If you told me in January that by April the government would pass a two trillion-dollar stimulus plan, I would have laughed at you over our coffee meeting. Yet here we are social distancing and sorting through an economic nosedive. Thankfully, Congress passed a rescue package. By now many small businesses are preparing to or have applied for an SBA loan.
In March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed to support small businesses and individuals. The critical portion to familiarize yourself with is the Paycheck Protection Program (PPP).
What is the PPP?
The Paycheck Protection Program is a new loan program under the SBA (Small Business Association). It provides federally guaranteed loans to employers who maintain their payroll during this time. It also helps cover payroll costs for both full-time and independent contractors.
What does this mean for your company?
Use this calculator to determine the loan size your organization is eligible for, and how much forgiveness is possible. Now, this point is critical. The funds must be used for specific purposes:
- Payroll costs, including healthcare (for current employees and those you had to furlough), payroll tax, and state unemployment insurance; all for W2 employees only.
- Interest on debt, mainly mortgages
- Group health insurance premiums
Remember, if you knowingly use the loan to pay for anything not listed above, you may be charged with fraud. Bottom line: get specific rules from your lender. Also, if you don’t use the fund properly, you may not be eligible for loan forgiveness.
Wait. Tell me more about forgiveness.
According to the U.S. Senate Committee on Small Businesses & Entrepreneurship, borrowers receive loan forgiveness for, “up to 8 weeks of payroll based on employee retention and salary levels, no SBA fees, and at least six months of deferral with maximum deferrals of up to a year.”
Use this calculator to determine how much forgiveness your organization may be eligible for. We also strongly recommend contacting a CPA to maximize the forgivable amount. The Department of Treasury and SBA continue to make clarifications on loan forgiveness. It is your job to make sure you know the rules.
Approved? This is what to do next.
After your loan is approved, talk to your lender about the next steps. To earn forgiveness, you must diligently document how you spend the money. The Senate says you must provide this paperwork to prove compliance:
- “Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings.
- Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities.
- Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.”
If you have not applied for a loan yet, there is still time. But not every business can participate. Here are a few more critical elements to the program.
What types of businesses are eligible?
Companies with fewer than 500 employees can apply for a loan. The business must have been operating on February 15, 2020.
What about individuals?
The loan also applies to sole proprietors, independent contractors, and people who are self-employed.
Who is not eligible for a loan?
Some organizations and individuals cannot participate. They include:
- Businesses with 500 or more employees
- Financial services businesses and lenders
- Businesses that have defaulted other federal loans
- Businesses whose owners and/or partial owners are currently indicted or arraigned, are on parole for a criminal charge, or were convicted of a felony within the last five years
- Businesses dealing in cannabis or are otherwise illegal at the federal level
- Businesses that engage in a pyramid scheme
- Startups backed by venture capital firms with 50% or more ownership may require counting both employees and those of the VC firm and its other portfolio companies
- Household employers (e.g., nannies or housekeepers)
Is there a limit on allowable funds to borrow?
Yes. The maximum a small business can borrow must be the lesser between 2.5 times the average monthly payroll costs or $10 million.
Read this guide and checklist from the U.S. Chamber of Commerce. If you decide to apply for the SBA loan program, at a minimum, use the SBA calculator to determine how much loan forgiveness you may receive. Consider contacting an attorney or accountant to plan for the influx of funding. The SBA loan is a life preserver to many organizations, but it is imperative that each business uses the funds responsibly to avoid penalty and maximize the opportunity for forgiveness.
We want to help make your new normal easier to manage. Read our series on working in the time of the coronavirus on our blog.