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 immediately, know how to apply, and skip common mistakes that can get you rejected. While PPP applications are no longer being accepted, legislation is pending that could reopen the program.
To help explain the PPP loan, Fundbox recorded a podcast Q&A, covering 25 key questions about the loan program, including necessary application documents, authorized uses for the loan, loan forgiveness, and special circumstances for independent contractors.
For your reading convenience, a complete transcript of the podcast appears below:
Thank you for joining our conversation today, on the CARES Act—and specifically, some things you’ll want to know about applying for the Paycheck Protection Program, or PPP loan—to help your small business during the coronavirus pandemic. For this Q&A, our expert guest is Greg Powell, Head of Corporate Marketing at Fundbox, and is extremely knowledgeable and up-to-date on the details of the PPP loan stimulus program.
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. This two trillion dollar stimulus package was designed to give financial relief to individuals and businesses that have been negatively affected by the pandemic.
Originally about 350 billion dollars was allocated for small businesses, to help with job retention and operating costs. While that funding ran out on April 6th, Congress recently passed a bill for an additional 310 billion dollars to aid small businesses, and it was signed into law on Friday the 24th, and the SBA began disbursing funds on April 27.
The CARES Act includes two loan options for businesses: the Small Business Administration’s (SBA) 7(a) Paycheck Protection Program (PPP), and the SBA’s Economic Injury Disaster Loan, or EIDL. Today I’d like to focus just on 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 program from the Small Business Administration. 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 this next period of 8 weeks, during what’s expected to be 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 and/or business operating expenses, like rent. Qualified businesses can borrow up to $10 million at a 1% interest rate, calculated based on 2.5 times your average monthly payroll costs (or 3.5 if your business is in the food services or accommodation industry, 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 (basically, to cover payroll, office space rent, or keep your company open).
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 with 500 or fewer employees—or even an independent contractor or other self-employed individual—who has been or will be harmed by the pandemic—as long as all of the following are true:
You were already in-operation on February 15, 2020. (With very few exceptions, you can’t have started a business this March or April and expect to get PPP funds.)
Your primary place of residence is the United States. (It’s interesting to note that as of April, there’s no longer any stipulation that you have to be a U.S. Citizen); and
Your business has filed—or will file—a 2019 or 2020 tax return with the IRS. For independent contractors, this means a Form 1040 Schedule C for 2019 or 2020 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.)
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.) Also, small businesses that have minority shareholders (like private equity or venture capital) can still qualify if those shareholders relinquish rights.
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—and we’ll probably hear this again today—is: no double-dipping.
Is funding available again?
The good news is that Congress passed another 310 billion dollars for the program, which became law on April 24th. Incidentally, nearly $60 billion of that new PPP funding is being set aside for businesses that do not have established banking relationships, including rural and minority-owned companies.
Can businesses and sole proprietors still apply for the PPP now?
Yes. In fact, now that the President has signed the interim coronavirus relief bill into law, the U.S. Chamber of Commerce invites small businesses to connect with a lender and apply for the PPP loan. It’s essential to do this as soon as possible. Just like with the first round of funding, the minute these future funds are available, they will be doled out on a first-come-first-served basis.
Remember, you also may also be in line with all the small businesses who had already submitted their applications for the first round when it ran out. Some experts believe this new infusion of 310 billion will go fast—maybe as quickly as in the first 48 hours.
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—the SBA can help you find a lender.
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 the next round of funding is exhausted. 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 comes in about five to seven 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.
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. Make sure you have the most current version, which at this time is dated 04/20 at the bottom of the last page. 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 8 weeks as if they only had a salary of $100,000. In simpler terms, the max you can claim for an employee’s wages for that 8 weeks is $15,385—not including benefits. 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 $15,385 to cover the salary portion for those 8 weeks.
What does loan forgiveness mean?
Up to 100% of the PPP loan is forgivable if you follow certain requirements around payroll and employee retention. Here’s how it works: If you are an employer and keep your employees from the time your loan is originated through the end of your choses forgiveness period and maintain their salaries at a minimum of 75% of their pre-pandemic rate, the SBA will forgive the portion of the loan you used to cover payroll, rent, mortgage interest, and utilities.
However, due to the high number of businesses likely to enroll in the program, you need to use at least 60% of the forgiveness amount for payroll. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
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.
Also, there’s a per-employee salary cap of $100,000, not including benefits and non-cash compensation.
Is loan forgiveness automatic? Is the whole loan forgiven?
Loan forgiveness is not necessarily automatic, and it may not cover 100% of the loan if you don’t follow the rules. 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 will be reduced, according to the SBA’s guide.
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 eight weeks.
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 25% of the loan can be used for non-payroll purposes.
At least 75% 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 75% 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 75%, 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 7 on your 2019 IRS Form 1040 Schedule C. If the amount on Line 7 is over $100,000, write $100,000.
Divide the amount from Step 1 by 12.
Multiply the amount from Step 2 by 2.5. 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.)
Now, 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 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. Fundbox is an agent and customers can visit get.fundbox.com/ppp to apply through us if their bank has refused to help them apply.
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 will 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 weeks are up and have used the funds for payroll and bills. What happens to the money that is left over?
It converts into a loan. Once you use it for the approved expenses and the 8-week period is over, the SBA expects you to repay the rest at the 1% rate over 2 years. Payments are deferred for 6 months.
We’ve been approved for a PPP loan but not funded. Would the EIDL grant need to be paid back in that case?
There are two portions to the EIDL. The loan portion, which would need to be repaid no matter what. And the advance, which is a grant. This is up to $10,000. The EIDL grants would not need to be repaid if they were accounted for in the PPP application—if you already deducted them from the PPP loan amount you applied for. If you did not deduct the EIDL advance from your PPP application then that amount would have to be repaid.
The information discussed in this article and podcast was collected from a variety of external sources, and to the best of our knowledge, was correct as of April 27, 2020. 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