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PPP Second Wave: What Small Businesses Need to Know Before Applying

April 22, 2020
(Photo credit):© Rana Faure/Corbis

Congress just passed $310 billion in additional PPP funding—here’s what you need to get a loan.

Congress recently voted to pass the deal on an additional $484 billion emergency COVID-19 funding. The deal includes an additional $310 billion for the Small Business Administration’s Paycheck Protection Program (PPP), which ran out of its initial funds last week despite many small businesses still actively seeking loans. Many small lenders and community financial institutions were left to the wayside in the first round of funding, so the new deal specifically allocates $60 billion for small lenders and community financial institutions.

Brief overview of PPP

The Paycheck Protection Program is a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that’s aimed specifically at helping small businesses keep their employees paid. As long as a business meets the loan’s eligibility requirements, they can apply. Loans are approved on a first come, first serve basis through any existing SBA lender, with a maximum loan size of $10 million.

On June 5, 2020, President Donald Trump signed the Paycheck Protection Program Flexibility Act into law, which expands the terms of the original PPP. To learn more about the new provisions, click here.

Key notes about PPP:

  • Max loan size of $10 million
  • For the loan to be fully forgiven, at least 60 percent of loan must be used toward payroll expenses.
  • The other 40 percent may be used for mortgage rates, utilities and rent.
  • The loan must be used within a 24-week period that starts from the day the loan is first disbursed, or before December 31, 2020, whichever comes first.
  • Any remaining or unforgiven funds will have a 5-year maturity at a 1 percent interest rate.

PPP eligibility requirements

Businesses must meet a number of requirements in order to be eligible for a PPP loan.

  • Have been in operation on February 15, 2020
  • Have 500 or fewer employees (under PPP definitions, independent contractors do not count as employees), or otherwise meet SBA size requirements for your industry, which include:
    • Any business that’s categorized under “Accommodation or Food Services” with less than 500 employees per location also qualifies
    • Independently owned franchises
    • Tribal businesses
  • Must certify that your business has been negatively impacted by COVID-19

Should you apply for a PPP loan?

Given the recent criticism over publicly traded companies receiving sizeable PPP loans, the SBA is likely to closely scrutinize loan forgiveness applications from businesses they deem to have access to other forms of capital. This extends not only to publicly traded companies, but also businesses owned by larger parent companies and/or foreign entities and individuals, according to law firm Holland & Knight.

Although those factors do not necessarily preclude a business from getting a PPP loan, it could prevent them from getting their loans forgiven, which could potentially leave businesses in a worse financial position. Companies need to thoroughly scrutinize their own operations and liquidity to see whether they truly need a loan. According to the SBA’s latest FAQ, borrowers need to certify that PPP funds are necessary to maintain operations; if a business has already received a PPP loan but reconsiders the necessity of it, the SBA is allowing them to return the loan by May 7, 2020, no questions asked.

Here are some factors businesses should consider to determine whether they need a loan:

  • Ease of access to liquidity

    The SBA is likely to closely monitor businesses that have access to other forms of capital, such as businesses that have substantial cash reserves, access to capital markets, and/or revolving lines of credit. However, if these other forms of capital are not readily available and can’t be used to support operations, a business can still qualify for a PPP loan, provided they are able to substantiate their need for the funds, upon request from the SBA.

  • Business revenue and EBITDA projections

    Some businesses, such as grocery stores, are doing well during the pandemic. If you project revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) growth, then you most likely won’t qualify for a loan. However, if you project that revenue and EBITDA to decline for the foreseeable future, you may still qualify even if you have access to other forms of capital.

  • Health of your business’s balance sheet

    Even if your revenue and EBITDA have declined, if you have ample cash reserves that will allow you to continue paying employees, your business may not count as “needing” a loan. On the other hand, if the cash on hand is restricted and can’t be used to pay employees, or is likely to be depleted to dangerous levels, you could still qualify.

  • Business location

    Some states will reopen more quickly than others. Where your company does the bulk of its business will determine whether it qualifies for loan—if you do business in a state that is likely to reopen soon, then you may not qualify. Conversely, if your business operates primarily in a state that is likely to stay shut down for a while, you could still get a loan.

Calculating payroll expense

Payroll expense is capped at $100,000 per employee, says Brian Pifer, vice president of entrepreneurship at the Small Business Majority. However, if your business employs contractors or sole proprietors, you cannot include them in your payroll calculation because they can apply for a PPP loan themselves. It’s also important to note that businesses can only count expenses for employees residing primarily in the United States, meaning that foreign employees cannot be counted when applying for a PPP loan (typically, the SBA allows the inclusion of foreign employees for its other loans).

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“The borrower should try to use all of the loan towards eligible expenses, as they will get a dollar-for-dollar forgiveness with proper documentation.”

-Matt Vondersaar

Otherwise, Pifer explains, “eligible payroll costs include compensation, which is defined in the law as salary, wages, tips, or equivalent. It’s also any payment you expend on vacation, parental, family, medical or sick leave, any allowance for dismissal or separation.” Businesses can also include payments for any group health benefits, including premiums, retirement benefits, and state and local taxes assessed on the compensation of employees.

To calculate payroll expenses, you need to determine the average monthly payroll expense from the past 12 months, if you were in business then. If you’re a seasonal business, then take the monthly average between February 15 and June 30. You then multiple that average by 2.5, and that will be the loan amount your business qualifies for.

“So, let's say your payroll was $1.2 million in the past 12 months,” postulates Pifer. “Divided by 12, that’s $100,000. You will be eligible for a $250,000 loan through this program.”

A business can receive a brief delay in funding, adds Matt Vondersaar, first vice president and credit supervisor at East West Bank. In order to best take advantage of the PPP loan, businesses can delay disbursement to try to wait for a more optimal time. Since many businesses, such as restaurants and retail stores, must stay closed until mid-May, business owners might want to delay when they receive their first loan disbursement so that they can more fully utilize the eight-week period stipulated by the SBA. However, lenders can only delay for a maximum of 10 calendar days.

Your lender needs to verify that the number of employees on payroll, mortgage interest, rent and utilities expenses and the requested loan amount match up, so you need to provide documentation for each of those things.

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Documents needed for application

Your lender needs to verify that the number of employees on payroll, mortgage interest, rent and utilities expenses and the requested loan amount match up, so you need to provide documentation for each of those things. If your business provides medical insurance or retirement benefits, you will also need documentation for those.

You will need to know how much you spend for payroll in an average month and provide your lender with documentation to confirm that amount, Vondersaar says. For most applicants, the easiest documents to provide are the quarterly or annual FUTA forms your business files with the IRS (Forms 940 and 941) or W-3s for 2019. If your business provides medical insurance or retirement benefits, you will also want to provide statements from your health insurer and retirement plan administrator to show how much all employer paid expenses were in the past year.

For payroll expenses, you can use state tax or IRS filings, but, if you use a third-party payroll processing service such as ADP, you can also submit that payroll report. Some payroll reports already have a setting specifically for PPP loans, explains Vondersaar, and are typically much easier for business owners than submitting tax filings.

If you are a sole proprietorship or independent contractor, you need your Schedule C (Form 1040) for 2019 and 1099-MISC forms.

The PPP application is fairly straightforward. Only one business owner or authorized signer needs to fill out the form. However, if a business has more than one owner who owns 20 percent or more of the business, then the signer needs to provide the owner information (i.e. name, Social Security Number, date of birth, etc.) for all those owners. Otherwise, you just need to certify in good faith that you need the PPP loan to support operations and that the funds will be used for its intended purposes. Once completed, send your application to your loan officer at your current bank.

Requirements for loan forgiveness

In order to be completely forgiven, the PPP loan requires that a business use at least 75 percent of the loan amount for payroll expenses in the eight week period after the lender makes the first PPP disbursement.

Businesses that still have substantial employees on payroll, or the ability to quickly rehire employees upon loan approval, are the ones best suited for the loan because the PPP mandates that a business maintain employee and compensation levels.

“This is very important, as the PPP is not just for business owners, but to also make sure their employees are still getting a paycheck as well,” says Vondersaar. “The borrower should try to use all of the loan towards eligible expenses, as they will get a dollar-for-dollar forgiveness with proper documentation. Unspent or unforgiven funds will still be owed by the borrower over the next two years at 1 percent interest.”

If a business has reduced the number of employees or reduced employee wages by more than 25 percent compared to the previous year, then the amount eligible for forgiveness may also be reduced. However, if by June 30 you are able to restore employee numbers and/or compensation to the levels they were at on February 15, 2020, then the forgivable amount won’t be reduced.

The SBA is using two different methods to determine whether a business has maintained payroll levels, and businesses must be able to pass both tests in other for the PPP loan to be fully forgiven, Vondersaar emphasizes.

  • Method #1: Determining forgiveness based on reduction in the number of employees
    • Forgiveness amount equals the total payrolls costs, multiplied by the average number of full-time employees you maintained in the eight weeks since the loan origination
    • You can use the average number of employees from February 15, 2019 to June 30, 2019
    • Or you can use the average number of employees from January 1, 2020 to February 15, 2020
  • Method #2: Determining forgiveness based on reduction in employee wages or salaries
    • Forgiveness amount equals total payroll costs, minus the amount in reduction of wages of more than 25 percent for all employees earning less than $100,000

The SBA still has not issued guidance on specific requirements for loan forgiveness, says Awesta Sarkash, government affairs manager at Small Business Majority, so it’s dependent on the business owner to keep careful documentation of loan usage and expenses.

“In order to get loan forgiveness amounts proved, you have to have your payroll tax filings that you report to the IRS—state income, payroll and unemployment insurance filings, as well,” Sarkash recommends. “For verifying your employees on payroll, you need documentation of canceled checks, payment receipts, transcripts of accounts [and] other verifying payments.”

For more tips go to our business continuity toolkit with the latest resources on how to deal with the pandemic

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