Afford Anything - PSA Thursday: The History of the PPP -- and 4 Extra Relief Options for Entrepreneurs

Episode Date: July 2, 2020

Here's the sordid history of the Payroll Protection Program, plus four additional options for getting pandemic relief as an entrepreneur. In this episode we share the following resources for small businesses: Economic Injury Disaster Loans (EIDL) Employee Retention Credit. SBA 7(a) Program Mainstream Lending Program   For more information, visit the show notes at https://affordanything.com/psa-thursday Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to PSA Thursday. This is a mostly weekly-ish segment of the Afford Anything podcast, special bonus segment in which we talk about how to handle money, work, and life in the midst of the coronavirus pandemic. Today we will be discussing, Duna-da-da-da-da-da-done PPP funding is over. Stop the presses, update, update. Okay, so things here are changing really, really fast. So we scripted this episode on Tuesday, June 30. That was the final day of the PPP, and we decided, hey, PPP's ending. Let's do an episode about what to do now that it's ending. The following day, 24 hours later, Congress approved a bill which, if passed into law, would extend the PPP out until August 8th. However, the president has not signed that bill. So as of right now, the PPP is still officially over.

The PPP still is officially not running anymore. It is ended. There is a chance that that could change. So due to the Wednesday, July 1st legislation that was passed in both the House and the Senate, that legislation allows the PPP deadline to get extended out to August 8th that has not yet gone into law. Check the news for more because this is a rapidly changing and developing story. So that is the latest update. There's a ton that's changed in the last 48 hours. With that being said, let's go back to our regularly scheduled program already in progress. So if you are a small

business owner and entrepreneur, a freelancer, and you are trying to figure out what to do, because government AID ended this week and your revenue is still down. We're going to talk about that in this episode. Now, if this is your first time listening to a PSA Thursday episode, here's a primer on what this is. PSA Thursday is a stripped down, bare bones, cut to the chase, simple version of the Afford Anything podcast. These are much shorter episodes. We don't have any intro music or outro music or sound effects. There's no crazy production value. They are pure PSA episodes where we deep dive into a specific topic. And when I say that they come out on Thursday, don't take the word Thursday too literally. Thursday is really aspirational. It frequently comes out on a day that the rest of

society refers to as Friday. So these are mostly weekly-ish and ideally on Thursday-ish. In previous PSA Thursday episodes, we covered your complete guide to donor advised funds. So if the coronavirus pandemic has inspired you to donate more money to charity, in a previous episode, we covered everything you need to know about how to set up a donor advised fund. Also, in a previous episode, we covered the CARES Act and how it impacts student loans and student loan repayment. So check the PSA Thursday archives for those episodes, plus much more. You can dig through the PSA Thursday archives at afford anything.com slash PSA Thursday. So with that introduction, let's jump into today's episode because today we are discussing the fact that PPP funding is over. That is the

big current event of this week. As of Tuesday, June 30, 2020, there is officially no more PPP funding. So today, we're going to discuss two things. First, we're going to review what is the PPP, and then we're going to talk about what options are available for entrepreneurs, small business owners, and freelancers now that the PPP has ended. Let's start with what the heck is the PPP? So much has happened in the past few months that you can be forgiven if your memory of the detail of the PPP are a little hazy, since the last time that this program was dominating headlines was all the way back in April. So here's a quick refresher and a quick history lesson. PPP stands for the Paycheck Protection Program. It is, or it was, an economic lifeline for

many small businesses. It was created by the CARES Act and managed by the Small Business Association, or SBA. Now, the SBA defines a small business as any business that has fewer than 500 employees, and that includes people who are self-employed or freelancers, because technically, self-employed people operate a business with just one employee themselves. The SPA estimates that there are approximately 30 million small businesses in the U.S. The PPP was designed to award ultra-low-interest loans to small businesses, and the loan size is, in theory, sufficient to cover two months of payroll, as well as rent and utilities.

In order to apply, businesses have to submit payroll records to the SBA, and the loan amount is calculated from the average monthly payroll cost from the preceding calendar year or preceding 12-month period. Now, that is subject to a limit of $100,000 in annual compensation per employee. So PPP funds will cover payroll costs for employees of small businesses, which includes you yourself, if you employ yourself. It covers up to two months of those payroll costs, up to an annual cap of $100,000. So if you are self-employed but you pay yourself a salary of $120,000 per year, they would subtract that $20,000, lower their estimate of your payment to yourself down to $100, and then they would pay you one-sixth of that to cover two months. Now, the goal of the PPP program is to keep people employed through the shutdowns,

because if people are unemployed, then they collect unemployment insurance. So why not contribute funds to keep people employed at their jobs? That way, they're still going to work every day. They're still doing their jobs. And hopefully, by virtue of doing so, that work contributes to the economy, aids in productivity. Essentially, the idea was if the government is going to pay out in one form or the other, if they're either going to pay out in the form of unemployment or in the form of offering funds to help small business, cover payroll costs, you may as well offer the funds to help small businesses cover payroll

costs so that that way people remain on the job. Now, PPP funds are technically low-interest loans, but the loans may be forgiven, meaning they'll effectively turn into grants if they're used according to certain parameters that are set by federal guidelines. So essentially, it's a loan that never needs to be repaid. It's free money from the perspective of a small business owner or an entrepreneur or a freelancer who receives PPP funding. Now, this set up, this free money setup, made it, of course, very popular. So the Paycheck Protection Program opened in early April, initially with a budget of $349 billion, and very quickly made headlines when it ran out of money after just 13 days.

This triggered a closer look that revealed that many of these loans were awarded not to small businesses, but rather to huge companies and major franchises, such as 10 million to Shake Shack, 10 million to Potbelly, 10 million to the parent company of Taco Cabana, 4.6 million to the Lakers, and perhaps most egregiously, nearly 95 million that went to Auto Nation, which is a Fortune 500 company.

In total, publicly traded companies received 905 million through the PPP funding during that ill-fated first round of funding and remember this first round of funding ran out of money in less than two weeks. Now, in fairness, after a massive public outcry, many large companies, including all of the ones that I just named, returned their loans back to the SBA. However, the public outcry centered around the companies that have recognizable names. This became the double-edged sword of brand recognition, the perils of fame, if you will,

because the public outcry centered around those companies with loads of brand recognition. And there were many equally large or larger companies in sectors like pharmaceuticals, biotech, healthcare, utilities, energy. These companies also received just as much or more PPP funding as the restaurants that I just named. But they didn't receive nearly as much public pressure to return those funds. So these are companies like Masonics, DMC Global, Wave Life Sciences, Lindblad Expeditions, Mankind, Quantum Corp, Optinose, Digimark. Every single company that I just named has a market cap that's over 100 million. And yet because they're not consumer-facing, these companies don't have the brand recognition of ShakeShack or Taco Cabana.

They're not everyday household names. So their loans didn't dominate headlines. It didn't rile the crowd or generate emotions of public outrage, even though they also consumed taxpayer funds that were meant for freelancers and for mom-and-pop businesses. So how did they get this money? Let's pause and review why these major companies were able to get their loans processed so quickly. The PPP was designed such that financial institutions, including major banks like Chase, Wells Fargo, Bank of America, these financial institutions served as the middleman between the loan applicant and the SBA. So the role of the financial institution was to accept the application, review each application to make sure all of the necessary paperwork and supporting documents were in

make sure all the eyes were dotted, the cheese were crossed, and then the financial institution's role was to submit that application to the SBA. So in other words, small business owners and self-employed people could not directly apply for PPP funding. They could not directly apply to the SBA. They had to apply through a financial institution that served as an intermediary. Now, on the surface, that doesn't sound so bad. But there were two factors that came together to turn that into a very bad situation. Those two factors are compensation structure and capacity. So let's talk about each. First, the program was designed in such a way that financial institutions received compensation from the government based as a percentage of the loan amount. Now, this was on a

sliding scale. Financial institutions earned a fee of up to 5% of the loan amount for loans under $350,000. On a sliding scale that ended at 1% of the loan amount for loans. over 2 million. But let's do some third grade math on that. So 5% of $350,000, which is the maximum amount in that bracket, is $17,500. Meanwhile, 1% of $2 million, which is the minimum amount in that bracket, is $20,000. So even if we're comparing the maximum payout at the 5% bracket to the minimum payout at the 1% bracket, it's still in the financial institution's own best interest to prioritize the $2 million loan application. And that gets amplified when the financial institution is choosing between, say, a $10 million loan

application versus a $20,000 loan application that a freelancer or a self-employed solopreneur might be submitting. 5% of $20,000 is $1,000. So a bank would have to process 100,000 loan applications at that amount in order to equal the compensation that they would receive for processing just one $10 million loan. This incentivized financial institutions to prioritize the biggest loan applications, which came from the biggest companies. And as a result, truly small businesses, businesses with fewer than 10 employees, or fewer than five employees, or fewer than two employees, these were the

businesses that got pushed to the bottom of the stack. And this also explains why that first round of funding ran out so quickly. The PPP awarded fewer loans in the first round, but the loans that they gave out were significantly larger, awarded to significantly larger companies. Now, this problem of compensation structure was further compounded by the limited capacity of financial institutions, because there were so many small businesses that were applying for these loans so quickly that eventually many lenders, including almost all of the major banks, just got overwhelmed, closed their doors entirely and stopped accepting. new applications. This was the situation that I faced when I went to apply for PPP funding.

I have business accounts with two different banks, and neither of those banks were accepting new applications. They had so quickly become overwhelmed with applications that they simply didn't have the capacity to accept anymore. And so I, as a small business, afford anything, is a business that has two full-time W-2 employees who receive W-2 paycheck. and health benefits. I'm very proud of that. Afford Anything pays full health benefits to our two W2 employees, but we're a two employee business. We're a very small business. And we have 1099 contractors, but PPP funding doesn't cover that. So when both of my banks said, hey, we're no longer accepting applications, I experienced what many other small business owners all around the nation were

simultaneously experiencing, which is, man, what do you do when the banks close their door? and say, sorry, we can't help you. So everything that I've just described happened in April. April was a big month. And that leads us to May, when the government approved a second round of PPP funding worth $175 billion.

The SBA started accepting applications for the second round of funding during the first week of May, and there was a lot of initial chatter and speculation about how quickly that second round would run out of funds, but it didn't. And then it fell away from the headlines.

And I'm guessing that you probably haven't heard any news coverage about the PPP since then. But in June, two major things changed. Number one, the passage of the Paycheck Protection Program Flexibility Act of 2020, which was signed into law on June 5th. This act amended the PPP to give borrowers more time to spend those loan funds and still obtain forgiveness. For the borrowers, the small business owners that don't receive loan forgiveness, the time to pay off the loan got extended to five years rather than the original two years. And the act also lets businesses delay paying payroll taxes even if they took a PPP loan. So that was one of the major things that happened in June, essentially receiving the funds for the small businesses that did receive funds, the parameters, the restrictions, the qualifications around.

receiving those funds became easier. The other major thing was, and this is where we turned to current events and discuss what's happening this week, this week is special because the PPP program officially ended on Tuesday, June 30. And what's astounding is that it is closing with $130 billion left over. So of the $175 billion that was approved in the second round, only $45 billion got claimed. The remaining $130 billion is apparently money that nobody wanted. And of course, I'm being facetious when I say that because, of course, people want that money.

There are many small business owners and freelancers and solopreneurs who are still looking for economic relief. And that brings us to the actionable part of today's episode. What options are available to you if you are an entrepreneur, a small business owner, or if you are self-employed or a freelancer? Now that the PPP is closed, what other avenues are you? can you turn to? Here are a few suggestions. Number one, the first place to look is alternative loans that are offered by the SBA, and the most prominent of these, one of the most prominent of these, is called the Economic Injury Disaster Loan, or EIDL. The EIDL program offers loans up to a maximum loan size of $150,000, but these loans need to be repaid. These are 30-year loans at a 3.75% interest rate,

available to small businesses. Unlike the PPP, getting an EIDL loan requires a credit check, and the SBA will be able to claim your business assets as collateral. So it is a legit loan. And unlike the PPP, the EIDL does not have a formal loan forgiveness program. So they offer loans with a very attractive loan terms, but ultimately they are still unforgiven loans. They do still need to be repaid.

And that is the biggest difference between the PPP and the EIDL, is that the PPP is alone with a very robust forgiveness program that is technically alone, but essentially a grant, whereas the EIDL is truly alone. But here's the kicker. You can apply for an EIDL advance of up to $10,000 from the SBA, and you're not required to repay this advance if you meet their qualifying criteria. that $10,000 advance is forgiven and effectively treated as a grant. So again, just to reiterate, the bulk of EIDL funds are loans that need to be repaid, but if you take the advance grant of up to $10,000, it's a grant. It doesn't have to be repaid. Now, if you have already taken a PPP loan, you cannot use EIDL and PPP loans for the same

purpose. So for example, if your PPP funds covered payroll during the months of May and June, your EIDL funds cannot do the same. But your EIDL funds can be used for other approved expenses like rent or utilities for your business, or it can be used to cover payroll costs during a different pay period. Now here's the other important thing to know if you have also received PPP funds. The advance grant from the EIDL will be subtracted from the PPP. loan forgiveness amount. So if you take both PPP and EIDL funds, you have to declare the EIDL grant when you apply for PPP loan forgiveness. And the amount of that grant that you receive will be subtracted from the amount that is forgiven on your PPP loan. If you are a small business owner

and you have not received any PPP funding, then definitely apply for the EIDL. So that is option number one, the economic injury disaster loan, EIDL. Option number two, the employee retention credit. This is a tax credit for small businesses, and it's available to employers who have 100 or fewer full-time employees in 2019. Now, eligible employers can receive a refundable payroll tax credit of 50% of wages paid to employees between March 13, 2020, through the end of the year in 2020. You cannot, this is very important, you cannot claim this tax credit if you accepted

PPP funds. Now, this tax credit covers wages, including health benefits, capped at $10,000 in wages per employee. So for example, let's say that you have an employee who was employed during that period of March 13, 2020 through December 31, 2020, and the wages paid to this employee during this time period equals $10,000 or more. You as the employer are eligible to receive a 50% credit against payroll taxes, which equals a $5,000 credit per employee. So if you are a small business owner that did not receive PPP funding, this is a fantastic opportunity. Now, in order to qualify to receive this tax credit, you have to meet certain hardship criteria. You have to have either experienced a significant decline in your gross revenue during the calendar quarter, or you have to have either

fully or partially suspended the operation of your business. during any calendar quarter in 2020 due to orders from an appropriate governmental authority. So, for example, if your city, your county, your state ordered a shutdown and that shutdown forced you to close your doors, then you meet the hardship criteria that would allow you to be eligible for the employee retention credit. And again, I'll just reiterate that you cannot claim this tax credit if you accepted PPP funds. So think of this tax credit as the consolation prize for not getting PPP funds. So that is option number two. Option number one was EIDL, and option number two is the employee retention credit.

Option number three, the SBA 7A program. The 7A loan program is the SBA's primary program for providing financial assistance to small businesses. Now, these are loans, unlike the PPP. which is effectively a grant, unlike the EIDL Advance, which is also effectively a grant, 7A loans are loans. They need to be paid back. But specifically, there is a product called the 7A small loan. It has a maximum loan amount of $350,000, and it is designed for very small businesses.

For example, lenders aren't required to take collateral for loans of up to $25,000. And if you're a very small business, a loan of, a loan of, $25,000 is a significant amount of money. It has a turnaround time of between 5 to 10 business days, and the interest rate is capped at a certain maximum. That maximum is determined by the SBA and is very small business friendly. So if you are a small business owner looking for more funding to get you through these times, the 7A loan program is an attractive option. It's an option that can help you keep your doors open. And then finally, option number four, the Federal Reserve set up a new program called the Main Street Lending Program. Now, this program began two

weeks ago, and the Fed's Main Street lending program is the central bank's first attempt since the Great Depression to go beyond its typical financing for large banks and for Wall Street firms. It is the first time since the Great Depression that the Federal Reserve is providing loan, to small and mid-sized businesses. And its goal is to help companies survive the pandemic by providing five-year loans with no interest payments for the first year and no principal payments for the first two years.

And the interest rate is just a little over 3%. So just a little over the rate of historic inflation. Banks will make these loans, and the Fed will purchase 95% of the value of the loans from the banks, which frees up the banks to do more lending. And it's available, as I said, for small and mid-sized businesses, which the Fed defines as businesses with up to 15,000 employees or $5 billion in revenue. And the loans can range from a minimum of $250,000 to a maximum of $300 million. So if you're a small business owner with a slightly larger business, maybe you have 15 or 20 employees, and you could totally use a loan of $250,000.

thousand dollars, the Main Street lending program will allow you to access that money with an interest rate that is basically inflation. But here's the fascinating part about this program, right? So as I mentioned, this program went into effect two weeks ago. And so far, according to U.S. News and World Report, so far as of Monday, June 29, there have been exactly zero loans issued. So the public response to this is the opposite of the public response to the PPP. The PPP ran out of funds. It ran out of $349 billion within the first 13 days. And by contrast, the Main Street lending program, which is also two weeks old, has issued absolutely literally zero loans.

Apparently one of the major reasons for this is that banks are not well incentivized to participate. So according to U.S. news, federal officials say that of the roughly 5,000 lenders in the United States, only 200 of them have signed up to participate, and none of them have actually issued any loans yet. What that indicates is that if you want to participate in the Main Street lending program, your biggest challenge might be finding a bank that's participating or a lender that's participating in the program. And that actually leads me back to the issue that a lot of small business owners had when they were trying to tap PPP funds, myself included, which was our issue also was finding a lender who would still accept applications. Because as I mentioned earlier, when I went to apply, both of the banks that I bank with said, hey, we are overwhelmed with applications. We just can't accept anymore. In that case, the issue was getting a bank to process the loan. and with the Main Street lending program, it seems as though that's also the issue for a different reason, but that's still also the issue.

A lot of people who want to apply for these loans are having trouble finding banks that will facilitate that. In my case, what saved my butt was my payroll processor. So I use Gusto, which is a podcast sponsor, and they're the payroll processor that I've been using for a few years. and they have a super robust resource program for coronavirus relief aid. And so when both of my banks said, hey, we're not accepting applications anymore, I went to Gusto. I looked at their resource center, and they were updating daily their resource center to reflect the lenders, including very small lenders,

lenders I had never heard of before, that were still accepting applications. So it was through them that I was able to get my PPP application submitted and ultimately able to get those funds. And they have a huge COVID-19 resource center. They can help facilitate. It was through them that I learned of the employee retention tax credit. You know, they can help facilitate access to any of these programs. So they are a podcast sponsor.

They're not paying me to say this. They have no idea that I'm saying this. But they absolutely saved my butt. They are the reason that I was able to get a PPP loan when I had no other options. So you can get an account with them for free at gusto.com slash paula. It'll be free for three months. And if you want, you can cancel it the three month mark. But it's free for three months at gusto.com slash paula.

Again, this is not an ad. They're not paying me to say this. But the topic of this episode is resources for small business owners who are looking for funds to get them through. And they have the single best resource center that facilitates the connection between small business owners, soloprenors, entrepreneurs, freelancers, with the institutions that they need to work with in order to be able to access these various programs and grants and advances and loans. So those are options available for small business owners now that the PPP has ended. Again, to review the four options we talked about, number one is the economic injury disaster loan and specifically

the advance of up to $10,000 that they offer because that advance is a grant that doesn't need to be repaid. We covered the employee retention tax credit. We covered the SBA 7A program, and specifically inside of that, the 7A small loan. And we covered the Federal Reserve's Main Street lending program, which is officially only two weeks old. Those are four options for small business owners who want to tap funds that can help keep them afloat, can help keep their doors open, can help keep their employees on the payroll, including yourself. If you are a freelancer or if you're self-employed, you are your own employee, and you have to keep yourself on the payroll.

So these are some resources that can help you now that the Paycheck Protection Program is officially over. That is our episode for today. That is a PSA Thursday for Thursday, July 2nd. Thank you for tuning in. Now, the Afford Anything podcast, typically we run our full show, our full episodes on Mondays. Once a month, on the first Friday of the month, we air a first Friday bonus episode. So the first Friday of July is tomorrow, Friday, July 3rd.

And in honor of the 4th of July holiday, to give our hardworking team some time off, we will not be airing a first Friday episode tomorrow. We will not be airing a first Friday episode on the 3rd of July. But we will see you on Monday, July 6th. for our regular Monday episode. And in that episode, myself and former financial planner Joe Saul Seahy, will be answering questions that come from you. So make sure you hit subscribe or follow in whatever app you're using to listen to this episode so that you don't miss Monday's upcoming show or any of our future upcoming shows.

You can sign up for the show notes at afford anything.com slash show notes so that you will get a record of the content of each of these episodes. that you can easily refer back to, and you can search through the PSA Thursday archives at afford anything.com slash PSA Thursday. Thanks so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast,

and I will catch you in Monday's episode. Today's episode. Today's episode.