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Things are moving quickly during this COVID-19 crisis, and banks are scrambling to put together a system to accommodate the massive demand from small business owners trying to get financial assistance. Some of our clients, like many other SMBs, have either been forced to completely shut down the business, or had to lay off their employees. Payroll is the heaviest burden to SMBs right now. Whether you’re a sole proprietor, or a company with 500 employees, we’ve all felt the pressure. The federal government is stepping up in a big way to help SMBs through the Paycheck Protection Program loan (a.k.a. Coronavirus Stimulus Loan, or PPP Loan).
On March 31 the SBA issues its guidance and sample application for the loan to be used by banks and approved lenders. 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 a Sole Proprietorship, S Corp, C Corp, LLC, or independent contractor. It also includes certain nonprofits, veteran groups and tribal 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. Exactly how an SMB will go about certifying this is still unclear.
How Much Can I Receive?
The amount each business receives is based on its payroll costs, but it can be up to $10 million. The amount you qualify for is based on 2.5 times your average monthly payroll costs. That average is based on your prior 12 months of payroll. Take that average and multiply it by 2.5. So, for example, let’s say your monthly average payroll was $10K, then you would qualify for a $25K PPP loan.
What Can I use The Money on?
Payroll, first and foremost. Payroll for you and your employees, but you can also use the money for rent, mortgage obligations, utilities, and other existing debt obligations.
What’s Included in Monthly Payroll Costs?
It includes salary, wages, commissions, vacation pay, sick pay, medical leave, group health coverage premiums, and state and local taxes assessed on payroll. However, it does NOT include federal payroll taxes. It also doesn’t include payroll costs for those making more than $100K. However, the first $100K is considered, but anything after that is not considered for determining average monthly payroll costs.
What Will The Interest Rate Be?
Half a percent! Yes, the loan is nearly interest-free. 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 be set at 0.5%. Our government is stepping up in a big way to stop banks from over-charging for these loans. This rate could certainly change, but the law states that it cannot exceed 4%.
Do I Have to Put up Collateral?
Absolutely not, not even sign a personal guarantee. This is a great deal.
How Do I Get The Loan Forgiven?
The loan forgiveness provision is absolutely the best part about this program. You are eligible for loan forgiveness for the amounts you spend on certain qualifying expenses over the next eight weeks after receiving the loan. The qualifying expenses of the business over this 8-week period include payroll costs.
However, if the number of full-time employees is reduced over this time period or if your payroll costs are reduced by more than 25%, then the amount of the loan eligible for forgiveness will be reduced.
The bank that 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.
Do I Have to Pay Taxes on The Amount of Debt Forgiven?
Nope. The new law specifically stated that forgiven PPP loans will NOT be considered forgiveness of debt income. This is also very good news!
Do I still Qualify If I Already Have an SBA Loan?
Yes, you can have more than one SBA loan, you just can’t exceed the total SBA loan maximums when the loans are combined.
What About the SBA Economic Injury Disaster Loan (EIDL)?
The SBA Economic Injury Disaster Loan is typically used for natural disasters that have been approved for businesses affected by the Coronavirus pandemic. This is definitely another good loan option, but do keep in mind that though they have low rates, they do NOT offer any form of loan forgiveness. However, they do include a quick $10K grant to affected businesses.
So, What Should You Do Now?
It is absolutely crucial that you apply early. There are 30 million SMBs in the U.S. and only $350 billion allocated to the program. Banks are expecting funds to run out before everyone can receive a loan. My recommendation is to apply through your existing bank.
The program was supposed to be up and running, and ready to receive online applications on April 3rd. As of this writing, most banks were struggling to meet this deadline and they have already begun communicating with their customers that the system won’t be available for a few more days.
You may want to gather your payroll records for the prior 12 months, look at the sample loan application, and be ready to be amongst the first in line to apply. Check with your bank to find out what their process for taking these PPP loan applications will be. Most of the banks will know just as much as you now do, or even less.
This isn’t regular debt, this debt is eligible for forgiveness by the government. It’s debt that will keep your employees on the payroll, and it will help towards ensuring that SMBs and their employees can survive this current crisis financially. No matter what your situation is, you’ll want to take advantage of either loan, or both, but I highly encourage you to act quickly.
Stay positive, encourage each other, stay connected, ask for help. We are available if you need to talk about ideas on how to pivot your business or need digital marketing help.
We’ll get through this.