work.

Still, coming up against the eight-week deadline, Lacy wasn't sure he'd be able to spend his entire loan, which was "below $500,000," he says, in time. "We wouldn't have done anything differently had we known this change would happen," he says. "But we would have been a little less frantic."

Proceed With Caution

Small-business experts warn that companies interested in taking advantage of the changes should proceed cautiously, as some details may require more clarification or be further amended. For example, according to McClelland, under the new rules, it first appeared that companies would lose their eligibility for any forgiveness if they didn't use 60% of the loan for payroll. While an SBA statement released June 8 clarified that a sliding scale for forgiveness would still be in effect, she urges, "Just be careful of that 60%."

Also, the new act does not automatically extend the terms of all loans retroactively, notes Peter N. Riefstahl, a supervising CPA at the Louisville, KY accounting firm Louis T. Roth & Co. "The five-year repayment term applies automatically to new loans effective June 5, 2020, but an extension must be arranged with your lender if you received a loan prior to June 5," he says.