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Policy Recommendations for a More Efficient and Effective U.S. Paycheck Protection Program

From entertainment venues to restaurants, from Main Street shops to auto garages, from farms to family-owned factories, small businesses drive the U.S. economy, lead on innovation, and foster competition. They are the backbone of our communities, support businesses of all sizes, and make up an essential part of the technology industry ecosystem. We all rely on their success.

That’s why the U.S. Congress created the Paycheck Protection Program (PPP) to keep Americans on the payroll of small businesses across the country. The U.S. Paycheck Protection Program is a critical lifeline for the continued existence of these businesses and more than 1.6 million were approved for this support before the fund guarantees tapped out.

While the program already exhausted its authorization of nearly $350 billion, ongoing negotiations to replenish the program create an opportunity for policymakers to make the PPP more efficient and effective for the hundreds of thousands of businesses that already applied for assistance and for those that will apply when funds are once again available. We urge the U.S. Congress and the administration to consider the following programmatic changes:

  • Clarify existing definitions and broaden the allowable expenses under the loan forgiveness provisions. The revenue many of these small businesses lost over the last several weeks may in fact be lost forever. For those businesses, loan forgiveness means the difference between continued viability or living under the weight of a debt they will never be able to repay. The promise of loan forgiveness may be elusive for a number of these entrepreneurs, however, due to (1) the limited definitions of “payroll costs” and “allowable uses” in Section 1102 of the CARES Act, the legislative text establishing the program, and (2) the U.S. Small Business Administration’s (SBA) rule that 75 percent of the forgiven loan amount must be used for payroll. The U.S. Congress should consider expanding the term “payroll costs” to include not just wages but also payroll services that deliver wages to employees (i.e., payroll software or service providers), or the SBA should lower the threshold for required payroll expenses to accommodate businesses that must utilize such services to effectuate payroll. Additionally, while meeting payroll directly benefits employees, a business must be able to continue operation for employees to have a job to return to when operations return to normal. Congress should consider clarifying that expenses for core business needs, such as business software or cloud services, are permissible expenses for loan forgiveness calculation.
  • Clarify affiliation rules to avoid technical disqualification of certain small business. Startups are small businesses, and they often receive critical seed money or equity investment from larger firms. As a result of the affiliation rules, the headcount of these small businesses is bloated by the headcount of the larger firms, disqualifying them from eligibility for the PPP. These small businesses drive technological research, innovation, and, ultimately, competition. While venture capital is critical to the viability of a startup, it is not an endless spigot, and these companies are generally pre-revenue. As a result, startups and their employees face the same existential threats created by the crisis as small businesses across all industries. Not only will employees be without jobs should these companies fold, but the U.S. may never realize the innovation potential and economic promise of these startups.
  • Enable non-traditional lenders to swiftly service more small businesses by fostering the flow of capital. Many small businesses have only a few weeks of liquidity and need imminent cash infusion to retain their employees and maintain their business operations. As of April 13, over 70 percent of the loans approved under the PPP were for less than $150,000. These small loans are typically not serviced by the larger banks, which is one reason former U.S. Small Business Administrator Karen Mills recently said fintech companies will be instrumental in administering this program. Utilizing artificial intelligence, big data, and important “know your customer” information to protect against fraud, technology companies have deployed sophisticated platforms for aiding small businesses in the identification of benefits, matching them with lenders, and for offering loans directly from their own balance sheets. Further, these nontraditional lenders, who primarily work with existing customers, can process loans at a much faster pace. In some cases, the PPP loan proceeds can go from approval to employee disbursement within just 48-72 hours. Key to enabling this innovation and faster processing, however, is ensuring the flow of capital. The Department of the Treasury should move as quickly as possible to clarify the rules around the secondary market for the PPP loans to keep capital flowing freely to those who need it most.

Not only are small businesses a critical component of the technology ecosystem, they are owned by and employ our neighbors, our friends, and our loved ones. Their ability to weather this historic crisis will directly impact the overall well-being of the U.S. economy and communities across the country. It is essential that the U.S. Congress restore this critical program and make it work for years to come.

Public Policy Tags: Coronavirus Response