A new report from the Consumer Bankers Association dramatically illustrates how many small businesses were impacted by COVID-19 during the latter part of the first quarter of the year. The report found that delinquency and use were emphasized. This was likely due to short-term business closures, especially in the Northeast, although other parts of the country were hit early in the pandemic. Some important findings:
– Delinquencies increased on various types of credit, including commercial card, credit line, open end / standing and maturity. The quarter marked the highest delinquency point since the survey started in Q1 2018.
– Both credit limits and balances have fallen to their lowest point since the survey started, with balances falling at a faster rate than limits. This led to an overall decrease in credit utilization.
– Charges increased for accounts that extend outstanding credit. but dipped for secured loans. Overall, however, write-offs declined.
– Delinquencies and credit utilization increased, likely driven by short-term business closures affecting many industries, especially in the North East region.
– As the coronavirus continues to spread across the country, I suspect these numbers could rise even higher – especially in Q2 and Q3. (To view the full report, click here.)
Fortunately, the government got involved in helping small businesses. According to most accounts, the Paycheck Protection Program (PPP), Congress’ central policy of keeping workers in employment amid widespread business closures due to COVID-19 has been a success. Implemented by the Treasury Department and Small Business Administration (SBA), the most recent data reported shows that the scale of PPP is historic.
Since the program’s launch in April through July 6, nearly 5,500 lenders have provided 4.9 million loans averaging $ 106,000, totaling $ 521 billion in funding for small businesses that might otherwise have failed. According to the SBA, these loans went to businesses and helped maintain more than 51 million jobs across the country. That’s about 84% of the country’s small business payroll.
These data prove that despite the chaotic initial implementation, the PPP did what it was intended to do: it provided liquidity relief to a large number of small businesses very quickly.
What made the credit program so attractive was the forgivable nature of the loans. If small business owners abide by the terms of the PPP, the loans essentially become cash gifts that don’t have to be repaid. If this is true, there was little risk, but quite a significant reward for small business owners. Companies only need to demonstrate that they have used the money for the intended purposes as specified in the PPP guidelines.
A PPP loan is forgiven in full if the borrower can demonstrate that he or she has used 60% or more of the money for wage costs, mortgages or rent and utilities. If the small business owner did not meet these requirements, and therefore the loans cannot be forgiven, and the money must be repaid at an interest rate of 1%. It’s still a deal worth taking. Loans issued before June 5 have a term of 2 years, while loans issued after June 5 have a term of 5 years. Loan payments are deferred for six months. No collateral or personal guarantees are required.
Forgiveness is based on the employer retaining or quickly recruiting employees and maintaining the salary level. Forgiveness will be reduced if the full-time workforce decreases or if salaries and wages decrease. The PPP loan forgiveness form and instructions contain measures to reduce the compliance burden and simplify the process, including:
• Options for borrowers to calculate wage costs using an “alternate covered payroll period” that aligns with borrowers’ regular pay cycles
• Flexibility to include eligible payroll and non-payroll costs paid or incurred in the 24-week period after receiving their PPS loan
• Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm your eligibility for loan forgiveness
• Credit-friendly implementation of legal exemptions from loan waiver reduction based on new hires as of June 30
• Addition of a new exemption from the loan waiver reduction for borrowers who have made a good faith, written offer to re-hire employees, which has been declined.
The lender’s approval of a loan to a small business or non-profit organization does not reflect the SBA’s determination that the borrower is entitled to forgiveness of the loan. All PPP loans are subject to SBA review and all loans in excess of $ 2 million are automatically reviewed. The fact that a borrower has received PPP financing is not a guarantee that the loan will be forgiven.
Because the PPP was administered by federal government agencies, the paperwork is more extensive than for other types of loans. It can be intimidating. To facilitate the process, the American Institute of CPAs (AICPA) and CPA.com have released a free online platform, PPPForgivenessTool.com, driven by Biz2Credit, to help small business owners submit their forms.
The online tool, using advanced Biz2X technology, includes a PPP forgiveness calculator created by the AICPA in May and is available to any company approved for a PPP loan, regardless of the lender or bank they’ve partnered with to receive funding. Borrowers or their CPA advisers can log into the platform to complete the forgiveness application and the tool will automatically produce all government-mandated forms.
PPP applicants will be able to electronically sign the 3508 or 3508 EZ forms, and all required source documents will also be included in a downloadable file that can be provided to their lenders. The platform will likely save hours of manual work for every applicant going through the process.
“Over the past three months, we have been very actively involved in providing resources and tools to support the 44,000 CPA companies in the critical role they have played for the five million companies applying for PPP loans,” said Erik Asgeirsson , president and CEO of CPA.com. “We are now incorporating our PPP calculation and process recommendations into a dynamic PPP forgiveness tool to encourage a simple and effective forgiveness process. Our broader goal with this tool is to also help drive a common approach to this process with the payroll and lender communities. ”
PPP loans have been extended through August 8 in an effort to disburse the remaining $ 130 billion allocated to the program. In addition, future stimulus packages are discussed in Congress. As the virus continues to threaten human lives and the economy, further federal assistance may indeed be needed, especially as the southern and western parts of the country are hard hit by the pandemic.