The number-one pressure on small-business owners right now is payroll. Whether you’re a sole proprietor one-person-show or a company with 500 employees, you’ve certainly felt the pressure. Maybe you’ve already stopped paying yourself, have laid off workers or cut hours. Well, you can thank your federal government for the best aid program recently offered for small business, the Paycheck Protection Program loan (aka Coronavirus Stimulus Loan, or PPP Loan).
The PPP Loan was signed into law on March 27, 2020. On March 31, the SBA issued its guidance and sample application for the loan to be used by banks. Here’s a summary of the details you need to know.
A small business with fewer than 500 employees that was in business on or before February 15, 2020. This can be an S Corp, C corp, LLC, sole proprietorship or independent contractor. It also includes certain nonprofits, tribal groups and veteran groups. When obtaining the PPP loan, you need to certify that your business has been economically affected or that economic uncertainty make the loan necessary.
How Much Can I Get?
Up to $10 million dollars. But the amount each business gets is based on its payroll costs. The amount you qualify for is based on 2.5 times your average monthly payroll costs. Your monthly average payroll is calculated based on your prior 12 months of payroll costs. You take that average monthly payroll number and multiply it by 2.5. For example, if your monthly average payroll was $20,000, then you would qualify for a $50,000 PPP Loan.
What’s Included in Monthly Payroll Costs?
It includes salary, wages, commissions, payment of vacation, sick, parental/family/medical leave, payment of retirement contributions, group health coverage premiums and state and local taxes assessed on payroll. It doesn’t include federal payroll taxes though. It also doesn’t include payroll costs for those making more than $100,000. Their first $100,000 is considered, but anything in excess is not considered for determining average monthly payroll costs.
What Can I Use This Money For?
First and foremost, payroll for you and your employees, but you can also use the money for rent, mortgage obligations, utilities and other debt obligations you may have.
What Is the Interest Rate?
Half a percent. that’s right. It’s nearly an interest-free loan. The bill allowed for a maximum rate of 4 percent, but the guidance issued by the U.S. Treasury is stating that the maximum rate would be 0.5 percent. Your government is stepping up as they’re backstopping these loans for the banks. Now, this rate could certainly change, but under the law it cannot exceed 4 percent.
When Do I Have to Pay It Back?
The loan term specified by the treasury guidance is two years. Loan payments are deferred for the first six months. There is no pre-payment penalty though, so you can repay or have the loan forgiven earlier.
Do I Have to Put Up Collateral or Sign a Personal Guarantee?
Nope. I told you this was a good deal, right?
How Do I Get This Loan Forgiven?
This is the critical question. The loan forgiveness provision is the best part. You are eligible for loan forgiveness for the amounts you spend over the next eight weeks after receiving the loan on certain qualifying expenses. The qualifying expenses of the business over the eight-week period includes payroll costs, rent, interest on mortgage debt and utilities.
If the number of full-time employees is reduced over this time period or if your payroll costs are reduced 25 percernt or more, then the amount of the loan eligible for forgiveness will be reduced.
The bank who granted the loan is who will determine the loan forgiveness amount based on the criteria above. The business will request forgiveness of the loan with evidence to the bank, and the bank will have 60 days to approve or deny the forgiveness.
Will the Business Get Forgiveness of Debt Income Via a 1099-C?
Now, this is a question only your tax lawyer or account would ask. In other words, will I have to pay taxes on the amount of debt forgiven on the loan? Nope. The new law specifically stated that forgiven PPP Loans will not be considered forgiveness of debt income.
Do I Still Qualify If I Already Have an SBA Loan?
You can have more than one SBA loan. You just can’t exceed the total SBA loan maximums when all loans are combined.
What About the SBA Economic Injury Disaster Loans (EIDL)?
This is another good loan option. It is up to two million dollars and is the loan typically used for natural disasters that has been approved for businesses effected by the coronavirus pandemic. If you have a low payroll or need funds in excess of the amounts you qualify for under PPP, consider the EIDL loans, as they have low rates, longer repayment terms and can be used for more purposes than the PPP loans. However, they do not offer any form of loan forgiveness. But they do include a quick $10,000 grant to effected businesses that does no need to be repaid.
So, let’s run a quick scenario on the facts above for a PPP Loan. Let’s say your total “payroll costs” over the prior 12-month period is $240,000. As a result, your monthly average payroll is $20,000. We then multiply $20,000 by 2.5 and get the maximum loan amount of $50,000.
Let’s further assume that over the eight-week period after you receive the loan that you use $40,000 for payroll costs, $9,000 for rent and $4,000 on utilities. You would then have totally qualifying expenses for forgiveness of $53,000. Since you have qualifying expenses in excess of the loan amount, you would be eligible for forgiveness of the entire loan. Not bad, huh? Not bad at all. Finally, we have a stimulus bill that small businesses can be excited about.
So, What Should You Do Now?
Jonathan Morris, President and CEO of Titan Bank, an SBA Preferred Lending Partner based in Texas recommends that, “It is important that you apply early on. There are 30 million small businesses in the U.S. and $350 billion allocated to the program. We expect funds may run out before everyone can receive a loan.. I’d suggest only applying to FDIC-insured bank for PPP loans. Many non-banks are taking applications, but in almost all cases they are simply trying to broker this information to banks in return for a fee.”
What I’d suggest is that you gather your payroll records for the prior 12 months, check the sample loan app linked above and be ready to be amongst the first in line to get a PPP Loan. And by getting in line, we presume this will be with an application completed online, as most banks have limited in-branch capability right now. I’d recommend working with your current business bankers, if you have one, as they will have your business bank accounts and an established relationship. I have already seen notices from banks with increased questions and demand on these loans saying they are only working with existing customers first.
If you don’t have a good business-banking relationship, consider small community banks who tend to specialize in SBA loans and are more eager to get local businesses as customers. Open a business checking and savings account there to show them you want to be a customer for the long haul. And finally, consider banks who are SBA Preferred Lending Partners, as they’ll be familiar with navigating the new SBA rules. Not all banks provide or have SBA loan expertise and the ones who do can usually move faster.
Many business owners have learned the hard lessons of carrying too much debt. However, this isn’t just any debt. This is debt eligible for forgiveness by the government. It’s debt that will keep your employees on payroll, and it’s an effort by our federal government to ensure that small businesses and their employees can survive the coronavirus financially. So, step up and take advantage of this program while it’s there. We don’t know how long the coronavirus will impact our economy, small business and entrepreneurship, but what we can do is work hard, work smart and take advantage of programs like this that can give us all a better chance at bouncing back and staying open for business.