A week after banks — well, some banks — began taking applications from small businesses for loans that could ultimately be 100% forgiven, they’re gearing up for a new type of applicant on Friday: independent contractors.
The in-demand Paycheck Protection Program, courtesy of the $2 trillion federal stimulus plan known as the CARES Act, has so far focused on small businesses with 500 or fewer employees. Adding in the new category of micro companies will go a long way for folks who often feel overlooked.
“Independent contractors have felt kind of shut out,” said Karen Moldovan, policy director for Good Business Colorado, which represents small businesses. “I think that it is a sense of relief that there may be something they can explore as an independent contractor. … Hopefully as we’ve had a week now of the ‘Triple P,’ banks will be a little bit more prepared by (Friday).”
There’s still about two-thirds of the $350 billion designated for paycheck loans available, said Dan Nordberg, administrator for the U.S. Small Business Administration’s region that includes Colorado. As of Thursday, he said nearly 500,000 loans valued at $130 billion had been approved by 4,000 banks nationwide, which is up from the initial 1,800 banks on day one.
“This program is one of the largest economic recovery efforts in our nation’s history and was built in just seven short days, a true testament to the American spirit and demonstration of what is possible when we come together to serve a higher cause” Nordberg said in a statement.
Of course, the rollout hasn’t been without its hiccups and frustrations. While the SBA is overseeing the paycheck loan program, local banks are the ones making the loans to small businesses. The banks only received federal guidance on how to make loans the night before the April 3 launch. And there have been further updates for lenders this week.
“One of the analogies being used is that it’s a bit like building an airplane while you’re flying it because for the SBA, for the industry, for us as individual banks, everything has to be rebuilt,” said Koger Propst, president and CEO of ANB Bank in Denver. “We had no real communication other than our trade associations, even up until Thursday night of last week. And Friday it rolled out.”
Most banks weren’t ready on day one. Mega banks like Bank of America and Chase said they would only take existing customers. Wells Fargo began turning customers away over the weekend because it had reached the $10 billion loan limit set by the Federal Reserve in 2018 after the bank was found to have created fake accounts. The Feds temporarily lifted Wells Fargo’s limit on Wednesday.
Other lenders who were not SBA-approved had to apply, such as DreamSpring, which is based in Albuquerque and serves Colorado. The nonprofit lender, which focuses on loans for entrepreneurs in low-income communities, is an SBA Community Advantage lender and was approved to offer paycheck loans on Tuesday.
It began approving applicants on Wednesday and within 24 hours had received 376 applications companywide for loans valued at $15.8 million, said Marisa Barrera, DreamSpring’s executive vice president.
“We definitely know that for many micro enterprises and small businesses, this may be the first time an owner is navigating a federally provided loan process,” Barrera said. “We’re hopeful that we’ll serve as many entrepreneurs as possible.”
Chaos first, but loans getting approved
But because not all banks can offer the loans and the rules are still rolling out this week, many small businesses have been frantic that the $350 billion would run out. And that’s led to a frustrating process.
Megan Ossola, owner and operator of The Butcher & The Baker restaurant in Telluride, got her paperwork together days before the expected launch. She filled out the application three times because the SBA form kept changing. But then she learned her bank wasn’t ready. She had to scramble on day one to find a new bank and went with First Southwest Bank two hours away in Durango.
But chaos continued this week during her application process. She mistakenly said her 32 employees lived out of the country (they don’t). Then the bank said it needed a form that only her regular bank had. And then her regular bank said it could process her paycheck loan so she thought she’d restart the process with her own bank. The banks went out of their way to address the issues and help her through everything. On Thursday, she learned the SBA approved her loan through the Durango bank.
“I tried to have everything together but I filled out paperwork wrong. I reached out to too many (banks). It’s like a fire drill everywhere,” she said. “And I really only reacted that way because I had this sort of panic that the money was going to run out and I wasn’t going to be able to pay my employees.”
Rules still changing
The SBA has continued to update guidance for banks this week. Sarah Mercer, an attorney and lobbyist at Brownstein Hyatt Farber Schreck, has been answering paycheck loan questions all week for clients and in webinars that have attracted nearly 1,000 people. The chaos is understandable, she said, because of how quickly the program rolled out. One week after Congress passed the stimulus plan, 1,800 SBA-approved banks were supposed to be ready.
“Even if they had waited another week it certainly is likely that they still would have had some hiccups,” Mercer said.
The ability to continue answering questions this week has helped clarify eligibility. Loan amounts can be based on the average monthly payroll of either the past 12 months or for 2019. Large companies with thousands of workers overseas but no more than 500 in the U.S. are OK, too.
“Some of those types of questions wouldn’t have bubbled up until the program launched,” she said.
She also recommends that companies apply for both the paycheck loan and the Economic Injury Disaster Loan, which provides up to $2 million at a 3.75% interest rate. You just can’t use the funds for the same purpose, such as funding payroll for the same month. That program also offers up to a $10,000 advance that doesn’t have to be paid back. The SBA sent out notices on Thursday to EIDL applicants that clarified the advance offers $1,000 per employee, up to $10,000.
These loans are intended for businesses that need them because of the negative impact from COVID-19. And one way to discourage companies that don’t need the loan from applying is found on page four of the paycheck protection loan application: Information about the applicant and the amount will become publicly available because it’s a federal loan. (The Colorado Sun has applied for a paycheck protection program loan.)
“We are certainly aware and believe that there are going to be government watchdogs who want to make sure that this information is publicly available about who got loans and how much,” Mercer said. “If that’s a PR consideration for them, they should definitely take that into account.”
Loans getting funded
Propst and his team at ANB Bank had been studying the language of the CARES Act as the bill was being debated and passed. They had a decent understanding of what was allowed and what wasn’t — most small businesses with 500 or fewer employees qualified for a loan equal to about 2.5 months of payroll.
The loans, backed by the SBA, meant banks don’t have to worry about the creditworthiness of the small business. And if the business used the money to keep workers employed — or hire them back if they’d been let go because of coronavirus shut downs — the loan could be 100% forgiven. Some of the details of how this would work were only shared by the SBA the night before the loan program launched, including allowing banks to charge an interest rate of 1%, instead of 0.5%.
ANB, which reached out to all of its existing customers ahead of time, made one loan the first day, as a sort of test run. Over the weekend, it made about 150 loans valued at $34 million. By Thursday, Propst said the bank had done 1,200 loans for over $200 million. That’s about 20% of the bank’s total existing loans. He said the bank is now open to new customers looking for a paycheck loan.
“On the whole, I will tell you that it’s a lifeline,” said Propst, who expects the cash to be in customer bank accounts by next week. “It just gives hope. And many people need some hope right now.”
Paycheck Protection Program, the 7(a) loan
To qualify, a small business, nonprofit, Tribal business or veterans organization with fewer than 500 employees (there are some exceptions) must have been operating on Feb. 15. The loan is available from local banks — not the SBA (search for an approved lender HERE). Borrow up to 2.5-times of one’s average monthly payroll costs — up to $10 million. Expect to provide proof of payroll costs for the past 12 months and be sure to track expenses after receiving the loan.
Lenders will forgive 100% of loan if it’s used to cover an eight-week period by June 30 for expenses limited to:
- Payroll support, including paid sick or family leave, health care benefits
- Employee salaries under $100,000
- Mortgage payments
- Debt obligations incurred before the covered period
If loan is used for other items:
- A lower percentage of the loan is forgiven
- Interest rate capped at 1% for amounts not forgiven
- Maximum 10-year term
Applicants cannot receive other federal COVID-19 aid for the same purpose, such as paying staff wages or sick leave, between Feb. 15 and Dec. 31. But if the business owner already has an SBA emergency loan, it can be refinanced into the paycheck loan.
Independent contractors, sole proprietors and the self-employed should talk to their local bank first and make sure they are an SBA-approved lender, or a 7(a) lender. Expect to be prepared to submit documentation of operating expenses, employment records or how payroll is calculated. Applicants fill out the same forms as larger businesses.
To apply, check with your local bank. More details are posted on the SBA’s site.
SBA Economic Injury Disaster Loan:
Up to $2 million loan at a 3.75% interest rate is available to small businesses to cover fixed debts, payroll, and other bills that can’t be paid because of COVID-19. Applicants must have been in business on Jan. 31, 2020 and self-certify their eligibility. Apply: covid19relief.sba.gov
Emergency Economic Injury Grants
Provide up to $10,000 for businesses and nonprofits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan. This does not need to be repaid and can be used for worker’s pay, sick leave and for increased production costs due to supply chain disruptions, or other business obligations. The grant can be requested while applying for the SBA disaster loan at covid19relief.sba.gov.