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Millions of self-employed and gig workers got good news this week.
Biden’s administration on Monday changed how the Small Business Administration’s salary protection program calculates forgiveness loans for the smallest businesses and sole proprietorships.
But there is a catch. The updated formula – which is likely to lead to larger loan amounts for non-employer businesses, including sole proprietorships and independent contractors – will only come into effect in the first week of March.
Although the SBA has provided information on how the formula for loans will change, it has not yet released the details on how to calculate loans according to the new rules to credit providers.
This means that business owners who want to apply in the two-week priority window for the smallest businesses with less than 20 employees starting today may want to postpone to ensure that their applications are subject to the most up-to-date rules.
‘Loans submitted before the official rule changes are subject to the rules that applied at the time of the application, ” said Carol Wilkerson, a spokeswoman for the SBA.
To ensure that sole proprietorships benefit from the changes, the administration recommends that borrowers not submit their application to the system before the SBA’s written guidance has been issued.
Only a few days can make the difference between a loan that keeps the one-man business going and one that does not go very far.
What has been known so far about the formula change
For businesses with employees, the maximum EMP loans are 2.5 times the average monthly wage cost, per SBA. The SBA used the net profit information of tax returns as a means of payment for solo workers, although payroll and profit are different measures.
The net profit line also contains deductions that reduce or eliminate the profit numbers for some, which yield small loans or are not eligible for the program.
The updated formula uses gross income rather than income for wage costs, a larger number than net income, which means that many businesses will get more money on forgivable loans.
“This is a tremendous change,” said Keith Hall, president and CEO of the National Association for the Independent.
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The change is important, as sole proprietorships are the most common business structure in the US. The IRS says there are about 41 million self-employed people in the country and in 2018, more than 27 million people filed a return with an IRS 1040 Schedule C for one-man businesses, according to the agency.
Many of these enterprises have been particularly hard hit by the coronavirus pandemic. About 70% of such businesses without employees are owned by women and people of color, and according to SBA data, 95% of the businesses are black-owned and 91% of the businesses are owned in Latino.
But so far, very little forgivable funding from the SBA has gone to sole proprietorships – according to a recent survey by NASE, nearly two-thirds of members said they get no money from the program.
Much of that was due to confusion in the early days of the program about fitness and forgiveness, which is hopefully clearer today, Hall said. “Many of the reasons why small business owners have not applied for or been approved for a PPP loan. I think many of the barriers have been removed,” he said.
Loans submitted prior to the official rule changes are subject to the rules applicable at the time of application.
Carol Wilkerson
SBA spokesperson
Questions remain
Other small businesses outside of sole proprietorships can also apply for a PPP loan with caution, even during the two-week priority window.
Changes that qualify some student loan lenders, legal non-residents and those with criminal records for loans will also take effect on the first week of March, according to the SBA.
There are also other questions regarding the timing of applications for sole proprietorships, especially those who have already approved a loan, but would get more according to the new formula – there is no process to change a spread loan or to block an application that is currently pending.
“All strangers at the moment,” said Liberty SBF CEO Alex Cohen.
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