Self-employed, gig workers are still waiting for new PPP rules that would mean bigger loans

The self-employed and gig workers are anxiously waiting for the Small Business Association to update guidelines to its Paycheck Protection Program, which could mean bigger loans for the group.

The Biden administration announced last week changes to how the SBA will calculate forgivable loans for sole proprietors and other small businesses without any employees. The updated formula — which will likely lead to larger loan amounts for non-employer firms, including sole proprietors and independent contractors — will be announced this week.

It's still unclear when in the week the SBA will update its guidelines, meaning that those who would benefit from the change should still wait to submit their applications for the program.

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"Loans submitted prior to the official rule changes are subject to the rules in effect at the time of application," said Carol Wilkerson, an SBA spokesperson.

That's led to frustration for some who want to take advantage of the two-week priority application window for the smallest businesses that went into effect on Feb. 24 and ends the second week of March. Of course, sole proprietors will still be able to apply for PPP loans until the program deadline at the end of the month; they just won't get priority treatment once the 14-day exclusivity window closes.

For now, lenders are working to help borrowers prepare what they can to be ready for the updated guidelines.

"We've always taken the approach of, 'Hey, we don't have all the answers, but let's proceed as far as we can without the answers,'" said Ed Barry, CEO of Capital Bank, based in Rockville, Maryland.

Barry added that the bank is also working to build awareness among small businesses that may not realize that they're now eligible for a PPP loan.

What is known about the formula change so far

For firms with employees, maximum PPP loans are 2.5 times average monthly payroll costs, per the SBA. As a stand-in for payroll costs for solo workers, the SBA used net profit information from tax returns, even though payroll and profit are different measures.

In addition, the net profit line includes deductions, which reduced or eliminated profit numbers for some, yielding small loans or making them ineligible for the program.

The updated formula will instead use gross income as a stand-in for payroll costs, a larger number than net income, meaning many firms will get more money in forgivable loans.

"It's a tremendous change," said Keith Hall, president and CEO of the National Association for the Self-Employed.

The change is important, as sole proprietorships are the most common business structure in the U.S. The IRS says there are some 41 million self-employed people in the country and, in 2018, more than 27 million had filed a return with an IRS 1040 Schedule C form for sole proprietors, according the agency.

Many of these businesses have been particularly hard hit by the coronavirus pandemic. About 70% of such firms with no employees are owned by women and people of color, and 95% of Black-owned and 91% of Latino-owned firms are sole proprietorships, according to SBA data.

But so far, very little forgivable funding from the SBA has gone to sole proprietorships — according to a recent survey from NASE, nearly two-thirds of its members said they didn't get any money from the program.

Much of that was due to confusion in the early days of the program around eligibility and forgiveness, which are hopefully clearer today, Hall said.

"Many of the reasons that those small-business owners did not either apply or get approved for a PPP loan — I think many of those barriers have been removed," he said.

Questions remain

To be sure, other changes to the PPP program that the Biden administration announced last week do go into effect today, March 1 — some student loan borrowers, legal non-residents and those with certain criminal records are now eligible to apply for forgivable loans.

Still, there are further questions for sole proprietors around the timing of applications, especially for those who already got a loan approved but would get more under the new formula. So far, there isn't a process for amending a dispersed loan, or holding back an application that's currently pending.

"All unknowns right now," said Alex Cohen, CEO of Liberty SBF.

If you're a small business with a story to share about PPP, email Carmen Reinicke at [email protected]

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