If you’re a small business owner or independent contractor who’s suffering from the economic impact of the coronavirus/COVID-19 pandemic, the Paycheck Protection Program (PPP) could help save your company and your employees—if you act now and skip common mistakes that could get you rejected. Congress has approved additional funds for the PPP, and the program will be open until March 31, 2021 or until funding runs out. Now Fundbox can connect you and assist you with a streamlined application process through our partnership with Cross River Bank.
The information discussed in this article was collected from a variety of external sources, and to the best of our knowledge, was correct as of December 28, 2020. Some of the PPP details have changed with the restart of the program, and we are awaiting final guidance from the SBA, at which time those details will be updated here. This content is for informational purposes only. Fundbox and its affiliates do not provide financial, legal, or accounting advice. You should consult your own financial, legal, or accounting advisors before engaging in any transaction.
To help explain the PPP loan, here are updated answers to some key questions about the loan program, including necessary application documents, authorized uses for the loan, loan forgiveness, and special circumstances for independent contractors.
How about a quick overview of the PPP program and what it means to small businesses?
As we all know, due to closures and restrictions, the coronavirus has severely impacted the economy. This is especially true for small businesses and their employees, as well as independent contractors.
On March 27, the government passed the Coronavirus Aid, Relief, and Economic Security Act—the CARES Act, and on December 27, 2020, the Covid Relief Bill was added to renew financial assistance programs. These stimulus packages were designed to give financial relief to individuals and businesses that have been negatively affected by the pandemic.
These acts include two loan options for businesses: the Small Business Administration’s (SBA) Paycheck Protection Program (the PPP), and the SBA’s Economic Injury Disaster Loan, or EIDL. This article focuses on just the PPP loan.
What is a PPP loan? What makes it different? Why should I be trying to take out yet another loan at a time like this?
The PPP loan is a new program from the Small Business Administration as of 2020. I think it may be a disservice to call this program a loan. It’s more like a loan that converts to a grant, and it’s for small businesses—typically those with fewer than 500 employees—to help them maintain their employees and their payroll over what is hopefully the most significant business disruption. It’s unique in a few ways.
- First, it’s low interest, just 1 percent.
- Second, as the name implies, it’s intended to support payroll costs (or self-employment income and/or business operating expenses, like rent, mortgage interest, and some operation expenses. Qualified businesses can borrow up to $2 million at a 1% interest rate, calculated based on 2.5 times your average monthly payroll costs, or 3.5 months if you’re in the food service or accommodation industry (businesses with a NAICS code starting with 72).
- Third, and to some this is most important: it’s potentially forgivable, becoming a grant that you might not have to pay back—as long as you use the money from the loan according to the rules of the program.
Who is eligible to apply for a PPP loan, especially if I don’t have employees other than myself?
You are basically eligible to apply for a PPP loan if you are a small business or an independent contractor or other self-employed individual who has been harmed by the pandemic—as long as all of the following are true:
- You have 500 or fewer employees (300 or fewer if applying for a second draw PPP).
- Your tangible net worth is under $15 million and the average net income for full two fiscal years prior to application does not exceed $5 million.
- You are not a publicly traded company.
- You were already in-operation on February 15, 2020.
- Your primary place of residence is the United States. (You have to be a U.S. Citizen).
- Your business has filed a 2019 tax return with the IRS. For independent contractors, this means a Form 1040 Schedule C for 2019 showing self-employment income.
- Furthermore, to qualify, you must certify in good faith that the loan is “necessary to support [your] ongoing operations.” (In other words, PPP loans should be your only way of accessing needed money.)
- If applying for a second draw PPP loan, you must also attest that:
- You have 300 or fewer employees.
- You have already spent all funds you received from your first PPP loan.
- You have experienced a reduction of at least 25% in gross receipts during the first, second, third, or fourth quarter in 2020 relative to the same quarter in 2019.
- Your business has no significant ties to China.
In addition, some new special rules may make you eligible for a PPP loan even if your business previously didn’t qualify for an SBA loan. For example:
- If you are operating as a franchise, the normal affiliation rules do not apply. (You’re counted on the size of the specific business location you own, not on the main franchisor’s numbers.)
- Small businesses that have minority shareholders (like private equity or venture capital) can still qualify if those shareholders relinquish rights.
- If you are in the accommodation and food services sector (NAICS 72), the 500-employee limit is applied on a per physical location basis
- A sole proprietor, independent contractor, or self-employed
- A Tribal business concern
- A 501(c)(3) organization
- A 501(c)(6) organization
- A 501(c)(19) Veterans organization
- A housing cooperative
- Local news media outlets, including newspaper, radio or TV station
Even if I meet all the basic qualifications, are there some things that might still make me ineligible for a PPP loan?
Some “yes” answers (like to questions 1, 2, 5, and 6) on the application form, as well as a few other stipulations may automatically disqualify you. For example, business owners may be ineligible because of delinquent child support obligations, engaging in illegal activities, or they’re in one of the excluded industries, such as: farms or ranches, gambling, businesses of a prurient sexual nature, or lobbyists.
Also, business partners who report self-employment income are not eligible to also apply for a PPP loan as self-employed individuals. A good rule-of-thumb is: no double-dipping.
What’s the first step someone should take to apply?
The SBA does not lend money directly. It only guarantees loans provided through SBA-preferred financial institutions, such as banks, microlenders, and even some fintech companies. In order to get a PPP loan, you have to apply through a financial institution, which then submits the application to the SBA.
So your first step could be to ask the financial institution you do your business banking with if they are an approved PPP lender, and if they are accepting PPP applications. If your business bank is not an approved SBA lender, you need to find a lender now. You can find a state-by-state list of approved lenders on the SBA.gov website.
If you learn that your business’s bank or credit union is not an approved lender—or if you just want to skip this step—Fundbox can connect you to a lender and guide you through the application process.
Once the lender approves your application, it gets sent to the SBA for approval and then it’s time to cross your fingers and hope you get approved before March 31, 2021 or before the next round of funding is exhausted, whichever comes first. If you are lucky enough to get your application approved before the funds run out, you will get notification (usually by email) to sign final agreements, you’re then issued an SBA loan number, and then payment is electronically deposited into your business bank account within 10 days.
What can I do to maximize my chance of getting approved for the loan?
First, it’s important to act fast, since these loans are considered on a first-come-first-served basis. The SBA does not weigh the merits of one business over another. Unfortunately, the program is not set up to even allow for essential services—or businesses helping essential services—to take priority. It’s mostly a matter of timing.
That said, there are some things you can do to help ensure your success. Some businesses fail because they make common mistakes, fail to do their homework, or they’re missing some critical documents.
Here’s a quick rundown of some of the documents you’ll want to have at your fingertips. Please note: every lender is different, and this list may be incomplete and will be updated once we receive final guidance from the SBA and our lending partner.
- Basic information about your business and how to contact you. This includes phone, email, address, and your EIN.
- Average monthly payroll costs. Don’t forget to “show your work” on how you calculated the amount. Payroll costs include salary, benefits like healthcare, and state or local payroll taxes.
- Details of full-time employees and their payroll costs. List your employees and their monthly pay.
- Applicable tax forms (for 2019 and Q1 2020, if available), depending on your corporation type. Such forms may include: Form 940, Form 941, Form 944, and your payroll processor records if you have employees. For sole proprietors and independent contractors, you’ll need your Form 1099s and Form 1040 (at least the completed Schedule C, in case you haven’t filed yet).
- Proof of mortgage or rent, mortgage interest, and utility expenses. If your business owns or works out of a vehicle that you’re making payments on, have these records handy too. Even if they’re not asked for during the application process, such records may help with calculating or proving figures for potential loan forgiveness.
- Articles of Incorporation / Organization. Make sure to list the established date.
- Applicable forms to verify all ownership over 20%. These can include 2019 Schedule K-1s (for S corporations), 2018 Schedule K-1s (if 2019 ownership is different; explain how), 2019 Form 1065 (if incorporated as a partnership), 2019 1040 Tax Return Schedule C (For single-member LLCs), and any Bylaws or Operating Agreement stating partner/owner percentages.
- Copies of a government-issued ID for all 20%+ owners. Also provide each owner’s TIN, EIN, or SSN.
- Email addresses for all 20%+ owners of the business
- Proof of Active and Good Standing status of the business. Obtain your state certifications that you’re Active AND in Good Standing. Note: this may not apply to Sole Proprietorships or General Partnerships, since states don’t usually issue proof of good standing for such entities. However, to prove you were in operation as a sole proprietor or contractor, you’ll need to provide a 2020 invoice, bank statement, or book of record establishing that you were in operation on or around February 15, 2020.
- Download and complete the SBA PPP application, Form 2483, from the SBA website. There is one application form for first-time PPP loans and a different form for second draw PPP loans. Make sure you have the most current version. The older form, dated 03/20, includes now irrelevant questions about citizenship status.
- Electronic funds transfer information. While this isn’t requested on the SBA application. whatever lender who approves you is going to need your bank routing/account numbers so they can get your money to you!
For details on these documents and a complete list of what the SBA and/or your lender will want you to provide, please see our Fundbox blog article on the PPP Application Checklist.
Explain the $100,000 salary cap for employee wages.
This 100K limit is for calculating what loan amount and forgiveness you’re eligible for. For any individual employee who makes an annual salary over $100,000, you can only claim (and receive forgiveness for) a loan amount of what they’d make during 2.5 months (or 3.5 months if in the Food Services or Accommodations industry) as if they only had a salary of $100,000.
So no matter if their actual annual salary is $100,000 or $110,000 or even $150,000 per year, the SBA may only loan and forgive you for up to 2.5 (or 3.5) months of their salary.
What does loan forgiveness mean?
Up to 100% of the PPP loan is forgivable if you follow certain requirements around payroll and employee retention during a loan forgiveness “covered period” of either 8 weeks or 24 weeks. Now all businesses have a choice between using an 8-week or 24-week covered period on which to base the forgiveness calculation (including retroactively for previous PPP loan recipients). This choice depends on how long you wish to pay your employees while being held to the criteria for forgiveness, as explained below).
These forgiveness rules are:
- 60% of the money for payroll costs within a period of 8 weeks or 24 weeks—beginning on the day the PPP funds were deposited in your business bank account. To qualify for full forgiveness, the remaining loan funds (up to 40%) must be spent on eligible non-payroll business costs.
- For both a first-time or second draw PPP, your loan forgiveness can be reduced if—during your 8- or 24-week forgiveness period—you have:
- Reduced the number of employees, or
- Reduced employee salaries by more than 25%
Note: Certain safe harbors that apply that can exempt you from retention and wage related forgiveness penalties, such as in situations when an employee refused to accept an offered position.
- Forgiveness is not automatic. You must apply to your lender for forgiveness. However, if your loan was for less than $150,000, the SBA will provide a simplified one-page application process for loan forgiveness.
- If you also receive or received an EIDL (Economic Injury Disaster Loan) advance from the SBA, your amount of PPP loan forgiveness will not be reduced by the amount of the EIDL advance.
Here’s how it works: If you are an employer and keep your employees for 8 (or 24) weeks from the time your loan is originated and maintain their salaries, the SBA will forgive the portion of the loan you used to cover payroll, rent, mortgage interest, and utilities, as long as at least 60% of the loan funds were spent on payroll, and that the remaining funds were spent on qualified business expenses.
There are a couple caveats, though. For instance, as The Chamber of Commerce’s guide explains, businesses can’t factor in the salaries of employees who live outside the United States when calculating payroll.
Is loan forgiveness automatic? Is the whole loan forgiven?
Loan forgiveness is not automatic, and it may not cover 100% of the loan if you don’t follow the rules. You must apply to your lender for forgiveness. However, the SBA will now provide a simplified one-page forgiveness application if your loan was for less than $150,000.
What “payroll costs” are forgivable?
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
- State and local taxes assessed on compensation
- For a sole proprietor or independent contractor: replacing your compensation (wages, commissions, or net earnings from self-employment, based on your 2019 or 2020 income and capped at $100,000 on an annualized basis for each employee
Remember, the intent of this PPP loan is to keep employees in their jobs and/or to cover actual business operational expenses. For example, if you lay off any of your employees within the eight-week time period or cut wages by more than 25% for individual employees who already earn under $100,000 a year, your loan forgiveness amount may be reduced, according to the SBA’s guidance.
On the other hand, there are other factors that may count towards your payroll expenses. For example, if you increased employee wages or compensation during the eight-week period—by covering employee tips, for example—you may be eligible for additional loan forgiveness.
Another benefit is that you can bring back any employees you’ve already laid off to be eligible for the loan. You won’t be penalized for re-hiring employees or reinstating their original wages as long as you keep them on payroll for the designated 8 or 24 weeks.
What “non-payroll costs” are forgivable?
PPP funds may be forgiven if they make up no more than 40% of your total loan amount and are qualifying expenses related to your business during your chosen covered 8 or 24 week period. Such expenses may include these costs:
- Business mortgage interest payments*
- Interest payments on a loan (such as an auto loan) needed to perform your business*
- Business rent and lease payments*
- Business utility payments*
- Operations expenses for business software and cloud computing services and other human resources and accounting needs that facilitate business operations
- Payments to a supplier for goods that are essential to the operations of the borrower pursuant to a contract or purchase order in effect before the PPP loan is disbursed or with respect to perishable goods
- Worker protection expenditures required to comply with public health guidance related to COVID-19 (such as personal protective equipment, drive-through windows, and sneeze guards
- Property damage costs related to looting due to public disturbances in 2020 that are not covered by insurance or other compensation
*If you are self-employed, you must have claimed a deduction on your 2019 taxes for expenses indicated with an asterisk above to be forgiven.
Business expenses paid for using PPP funds are now tax deductible. This applies to past and future PPP loans.
What if a 1% interest loan sounds like a good deal? What if a business wants to borrow more than they know they can be forgiven for?
You can only borrow funds and use them for authorized purposes. Those purposes are payroll and associated costs, rent/mortgage interest, and utilities. That’s it. If you use the funds for anything else you’re in violation of the loan agreement and the SBA may penalize you.
- Not more than 40% of the loan can be used for non-payroll purposes.
- At least 60% of the loan proceeds have to be used for payroll purposes.
- If PPP funds are used for unauthorized purposes, SBA will direct the borrower to repay those amounts however they do not say how quickly.
- If PPP funds are knowingly used for unauthorized purposes, the borrower may be subject to additional liability such as charges for fraud.
- Also, there is now a need to certify that the loan is “necessary” for business continuity.
And if the borrower can demonstrate that 60% of the proceeds were used for payroll, then the entire loan will be forgiven. What remains unclear—and for which we are awaiting guidance from the SBA—is what sort of documentation will be required to support that 60%, and whether SBA will also ask for verification of how the remainder of the funds were used.
Since the CARES Act covers two types of loans, can I apply for both the PPP loan and an EIDL?
Yes, you’re allowed to apply for both the paycheck protection loan and disaster loan. However, you can’t use both loans for the same purpose. If you received an EIDL between January 31, 2020 and the time when the PPP loans are available, you’re still eligible for a PPP loan as long as you didn’t use your EIDL for payroll costs. Again, no double dipping.
If I don’t have a payroll, how much can I borrow as an independent contractor?
For most independent contractors, calculating your PPP borrowing limit is a 3-step process:
- Find line 31 on your 2019 IRS Form 1040 Schedule C (If you haven’t filed yet for 2019, go ahead and fill it out). If the amount on Line 31 is over $100,000, write $100,000.
- Divide the amount from Step 1 by 12.
- Multiply the amount from Step 2 by 2.5 (or 3.5 if your business is in the Food Services or Accommodations industry). For most borrowers, this will be your maximum PPP loan amount.
NOTE: If you received an EIDL loan between January 31, 2020 and April 3, 2020 you can refinance that as part of your PPP loan (minus any amount received as an EIDL grant).
As a sole proprietor and independent contractor, what can I use the PPP loan for?
According to the U.S. Chamber of Commerce’s Independent Contractor’s Guide to CARES Act Relief, you can use your PPP loan to do any of the following:
- You can use your PPP loan to do any of the following:
- Replace your compensation (based on your 2019 income)
- Pay interest payments on a mortgage or loan (such as an auto loan) you use to perform your business
- Make business rent payments
- Make business utility payments
- Make interest payments on any other prior debt incurred before February 15, 2020. (However, such prior debt payments amounts are not eligible for loan forgiveness.)
- Payments to a supplier for goods that are essential to your operations, as long as a contract or purchase order in effect before the PPP loan is disbursed, or with regard to perishable goods (like many foods)
In order to claim a loan or request forgiveness on loan interest, rent, or utilities payments, you must have claimed a deduction on your 2019 taxes for those expenses. That’s another reason why you need to complete your Schedule C for your 2019 Form 1040, even if you haven’t filed your taxes yet.
Some banks said they have massive demand and asked applicants to go elsewhere. What does it mean?
Many banks have allocated a certain amount of capital that they allocated toward SBA PPP loans. Some banks may be approaching that threshold. In which case they might turn some customers away. If that’s the case, there are other options beyond your bank. There’s a network of agents that work to connect business owners with banks that are eager to work with small businesses and help them get SBA PPP loans.
The first thing is to understand why your application was declined. Earlier we touched on eligibility requirements. But here are a few additional, more detailed reasons why you may be rejected:
- You are engaging in any illegal activity
- You are a household employer (your payroll goes toward childcare, cleaning services, or other domestic services)
- An owner of 20% or more of the business is incarcerated on probation, on parole, subject to indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or has been convicted of a felony in the last five years
- You or your business or any business controlled by you or your owners has ever defaulted on an SBA loan in the last seven years
If the reason was something else, like you didn’t fill out the application properly, then you should reapply. But this time, go through the application carefully and make sure you attach all the required documents and don’t skip any steps.
Once the 8- or 24 week forgiveness period is over, what if I have money remaining even after having used the funds for payroll and bills?
Those remaining funds, or any funds not found to be eligible for forgiveness, turn into a loan at the 1% rate, payable within 2 years.
Ready for more?
Apply for funding and find out if you qualify today