What are the SBA Loans that every small business is talking about right now?
There are two big ones out there – both created from the CARES Act. The Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP). The EIDL’s intent is to provide immediate relief to help the temporary loss of revenue due to COVID-19. The PPP’s intent is to keep employees on payroll.
Economic Injury Disaster Loan Q&A:
Paycheck Protection Program Q&A:
What is the intent of the Paycheck Protection Program?
What is the maximum amount we can borrow?
What are considered payroll costs?
How do you calculate the monthly payroll cost?
What can you use this loan for?
What are the perks of the PPP loan?
How can I use the money such that the loan will be forgiven?
How much of my loan will be forgiven?
When is the loan forgiven?
How do I apply?
Is there a deadline?
Can you have both a PPP and EIDL Loan?
Let’s talk about the Economic Injury Disaster Loan:
Any small business with less than 500 employees (including sole proprietors, independent contractors and self-employed), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19. Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.
There are two aspects of this loan. One, it offers up to $10k as an emergency grant paid within 3 days after applying for the program. This loan advance will not have to be repaid. However, if you’re approved for the PPP Loan, this grant could reduce the amount of the loan forgiven.
The second portion is the actual loan. If you get approved, you have up to 30 years to pay it back at 3.75% interest rate. Unless you’re a nonprofit, then it’s 2.75%. The maximum amount of the loan is not to exceed $2M.
SBA is waiving personal guarantees for loans under $200k. They are also forgoing the “credit elsewhere” clause. To be eligible, you have to be in business prior to 1/31/20.
The loan amount is determined by the SBA. Note…No tax return is required, but the SBA will review the business credit before conducting an inspection. It will be based on industry, revenue, employee size, etc.
You apply through the SBA website.
Now let’s go over the Paycheck Protection Program:
The intention of the loan is to keep people on payroll during this time so when your business is booming again, there is no lag on employment.
The amount any small business can borrow is 2.5 times their average monthly payroll cost, up to $10M.
Payroll cost includes salaries, commissions, tips, vacation, family, medical, or sick leave. It also covers health insurance, retirement benefits, and state and local taxes assessed on compensation. The maximum compensation per employee is $100k. This also includes self-employed income. Self-employed income includes wages, commissions, income, or net earnings from self-employment (capped at $100k)
You’re going to take the payroll cost calculated over the past 12 months (or for 2019) and divide by 12, unless you are seasonal. If you’re seasonal you have the option to take any 12 weeks from 2/15/19 to 6/30/19 and divide by 3.
Example: During 2019, you paid gross wages of $50k to an employee, you also had self-employed income of $50k, along with paid $10k for IRA SEP and $10k for health insurance. Total payroll cost is $120k for 2019. You’re going to take that divide by 12 ($10,000). Now multiple that by 2.5. Your max loan is $25k.
Payroll costs, including benefits; interest on mortgage and other debts, rent and utilities that began before 2/15/20.
The biggest perk is that some (if not all of it) can be forgiven. There is no personal guarantee, no collateral is required and no prepayment penalties or fees. The loan is 100% guaranteed by the SBA. The amount that is not forgiven is due back within 2 years at a 1% interest rate. Also, principal and interest is deferred for 6 months. Note…Interest will still accrue during this time frame.
From the time you receive the loan, there is an 8 week period. During this period, there are costs that are eligible to be forgiven. If you use these funds, to pay at least 75% for payroll costs and 25% for debt interest, rent, and utilities, your loan could be forgiven.
Example, you get $20k as your PPP Loan. At least $15k has to be paid for payroll cost, and the other 5k towards debt interest, rent and utilities.
Remember, the purpose of the PPP is to help you maintain employee and compensation levels. If you keep all of your employees during the 8 weeks with the same compensation, the entirety of the loan will be forgiven. If you still lay off employees, the forgiveness will be reduced by the percent decrease in the number of employees.
If your total payroll expenses on workers making less than $100,000 annually decreases by more than 25 percent, loan forgiveness will be reduced by the same amount. If you have already laid off some employees, you can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30, 2020.
At the end of the 8 week period, you can submit a request to the lender that is servicing the loan. The request will include support that can verify the number of employees and pay rates, as well as payments on mortgage, lease, and utility. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible payments. The lender has 60 days to make a decision to forgive.
You can apply through pretty much any local bank right now (here is a link to find eligible lenders). I’d start with your business banker first since their customers are priority. Each bank has their own process. You will need to completed a PPP application or an online version your bank has created. During this process, you will have to make a good faith certification that given the current economic uncertainty this loan is necessary to support your ongoing operations, along with a few other statements. You can assess the application here. They most likely will also ask for the following:
- 2019 quarterly payroll reports (Form 941s)
- Monthly payroll reports for each employee by month.
- Support for any self-employment income, such as a Schedule C and/or a copy of your profit & loss by month.
- Note: You have to be in operation before 2/15/20 to qualify.
Yes, 6/30/2020 but it’s on a first come first serve basis. So apply sooner rather than later.
Note: if you’re an independent contractor or self employed you cannot apply until 4/9/2020
Yes, however it has to be for different purposes. If they are for the same purpose, the EIDL loan will have to be refinanced into the PPP. The emergency EIDL grant award of up to $10k will be subtracted from the amount forgiven under PPP.
A little advice from us…
Keep these funds separate from your normal funds (potentially open another business bank account) so it’s easier to track expenses for forgiveness purposes. Also, see what your state offers. You are still eligible to apply for any state/local grants/loans. If you have any questions, don’t hesitate to reach out to us.
Stay safe and healthy!!