5 Quick Steps to Obtaining a Paycheck Protection Loan from The SBA
By this point, most small business owners and operators are aware of the Paycheck Protection Loan Program (PPLP) created by the CARES Act. The PPLP is, true to its name, a program designed to provide small businesses with the money necessary to retain their employees as the COVID-19 response causes substantial disruption to the global and domestic economy. With $350 billion in funding, the PPLP is a substantial opportunity for small businesses to increase their liquidity in tough times.
Provided below is our best, simplified understanding of how PPLP will work for your business. Keep in mind that new guidance is being issued daily — and some of the program’s requirements may change.
Step 1: Determine If You Qualify
To qualify, your business needs to employ fewer than 500 people (or otherwise meet Small Business Administration (SBA) size standards) and be facing challenges due to the COVID-19 pandemic. These challenges can entail staffing issues, revenue hits, supply chain disruptions, office closures, and more — the definition is broad.
The list of potentially eligible businesses is very broad:
- A small business with fewer than 500 employees
- A small business that otherwise meets the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- An individual who operates as a sole proprietor
- An individual who operates as an independent contractor
- An individual who is self-employed who regularly carries on any trade or business
- A Tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
Step 2: Determine What You Qualify For
Your PPLP loan amount eligibility will be based on payroll costs — but keep in mind that the loan amount (the amount you would receive from the government) and what you can spend loan funds on are two different things.
As to the loan amount, the maximum a business can borrow is two-a-one-half (2 ½) times your monthly payroll costs. Let’s break that down.
- What are eligible payroll costs? Payroll costs can include your business’ average monthly spending on a variety of domestic employee-related expenses including:
- salary, wage, and commissions;
- payment of cash tip or equivalent;
- payment for vacation, parental, family, medical, or sick leave;
- payment required for the provisions of group health care benefits, including insurance premiums;
- payment of any retirement benefit;
- payment of state or local tax assessed on employee compensation; and
- severance payments.
Obviously, this analysis is a bit different for sole proprietors, independent contractors, and the like. To determine the loan amount for these businesses, PPLP recognizes all compensation to, or income of, a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation as the basis for the loan request.
There are some employee related expenses that will not be considered towards loan amount eligibility, however. For example:
- PPLP is not going to (directly) subsidize your foreign workforce. If your business has employees in other countries, the cost of those employees will not raise your loan amount eligibility.
- PPLP is designed to prevent double-dipping. For example, qualified sick leave wages under the Families First Coronavirus Response Act will not be counted in the loan amount eligibility calculation. Federal income and federal payroll taxes are also excluded. These expenses are, or are likely going to be, subject to preferential tax treatment under other provisions of CARES or other laws.
- PPLP is a means-tested affair. Employees making six figures (more than $99,999) are subject to at least some exclusion from the loan eligibility amount. It is unclear at this time whether businesses can include the first $99,999 of compensation towards the loan amount calculation or whether these employees are exempted altogether.
- How do I determine my AVERAGE monthly payroll costs? The applicable time period for determining your business’ average monthly payroll cost is calendar year 2019. If you were not operating in 2019, however – look to January and February of 2020.
Step 3: Start thinking about whether this really makes sense for your business.
PPLP funds are not exactly free money — and don’t believe anybody that tells you otherwise. A few issues to consider:
- Know the difference between a loan and a grant.
To put it in simple terms, a loan generally has to be paid back; a grant generally does not. PPLP loans are loans subject to payback — but participating businesses will be eligible for forgiveness of the debt based upon certain criteria.
- Loan forgiveness is available if you’re spending loan money appropriately.
PPLP loans may be forgiven on a dollar-for-dollar basis with your spending on the following categories of expenses during the eight weeks following the origination of the loan: loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
- Payroll costs (see above for what constitutes payroll costs—and mind the exceptions!);
- Interest on mortgage obligations incurred in the ordinary course of business;
- Rent on a leasing agreement;
- Payments on utilities (electricity, gas, water, transportation, telephone, or internet);
- Additional wages paid to tipped employees.
While loan forgiveness is typically considered taxable income, PPLP allows this loan forgiveness to be tax-exempt.
- As in life, forgiveness has its limits — and this loan may limit your operational flexibility.
Many businesses have or will reduce employee headcount or employee compensation in response to the crisis and resultant recessionary conditions — and reductions to the number of Full-Time Equivalents and/or reductions to employee compensation will affect the level of forgiveness available under PPLP.
- Any dip in your headcount during the eight weeks from loan origination as compared to your average monthly headcount between February 15, 2019 and June 30, 2019 (or the average number of Full Time Equivalents in January and February of 2020) will be counted against loan forgiveness.
- Reductions of greater than 25% to employee compensation as compared to the most recent full quarter of wages will be counted against loan forgiveness.
Step 4: Cuddle up to your banker — and get your paperwork in order.
Even though Paycheck Protection Loans are administered by the Small Business Administration, a SBA-approved bank will likely be your primary provider of service.
You will need to make a good faith self-certification that the challenges facing your business make loans necessary in order to support operations. You will also need to certify in good faith that the funds will be used solely for payroll, lease payments, utility payments or mortgage payments. You will NOT however be required to personally guarantee the funds.
The documentation requirements are still a moving target. As with any loan, collect tax returns and internal financial statements. Unlike typical loan applications, you will need to provide payroll data. Begin crafting a spreadsheet with backup documentation noting wages, health insurance, employer-covered 401(k), and subcontractor costs for the past year.
Step 5: Rightsize your expectations as to timing.
Although PPLP is branded as fast action to protect the payroll of your business — the reality is that this will take weeks, if not months. The SBA has already pushed back the timing on application materials to the end of the first full week of April.
That said, all economic indicators suggest your business is up against a long term set of challenges. So prepare to put your best foot forward when the loan money starts to flow.
Preparing for the loan process and accounting for spending loan proceeds will require strong bookkeeping.
Call Community Tax today at (844) 329-2074 to ensure that the application and post-application process goes as smoothly as possible for your business.