The Paycheck Protection Program and Health Care Enhancement Act, (Enhancement Act) ― signed into law on April 24, 2020 ― provides a second round of roughly $310 billion in funding to replenish the federal Paycheck Protection Program (PPP), including a provision earmarking $60 billion for small banks, credit unions and community lenders serving businesses in minority, underserved and rural communities.
The program, designed to aid small businesses with forgivable loans for payroll and other qualifying expenses, was created in March as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, but quickly ran out of proceeds.
Businesses seeking to access the new funds should act promptly, as demand for the loans continues to be high.
Initial PPP Implementation
Almost a month ago, as public health initiatives undertaken to battle the COVID-19 pandemic began to roil the economy, Congress passed the CARES Act, which provided low-cost financing to businesses impacted by the measures, including $349 billion for the PPP.
The U.S. Treasury and the Small Business Administration (SBA) implemented the PPP through existing lenders. The SBA had initial difficulty detailing the eligibility requirements, rules and procedures for disbursing funds. However, on April 3, participating lenders began accepting applications. Due to Congress underestimating the vast demand, the allocation of PPP funds was exhausted within two weeks.
The average PPP loan granted during the initial period was about $200,000. One major lender told Politico that it received 55 times more applications in its business banking unit, which serves small businesses, than in its commercial lending unit servicing larger clients. While only one percent of all PPP loans were over $5 million, allegations arose that banks favored existing customers and publicly-traded companies with pre-existing access to the capital markets.
Although the lenders approved almost $1.7 million loans before the PPP funds dried up, many eligible businesses did not receive funding. In a random survey of its members, the National Federation of Independent Business found only 20% of applicants received loan proceeds before the program’s funds were allocated.
Accessing the Additional PPP Proceeds
The additional funds authorized by the Enhancement Act will allow lenders to fund loans for businesses with approved or pending PPP applications, continue underwriting applications in their queue and resume accepting new applications.
If you have already applied for a PPP loan, you should not submit a second application. If you have not yet applied for a PPP loan, now is a good time to contact your lender for guidance on submitting your application. Based on past experience with the first round of funding, we expect the additional funding to be disbursed on a “first come first serve” basis, so timing is critical.
The Enhancement Act reserves $60 billion of this additional funding for small banks, credit unions and community lenders serving businesses in minority, underserved and rural communities. As many of these businesses do not have adequate access to large financial institutions, and smaller businesses have expressed higher demand for PPP loans, this additional funding will provide loans to more businesses that desperately need the PPP lifeline.
Approximately half of the $60 billion reserve will go to community lenders, banks and credit unions with total assets of less than $10 billion. The other half will go to banks and credit unions with total assets between $10 billion and $50 billion.
Requirements Unchanged
Other than the additional funds, the Enhancement Act does not change the PPP’s framework. The SBA is still requiring that borrowers use at least 75% of loan proceeds for payroll costs. To qualify for forgiveness, a borrower must spend the loan funds within the eight-week period measured from the loan disbursement date.
The restaurant and retail sectors have been particularly critical of the timing of this eight-week period. Because most of these businesses are still subject to governmental mandates, many face the dilemma of rehiring employees with insufficient work or missing out on forgiveness of their loan, arguably the PPP’s most attractive piece. We expect that the SBA and/or Treasury may issue guidance on the Act to address these specific concerns.
Other New Funding
The Enhancement Act also earmarks an additional $60 billion for the Economic Injury Disaster Loan (EIDL) and emergency grant program run through the SBA’s Office of Disaster Assistance. As this office quickly exhausted the original $10 billion allocated to emergency grants in the CARES Act, $10 billion of these additional funds are available to replenish these grants.
Notably, agricultural enterprises with no more than 500 employees are now eligible for EIDL loans and grants.
The “Health Care Enhancement” portion of the Senate bill allocates an additional $100 billion to address immediate health care concerns arising from the pandemic, with $75 billion allocated to hospitals and other eligible health care providers and another $25 billion assigned to ramp up COVID-19 testing at the Federal, state, and local levels.
[View source.]
