How Joe Biden’s new PPP rules affect freelancers

On Monday, February 22 the Biden administration announced new rules to make the Paycheck Protection Program more accessible to very small businesses. This came as a surprise to me as well as to the banks tasked with disbursing the PPP funds, but overall the new rules could be very beneficial to freelance business owners, especially those who were previously ineligible for loans based on their net business income.

The biggest change with the new rule is that sole proprietors, independent contractors, and other self-employed individuals may now use their gross business income to calculate their maximum loan amount. Previously the maximum loan was 2.5 times the business’s average monthly net income. That meant you needed to subtract your business expenses from income to get to the correct loan amount, and if your expenses were equal to or greater than your income (i.e. you had a net loss for 2019 or 2020), you were ineligible to receive a loan.

The previous rules negatively impacted a lot of business owners who were just starting out, had high overhead costs, or just practiced good tax planning by maximizing their deductions in order to minimize taxable income. If you were previously ineligible based on your net business income, or if the amount you were eligible for was too small to bother applying for, you may now be able to take advantage of PPP for the first time. The new rules also eliminate exclusionary restrictions on receiving PPP loans for business owners with non-fraud felony convictions and those with student debt delinquency. That’s all good news!

The previous sentence implies the existence of bad news, which I will now deliver. If you’ve already received a PPP loan based on the old funding formula, but would be eligible for a higher loan based on the new one, you’re out of luck for the moment. According to press reports, the SBA won’t let existing borrowers change their loans or reapply based on the new rules.

There’s also the matter of implementing the new rules. Lenders were blindsided by the changes, and as of this morning a scan through the websites of numerous major banks revealed that none of them had incorporated the new rules into their application. The Treasury Department’s PPP site has no mention of the new rules, and while the SBA website mentions the changes, the most recent version of their loan application – updated just last week! – uses the old funding formula. If you go to your bank’s website to try to fill out an application right now, there’s a good chance you won’t receive the loan you would be eligible for based on the new rules.

So what should you do right now? Based on your situation, there are two courses of action I’d recommend:

If you haven’t received a PPP loan yet but may be eligible based on the new rules: Check your bank’s website for information on their PPP application. If they mention the February 22, 2021 announcement and have an application available based on those rules, go for it. If not, wait and keep checking. The SBA also announced a 14-day exclusive application window for business with fewer than 20 employees starting today, February 24, but you still have until March 31 to apply.

If you already received a PPP loan but would be eligible for a bigger loan based on the new rules: There doesn’t appear to be much you can do for now, but keep your eye out for new developments. The SBA and Treasury Department have a track record of announcing one PPP rule only to completely reverse course later on, so it’s reasonable to expect that the situation will be fluid.

I’ll keep this post updated as I hear of new developments.