GOP HEALS Act gives some businesses a second shot at Paycheck Protection Program loans

Cash-strapped entrepreneurs who took a federal Paycheck Protection Program loan and are running out of funding may get a second infusion of liquidity.

The Senate's HEALS Act,  the Republican proposal for another round of coronavirus relief funding, includes a measure that would permit certain small-business owners to borrow from the program a second time.

Sens. Marco Rubio, R-Fla., and Susan Collins, R-Maine, sponsored the measure, which is dubbed the Continuing Small Business Recovery and Paycheck Protection Act.

Since the lending window opened on April 3, businesses have borrowed some $519 billion, accounting for more than 5 million loans, according to July 24 data from the Small Business Administration.

The appeal of the program is that the loans are forgivable if borrowers spend at least 60% of the proceeds on payroll costs. Those who fall short may be eligible for partial forgiveness.

With Covid-19 cases on the rise and many small businesses facing the prospect of additional closures after they've run out of their first round of PPP funding, a second bite of the apple could keep them afloat.

"There are more people in that category: You took the PPP loan and you ran out of money," said Ed Zollars, CPA at Thomas Zollars & Lynch in Phoenix. "You should be out of money by now, unless you got in late."

New conditions 

Sen. Marco Rubio (R-FL) talks to reporters as he leaves a briefing for Senators by officials from the Department of Homeland Security, Federal Bureau of Investigations, Director of National Intelligence, and the National Security Agency on the state of election security on Capitol Hill on March 10, 2020 in Washington, DC.

Samuel Corum | Getty Images

The Rubio-Collins measure sets conditions for applicants.

For instance, they can't have more than 300 employees and they must demonstrate at least a 50% reduction in gross receipts in the first or second quarter of this year compared to last year.

Generally, borrowers may receive a loan of up to 2.5 times their average total monthly payroll costs in the year prior to the loan, up to $2 million.

Those who take a second draw of PPP funds are also eligible for loan forgiveness for expenditures incurred before Jan. 1, 2021. Borrowers must still commit at least 60% of the money toward payroll expenses in order to get full forgiveness.

The proposed legislation also earmarks second-round funding for the smallest businesses: $25 billion for firms with no more than 10 employees.

These two changes attempt to keep funding away from firms that don't otherwise fit the bill, as well as scammers. Whether it's enough is another story.

"This thing is rich for fraud if all you have to do is show a 50% loss of revenue and you're eligible for more PPP," said Adam Markowitz, enrolled agent at Howard L Markowitz PA CPA in Leesburg, Florida. "It's going to end up in the hands of the wrong people again."

Consider that this week, the Justice Department announced fraud charges against a Florida man who allegedly misappropriated close to $4 million in PPP funds and used $318,000 of the proceeds to buy a Lamborghini.

The Office of the Inspector General also warned of "serious concerns of potential fraud" in another coronavirus lending program, the Economic Injury Disaster Loan. 

Nine financial institutions reported a combined total of $187.3 million in suspected fraudulent transactions, the Inspector General said.

Loans for businesses in distressed areas

Sens. Rubio and Collins also proposed new terms for the SBA's primary loan program for small businesses to make funding available to firms in distressed areas.

Businesses located in low-income census tracts, as well as seasonal businesses, may be eligible to borrow up to two times their annual revenues, up to a maximum of $10 million, according to the proposal.

The loans would have a maturity of up to 20 years at an interest rate of 1%. Borrowers would be able to defer payments of interest and principal for up to two years, and the administrator of the SBA would have the authority to grant two more years of deferment.

Borrowers would have until Dec. 31 to apply, according to the proposal.

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"I think for small businesses, an ability to access capital where they would normally have a hard time accessing it, I imagine many would see this as attractive," said David Herzig, principal in private client services at Ernst & Young.

However, it may fall short for entrepreneurs who are reluctant to take on more debt while the economy remains uncertain.

"Even with the loan, if you know you won't survive, the last thing you want is this debt hanging around," said Zollars. "I won't be surprised if it doesn't get used much until people have certainty going forward on how Covid-19 plays out."

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