Danielle O’Connor’s Paycheck Protection Program loan did its job.
The co-owner of Shuffle in Tampa Heights had to lay off all but herself and two other employees — her co-owner and their chef — during the coronavirus pandemic. But the federally backed loan in May, worth $52,000, helped the bar and shuffleboard venue stay afloat and rehire workers. Now it’s almost back to full staff, even if the business isn’t what it once was.
Seven months later, the loan money is gone. O’Connor could go ahead and apply for federal forgiveness. But on the advice of her lender, she’s held off. The government’s forgiveness rules are on the verge of changing.
“I don’t think there’s any way they could say it’s not forgiven to us,” she said. “But if there’s some deadline, and we miss it, then it’s all over. I can’t imagine how many businesses are in that position, who don’t even know what they’re doing with it at all, not having any advice from anyone.”
Congress this week reached a tentative deal on a new stimulus package that extends the emergency loan program, clarifying some of its rules while expanding expenses that can be forgiven. If President Trump signs it, the bill would allocate another $284 billion in loan money, and allow some of the hardest-hit small businesses to apply for a second loan.
The new bill also vastly simplifies the forgiveness process for businesses like Shuffle that originally received less than $150,000, giving them clarity on an issue that’s been hanging over their heads for weeks: How and when to seek relief on loans that helped save their livelihoods.
“That was such a big push to hit that number, because it just simplifies it for the banks, for the clients, for everybody,” said Chris Stewart, the Tampa Bay market president for Centennial Bank. “This new piece of legislation will speed up this new process for those that were waiting on the sidelines.”
Even so, the process of getting old loans forgiven — and potentially processing millions more new loans — likely will be a monumental challenge for both lenders and borrowers in the new year.
“A lot of people are bracing for what’s going to come in the next two months, which is an avalanche of forgiveness applications, and how fast can they get to them,” said Don Weinbren, an attorney with Trenam Law in Tampa, who has worked on the borrower side of Paycheck Protection Program loans. “From a borrower standpoint, that’s going to be a big issue.”
To understand why the forgiveness process has been so fraught with uncertainty, it’s helpful to go back to March.
The Paycheck Protection Program was designed to get lots of money to lots of businesses very quickly. The distribution mechanism — banks with existing small business clients — was already in place. The government paid banks a flat fee to swiftly process applications without performing their normal, rigorous background and credit checks. If lenders and borrowers followed the rules about spending, the government would back the loans in full, and forgiveness was all but guaranteed.
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It rolled out so quickly that once it got going, kinks started showing. The Small Business Administration regularly tweaked rules and deadlines, expanded explanations and offered guidance on complications that arose along the way, such as for companies that were sold or went bankrupt.
“The people writing those things are not borrowers and not lenders,” Weinbren said. “They’re government bureaucrats. They don’t know what they’re doing. I’m not blaming them for it. That’s the nature of the beast.
“You’re trying to put out a program that’s designed to provide economic stimulus, but you don’t really know what you’re doing. So you make a lot of mistakes. And they really did. That’s why we have 20 or 30 ‘interim final rules,’ because they had to keep correcting themselves.”
Banks gave applicants the same advice: Follow the guidance on your application. Keep meticulous records. Open a separate account for the loan money so you don’t mix up how it’s spent. Give back money you don’t need. All of it was designed to ease the eventual forgiveness process.
That process won’t be equal for all borrowers, though.
Start with the deadline. Depending on when a company received a loan, it was required to spend its funds over a period of either eight weeks or 24 weeks, after which it has up to 10 additional months to seek forgiveness. Most companies are in that window now, but for those who received loans in late summer, the forgiveness deadline could extend into late 2021. (After that, the loan carries 1 percent interest and matures in two to five years.)
In October, the Small Business Administration informed businesses that got at least $2 million that they should start compiling records for an audit. In Florida, nearly 1,300 companies received that much. The Tampa Bay Times and its related companies received an $8.5 million loan in April.
Around the same time, the government simplified its rules for forgiving loans under $50,000, which in Florida accounted for more than 73 percent of all loans.
“There’s no calculations involved,” said Heidi A’Hara, a tax manager with Spoor Bunch Franz in St. Petersburg. “They basically just have to sign off on a bunch of stuff that happened and affirm to it and send that in.”
Under the new bill, that process would also apply to loans between $50,000 and $150,000, another 16.5 percent of Florida loans.
“You think about the savings on resources, on the business side of it, and it’s just a win for everybody,” Stewart said. “If it’s just a process where we attest that they used the money appropriately, and it’s forgiven, boy, that will really streamline things.”
Some banks decided they didn’t want responsibility for the loans, which are federally backed but carry low-interest rates. Some sold the loans to secondary lenders, partially for the bonus revenue, and partially to avoid being party to the complicated forgiveness process.
Centennial Bank did not sell its loans, Stewart said, though he added: “You don’t really want a loan on the books at 1 percent.”
Centennial has been processing forgiveness applications for a few weeks, and some loans have already been forgiven. If the new relief bill becomes law, it could spur a lot more businesses to push their applications through.
“We’ll see a bump,” Stewart said. “But I don’t think it’ll be anything that’s going to set any of the banks sideways. We were working 24/7 on the first round, when we were getting loans approved for these people. That hasn’t happened on the forgiveness side.”
What the government’s auditing process will look like is still anyone’s guess. More than 29,000 businesses were approved for at least $2 million, the threshold for an automatic audit. That amounts to less than 1 percent of all Paycheck Protection Program loans. But it’s the companies that received far less, that might struggle with record-keeping and have more to worry about, Weinbren said.
“A lot of small business owners are not good record keepers in the best of times,” he said. “That could come back to haunt them.
“The government’s manpower is so limited that I’m not sure how much auditing they’re truly going to be able to do, when you think about the number of loans that are out there,” he added. “On the other hand, the SBA has had so much focus on it as a result of some of these unanswered questions that, unless the administration says something to them, I would expect they’re going to probably try to audit as many people as they can.”
Throughout the Paycheck Protection Program process, the government left certain questions unanswered that created time-sensitive problems for borrowers.
For example, the original Coronavirus Aid, Relief and Economic Stimulus (CARES) Act did not specify that loans spent on appropriate expenses would be tax-exempt. As a result, the Internal Revenue Service declared those loans taxable income for 2020. The new bill rectifies that issue, easing potential tax headaches for recipients next spring.
“That was never the intention of the loan,” said A’Hara of Spoor Bunch Franz.
The new bill also doesn’t go into great detail on how the forgiveness process could shape businesses seeking a second loan payment.
“You almost wish we could have had all the loans out there and all forgiven before we started this second round, but that’s not life,” Centennial Bank’s Stewart said. “These people need the money.”
For now, entities that received more than $150,000 are prepared for a rigorous forgiveness process.
American Stage Theater Company in St. Petersburg received $314,600. Artistic director Stephanie Gularte said getting that money in the first place was a lot less complex than the process of seeking forgiveness. On the advice of its bank, the company is holding out for more answers.
“There were still too many moving parts to it,” she said. “They got the information for the application so quickly and moved everything so quickly, which was great. What followed after that was so much different messaging of what they want in order to have your loan forgiven — what was counted, what was not counted, what period of time we were talking about.”
Gularte said the company is moving ahead on its own annual audit, so it should be prepared if the government suddenly comes calling.
“We’re not concerned about whether or not we’ll qualify at all,” she said. “Will we get audited? If we do, we’ll be ready for it.”
O’Connor, the owner of Shuffle, isn’t overly worried either, and neither is her lender.
“They just said to save ourselves a headache until we know we have to do it,” she said. “I’m just not going to work extra-hard at getting it done if I don’t have to.”
Until then, she’s keeping an eye on the new stimulus package. As a restaurant, Shuffle might qualify for additional benefits under the second round of Paycheck Protection Program loans.
“We’re definitely going to look for more funding,” she said. “If there’s any available, we’ll take it.”