The Treasury Department on Friday made it slightly easier for small-business owners to avoid having to repay government-backed loans they took out under a program designed to keep them from laying off employees and permanently closing, the New York Times reported. Officials released a term sheet to guide borrowers on how to convert their Paycheck Protection Program loans into grants. The terms appeared to ease a requirement that businesses rehire a certain percentage of their employees in order to obtain forgiveness. But they did not do away with a requirement that many businesses found onerous: At least three-quarters of the money must be spent on payroll expenses and the rest on rent and utility bills. Many small businesses faced a quandary after receiving the loans: Despite having cash, they had to remain closed. There were plenty of expenses the money could go to, such as retooling their interiors to accommodate social distancing or making other, overdue payments. But the law said that they had to spend the money paying employees, even if there was no work for them to do. And when employees turned to state unemployment benefits — with an extra $600 a week injected by the federal government’s $2 trillion CARES Act package — many found it was financially better to be out of work than to return to work. Many small businesses were wondering whether the loans they had gotten would be forgiven after all or — in the worst case — whether the federal authorities would eventually accuse them of fraud. Friday’s guidelines said businesses that had to lay some employees off and were unable to rehire them could still get forgiveness as long as the layoffs occurred early on during the lockdowns. Combined with a safe-harbor provision that frees businesses that took out smaller loans from the worry of an audit, the guidance could solve a significant problem for many owners. Earlier this week, federal officials said they would take business owners at their word for loans under $2 million. Read more.
In related news, lawmakers and government officials are preparing to make significant changes to the Paycheck Protection Program, amid cooling demand for government-backed loans and criticism from business owners who say they can’t tap the funds, the Wall Street Journal reported. The changes are likely to include giving businesses more flexibility to spend the money, according to lawmakers and others following the deliberations. Under the original terms, 75 percent of the funds were required to be spent on employee salaries for the loans to be forgiven. The government also is expected to extend the time to spend the loan money beyond the two months it originally set. Both changes follow complaints from restaurants, hair salons and others who say they can’t hire back staff while they are closed during the coronavirus pandemic and need more money to cover their overhead costs. The steps being considered will mean a shift in the program’s focus — from one that was primarily aimed at keeping employees on the payroll, to also helping to keep small businesses from failing. Change is being driven in part by cooling demand for loans, which business advocates say reflects an inability of companies to use the money. The initial tranche of $350 billion in loans ran out April 16, after about two weeks. But three weeks after the second $310 billion tranche of funding was opened up, about 37 percent of the funds remained available, according to figures on the SBA website. “Liberalizing the rules by lowering the requirement to spend 75% on payroll-related costs and/or extending the time frame that funds can be used is critical for the survival prospects of millions of small businesses, and the ultimate success of this program,” said Ann Marie Mehlum, a former top SBA official and senior adviser at FS Vector, a financial advisory firm. Read more. (Subscription required.)
