Flexibility Act Loosens PPP Rules
The U.S. Capitol Building in Washington, D.C.
So far, four legislative packages to help get America through the disastrous effects of the COVID-19 virus have focused on the coordination between hospitals and states around treatment and response efforts.
There are endless updates and proposals, and for franchisees, it’s a confusing mess of big numbers and fine print. In this story, we summarize the legislative actions and how they affect the franchise industry.
Bookmark this page; will be updated throughout the coming weeks and months as legislative action continues with the most recent legislative action first.
Paycheck Protection Program Flexibility Act Signed - June 5
An update to the Paycheck Protection Program has been signed into law and makes the program a little easier to understand and easier for small business owners to qualify for forgiveness.
Under the Paycheck Protection Program Flexibility Act, there were five key changes to the program that has seen a handful of helpful updates but was still “ham-fisted” in implementation. According to the International Franchise Association and the Coalition of Franchise Associations, organizations that lobby across the franchisor and franchisee spectrum, say these are welcome changes after an intense lobbying effort.
“It’s been pretty stressful, in terms of advocacy, it’s like the Superbowl of lobbying,” said Matt Haller, IFA's senior VP of public affairs and government relations. “Fortunately, we’re, getting a lot of benefits out of the CARES Act.”
Misty Chally, executive director of the CFA, echoed that sentiment, and said this was an important update.
“When this initial PPP passed, it was a little while ago and the situation has evolved,” said Chally. “We needed to amend it to reflect the current situation.”
She said her and the IFA were successful in lobbying, and pushing a few stubborn senators to speed things up. The new updates are as follows:
1) Spending Rules Loosened
The biggest change, and a welcome one for many small business owners, is reducing the requirement to spend 75 percent of the loan on payroll expenses. The original spirit of the rule was to keep people employed, but as the pandemic spiraled and scores of people were laid off anyway, it started making less sense to operators seeking the loans or hoping for forgiveness.
Under the new rule, 60 percent of the loan must be spent on payroll, opening up more money to pay for other bills like rent, utilities etc.
2) Repayment Extended
The second key change is a major extension to the spending period. As we examined in prior coverage, the original legislation required operators to spend the loan in eight weeks, but based employee salary levels on 12 weeks of pay. It just didn’t make much sense. The new act pushes the period to 24 weeks to spend the funds, giving recipients a lot more time and more flexibility.
“That’s a big one,” said Chally. “Having more time to send the money, not having to spend it in those eight weeks and extending the repayment period.”
3) Repayment Extended
Under the original bill, businesses that didn’t qualify for forgiveness had to repay the loan in two years. That had some owners returning the money to avoid an aggressive repayment schedule on top of a brutal business hit and the lack of clarity beyond COVID-19.
Now, those who do not qualify for forgiveness under the expanded rules have five years to pay back the loan. At about 1 percent interest rate, with six months deferred and the extended payback period, it’s now a pretty attractive form of financing.
4) Payroll Tax Deferment Restored
In another quality of life update, the new act states that borrowers can defer their 2020 Social Security payroll tax whether it’s forgiven or not. Previously, borrowers who qualified for forgiveness still had to pay the taxes. This change puts PPP in line with the rest of the CARES Act allowances for non-PPP businesses. Still, the tax cannot be paid from PPP funds as a qualified payroll expense.
5) FTE Match Removed
Under the original rules, to qualify for forgiveness borrowers had to match the average number of full-time equivalent, or FTE, employees as pre-COVID-19. Many operators have stated difficulty getting people back to the same hours or back at all given the unemployment bonus making staying home more attractive.
The flexibility act pushes the deadline to rehire back to December 31 from June 30 and also eliminates the forgiveness test under a few scenarios. If PPP borrowers are either unable to rehire employees or find a similarly qualified replacement, they are not faulted. And if the borrower is unable to return to the same level of business as because of municipal or federal health rules.
And there have been other wins outside the CARES Act and the PPP, with Haller noting the major shift in the Financial Accounting Standards Board guidance around revenue recognition.
“Something that got a little bit less attention is just the general acknowledgement by the FASB is the delay of the revenue recognition rules. I wouldn’t say that’s only a result of COVID, but an acknowledgement by that board to take a wait and see approach to better asses franchise fees and what that does to opening costs,” said Haller.
He said there is more to come. The IFA is working to separate the new 7(a) lending rules from the PPP funding. The 7(a) guidelines allow borrowers who don’t qualify for typical disaster loans to access emergency loans.
“The enhanced and optimized 7(a) program during the last recovery period in 2009 and 2010 was one of the most important things that Congress did. We really see the 7(a) program for franchisees and franchisors to get working capital with really high or fully backed government guaranteed loans or little or no borrowing loans beyond the PPP. That program being fully funded or enhanced would be really helpful but the challenge is when Congress tied the PPP to the 7(a), so we need to delink that,” said Haller.
So work on the hill continues and certainly will. But the new flexibility is certainly a nice morale boost going into the weekend for borrowers or potential borrowers trying to figure out their financial strategy.
Industry advice: Reexamine the PPP loans with the new guidance. And get involved with the process.
“I hope this helps franchisees and franchisors understand that their voices really do make a difference. I don’t know how many times you see on TV that their representatives are supportive of small business. They are small business owners and they are important in their community, and they need to communicate with their representatives,” said Chally.
Fed Expands Loan Program - April 30
In a move to help to the business community struggling with the COVID-19 pandemic, the Federal Reserve expanded a rescue loan program even further.
The Fed announced this week that it would open up its Main Street Lending Program to larger businesses and businesses with higher levels of debt than the initial plan.
Under the original plan, businesses could source new loans or expand loans with a minimum of $1 million as long as they had maximum debt levels of four times earnings. The minimum was lowered to $500,000. For new loans, the four times earnings rule still applies; businesses expanding loans can now borrow if they have up to six times earnings. Larger businesses with up to 15,000 employees and $5 billion in sales can also utilize the program, an upward revision from 10,000 employees and $2.5 billion in sales. All loans come with a four-year repayment schedule, with the first year deferred.
The Fed broke the program down in a chart, visible below.
Another key change for the entire program is that businesses getting Paycheck Protection Program loans via the treasury can also access these loans. That’s an essential tweak for companies that raced to get the forgivable PPP loans but either need more capital to keep going through COVID-19 or the many companies that received much less than they expected via the PPP.
The initial two loan options went into effect April 30. The start date for the newly expanded portion for large businesses has not yet been announced. In all, the Fed program puts $600 billion to work and will buy 85 percent of eligible loans from bank originators at a much higher rate than other COVID-19 rescue loans; that hopefully means more banks and loan originators will be eager to tap into this program. A common complaint among owners seeking PPP loans was the funds were diverted only to businesses with a strong bank relationship already, leaving out the smallest and most vulnerable businesses.
Industry Advice: If PPP didn’t work, Main Street might.
CARES Act Expansion - April 24
Another round of COVID-19 relief has been signed into law by President Donald Trump.
Under the new measure, there is futher funding for the Paycheck Protection Program (PPP) and more money to help with the COVID-19 response. It brings the overall economic stimulus surrounding the pandemic to nearly $3 trillion—by far the largest stimulus in history.
The new measure will get a further $75 billion to hospitals hit hard by the lack of elective surgeries, an influx of COVID-19 patients and expanded operations during the pandemic. A further $25 billion goes to expanding testing for the virus, a key step to the recovery so the country can get a full view of how many people have contracted the virus. Right now, the majority of testing covers only people who are critically ill.
The big news for business owners is additional funding for the PPP. Under the measure, there will be a $310 billion funding allotment for the program, bringing the total to $660 billion. The funds in the initial allotment went fast, and controversy surrounded some large, well-capitalized companies securing massive loans—though some returned the money.
To assuage those concerns, the new measure also includes $60 billion that is set aside for businesses that do not have a strong banking relationship. Another $60 billion is going directly to the Small Business Administration’s disaster relief fund.
The measure comes as the United States recorded nearly 50,000 COVID-19 deaths and more than 860,000 total cases. It also came as a record 26 million people applied for unemployment benefits in the last five weeks. With each of those weeks, jobless claims far, far outweighed the historic high-water mark of just over 200,000 recorded in 1981. The weekly rate has been more than 3 million since March 21, cresting at 6.8 million on March 28.
Industry Advice: Stay in the queue for PPP loans.
CARES Act - March 27
The massive $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act is now the largest stimulus package in history. It was called a “wartime level of investment” by Senator Mitch McConnel and has been signed by President Donald Trump. The third measure to address the widespread effects of the COVID-19 virus includes language to expand prevention and treatment efforts and bypasses some FDA approval processes. It also suspends payments for federal student loans. This is the first bill with real help for business owners, along with direct cash payments to American consumers. It also affirms the IRS guidance to push tax deadlines back to October 15.
The franchise industry should especially watch for the following provisions:
Cash Infusions for Americans
Every American with a tax ID will receive cash infusions. Anyone making up to $75,000 per year will receive $1,200 in payments. The payment will scale down from there, getting smaller payments to anyone making between $75,000 and $99,000—those making more will not receive payments. Families will also get $500 per child in the household.
Fund for Businesses Large and Small
The final deal creates a $500 billion fund made up of $425 billion for Federal Reserve to dole out as loans and $75 billion for industry-specific loans like the airline and cargo transporting industries.
After complaints from Democrats, the fund will now have greater oversight from an inspector general, a Congressional panel and as a rule, no funds will go to companies owned by President Donald Trump or any senior political leadership. The final bill also includes a provision that any companies accepting money must also agree to halt stock buybacks for the duration of relief and an additional year afterward. The widespread use of stock buybacks meant less cash on hand for companies to weather disruptions like the COVID-19 pandemic.
Under the new business loan rules around express loans, business can borrow up to $1 million, up significantly from the prior $350,000 outlined in the SBA guidelines. That rule would last through January 1, 2021. It does maintain the rule in original bills that limits loan size to 2.5 times payroll.
The SBA also has 30 days after the passage of this bill to fill in details of the disaster relief loan program.
Forgivable Loans to Keep Employees on Payroll
One major concern is that by furloughing or laying off workers, they just won’t come back. It took a decade to return to post-crisis employment saturation after the Great Recession; this bill seeks to nip that in the bud by keeping people paid.
The final bill includes $350 billion for small businesses, including franchised businesses, to keep people on payroll through the crisis in what’s called the paycheck protection program. Owners who keep workers can also qualify for cash-flow assistance in the form of federal loans. Such loans would be forgiven if the employer keeps people on the payroll.
One minor caveat, the payroll costs are capped at $33,333 for the period under the bill; which runs March 1 though June 30—essentially reiterating the cap for help is for earners who make less than $100,000 annually.
Unemployment Benefit Expansion
The bill extends unemployment insurance benefits by 13 weeks, including a four-month enhancement of $600. Unlike prior bills, the expansion allows unemployed workers to keep their entire salaries while unemployed.
Robert Cresani, the IFA president and CEO, called on legislators to pass the bill as soon as possible to save the franchise industry from greater damage.
“Without this significant and immediate action in the form of direct federal aid, zero interest loan guarantees and tax credits to keep employees on payrolls, we estimate that 30,000 franchise owners may permanently close their businesses in the next 45 days, causing approximately 330,000 job losses in franchise community alone," said Cresanti in a statement. "In the next four months, we estimate that more than four million franchise workers will be without work, whether through layoffs or business closures."
While $2.2 trillion is an astounding number, one of the key leaders at the Fed through the Great Recession, Kashkari said their response proved too “timid.”
“We were always slow, and we were timid. We were too small. And the reason is we didn't know how bad the crisis was going to get, and we didn't want to overreact. Well, that was wrong. We kept thinking, well, maybe we've done enough. And then we'd realize, oh, my gosh, we have not done enough,” said Kashkari in an interview on NPR’s Planet Money. “One of my takeaways is when the downside scenario is that devastating, you should overreact. The right policy response is to overreact to try to avoid that terrible downside scenario.”
Cresanti echoed that sentiment.
“While the cost of this legislation is high, the cost of inaction will be higher. It is likely that additional legislation will be needed in the coming weeks to support America’s 733,000 franchise businesses and their nearly 8 million workers," said Cresanti. "Our economy depends on it."
Industry Advice: Understand your business options in the act.
IRS Extends Filing Deadline – March 21
The IRS officially extended all tax filing deadlines to July 15, including individuals, families and corporations.
The Families First Coronavirus Aid Package – March 13
The second federal action, HR 6201, pushed money toward SNAP benefits and programs for low-income and elderly Americans. It also expands paid leave benefits for anyone who is required to take 14 days or more of leave from work because of qualifying COVID-19 reasons. It covers two-thirds of wages up to $4,000 per month for leave that occurs from January 2020 to January 2021. It also expands funds for unemployment processing and payment for states.
Outcome for businesses: In Division F of the act, the legislation expands unemployment paid sick days, requiring all employers to allow employees to accrue seven days of paid sick leave and to provide an additional 14 days immediately in the event of a public health emergency, including COVID-19. It also insures that paid sick leave covers parents when a child’s school is closed or if they or a family member is quarantined. This applies to any worker: full time, part time, interns, union employees, new hires, etc. Only independent contractors are not eligible for this expanded sick leave.
Small businesses (fewer than 50 employees) will be reimbursed under this act for the costs of providing the 14 days of additional paid sick leave used by employees during the emergency after April 2, 2020, and before December 31, 2020.
Employers will get a tax credit as reimbursement against Social Security taxes. If the credit exceeds the taxes, they will be issued a refund of the difference. The Department of Treasury has also authorized the IRS to provide loan assistance to businesses that cannot pay out sick leave.
Industry Advice: In an advisory note from law firm Best & Flanagan, the firm advised business owners to contact their payroll provider to systematize tracking of employee usage of paid sick leave related to COVID-19 now to ensure the maximum reimbursement.
Coronavirus Preparedness and Response Supplemental Appropriations Act – March 6
The first federal action was HR 6074. In short, the appropriations bill outlaid $8.3 billion to fund all manner of health testing, vaccine work and state-level responses to the pandemic.
Outcome for businesses: This act provided appropriations to the Small Business Association Disaster Loans Program Account. This allows small businesses to apply for low interest loans to help with any business expenses or hardship caused by the COVID-19 pandemic.
Small business owners can apply for loans up to $2 million to “alleviate economic injury caused by the disaster,” including workforce capacity, capital access, supply chain issues, insurance or clean-up costs. The interest rate for such loans cannot crest 3.75 percent.
Industry Advice: Earmark any costs or damages associated with COVID-19.
There are numerous state actions, funds, relief efforts and rules around COVID-19. The national Conference of State Legislatures has a running list of such actions for each state and fiscal responses.