On Friday, the administration signed a supplemental bill to the CARES Act, which provides federal funding to several programs including the Paycheck Protection Plan (PPP) for small businesses. Funding for the PPP program ran out the previous week, as a swell of small businesses (and some not-so-small businesses) applied and received funding.
The main appeal of the PPP loan is that, if spent according to the Small Business Administration’s guidelines, it becomes less like a loan and more like a grant. In other words, every small business that’s eligible and needs help making payroll is incentivized to apply.
With the additional $310 billion added to the fund this week, many still doubt that amount will be enough to cover the need among small business owners. This is largely because the majority of business owners that submitted applications during the first round have yet to hear back on the status of their application, meaning only a small percentage were approved and a large backlog of applicants remains.
While the outlook of the program looks a bit bleak at the moment, keep in mind that the situation is shifting rapidly. More funds or new programs could be announced in the future. Until then, here are some things to consider if you have not yet applied for the program or if you’re one of the businesses waiting to hear back.
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Remember What the PPP Incentivizes
The Paycheck Protection Plan is designed around keeping as many people employed as possible. While it feels like every small business in America is applying for this loan, it’s important to remember what the intended purpose of the loan is.
While it can feel like “free money,” the loan is only forgiven if the funds are spent in the following categories:
- Interest on mortgage obligations
- Additional wages for tipped employees
Not only that, 75% of the funds must be spent on payroll alone. So if your business needs a loan for other uses, it might be more helpful to look into other loan options while the majority of attention is focused here.
If you know that you need a PPP loan in order to keep team members employed (or to make up for your own lost wages), get your application in as quickly as possible. It’s already estimated that funds could run out by Wednesday, April 29.
For a list of participating lenders, check out the SBA’s webpage here.
Take note that, while the big banks may have more funds to distribute, they’re also likely to move more slowly than regional banks and have already made loans to some questionably large “small businesses.”
The new round of funding also sets aside $60 billion of the $310 billion for small lenders and community banks. So if you have a connection to a small, local bank, try them first. You might have better luck than going through the big guys.
Not sure how to fill out the application? Check out our free COVID-19 loan calculator. It will analyze your QuickBooks or Xero accounting file to help you calculate your past payroll costs.
Try Multiple Lenders
Whether you’ve already applied and are waiting to hear back or you’re about to apply now, keep in mind that there are no penalties for applying through multiple lenders. Of course, if you received and accepted multiple loans, that would be a problem. But with the competition for funds as intense as it is, there’s little reason for small business owners to wait on any one bank.
Instead, reach out to several banks and ask about their capacity. If you need to, don’t be afraid to apply more than once. Again, here’s the link to participating lenders.
There’s a lot of misinformation out there about the kinds of documents your bank will ask you for. Some lenders may ask for more information than others, but here’s what we recommend you pull before you meet with one.
If you have employees and a payroll provider:
- Payroll documents
- W-3 (It’s like a W-2 but for all of your employees. Learn more.)
- Form 940 (Your unemployment tax return. Learn more.)
- Organizational documents (whatever paperwork you filled out to start your business, like articles of incorporation or an LLC agreement).
If you use a payroll provider, you should be able to access all of this information through them.
If you’re a sole proprietor or partnership:
- For sole proprietors, you’ll need a Form 1040, Schedule C for 2019. This shows the amount of business income you paid taxes on last year in your personal return.
- For partnerships, you’ll need a Schedule K-1. (This is the document that helps you know how much taxable income you had from your business last year. Learn more.)
- Note: Partnerships applying for the PPP should submit one application per business. Individual partners should not apply separately.
- Proof of self-employment.
- If you’re an independent contractor (under the sole proprietorship entity type), this will most likely come in the form of a 1099-MISC, which you received for previous contract work. If you have not received any 1099-MISC forms as either a sole proprietor or partnership, your Form 1040 or K-1 should suffice. Learn more.
- Bank statements to prove that you were in business before February 15, 2020.
Both the Form 1040 and 1099-MISC are tax forms that are sent to the IRS. You should be able to find both by retrieving last year’s tax returns. Note that if you did not have a positive net income in 2019 (meaning Line 31 of your Form 1040 Schedule C is negative or zero), you won’t be eligible for the loan.
This is because, as a pass-through entity, your profit is your income. What you earn through your business is considered your salary. If you’re unable to show that you earned income through your business’ profit, the lender won’t see a credible need for assistance now.
Lenders may ask for additional information, like financial statements. Be ready to provide a profit & loss statement and balance sheet if they ask—both of which can be pulled directly from QuickBooks or Xero if your books are up to date for the period.
Check out this webinar recording for more information on the differences between the PPP and EIDL loans and how to apply for both.
Try for Other Loans and Grants
While the PPP loan is the most enticing because of its forgiveness options, there are several other loan options out there that don’t limit how you can spend the money. And with low interest rates and deferred start dates, the terms are favorable. Here are a few others to consider.
Economic Injury Disaster Loan (EIDL)
The EIDL is another loan that’s run through the SBA. Unlike the PPP loan, you can apply online through SBA.gov. Typically, disaster loans are tedious to apply for, but the SBA has streamlined the application and waved the burden of proving that you have been negatively impacted by a disaster.
One of the highlights of this loan is a $10,000 advance that does not need to be repaid and will hit your bank account more quickly than the rest of the loan. (They say within days, rather than weeks.)
Learn more about the differences between the EIDL and the PPP programs here.
Our COVID-19 loan calculator also works for this loan type. Connect your accounting file, and we’ll pull the relevant data from your books to help you apply. Like the PPP, this program does not have unlimited funds, so act fast.
Save Small Business Fund
The Chamber of Commerce has created the Save Small Business Fund to provide grants to businesses in economically vulnerable communities. This program provides up to $5,000 in grants for qualified businesses.
The eligibility requirements are that you:
- Employ between 3-20 employees
- Have been harmed financially by the COVID-19 crisis
- Are located in an economically vulnerable community
Plug in your zip code on their website to find out instantly if your business is eligible to apply.
Main Street Lending Program
The Main Street Lending Program is a loan program that will be issued by the Federal Reserve, meaning it does not have any connection to the SBA. These loans are intended primarily for mid-sized businesses (eligible recipients can have up to 10,000 workers and revenues up to $2.5 billion). These loans will be 4-year loans with principal and interest payments deferred for the first year.
We’re still waiting for more information about how to apply and will update our resources when we know more. In the meantime, check out the Federal Reserve’s website for more information to determine if it might be a good fit when the program opens.
State and Local Resources
A COVID Loan Calculator for Business Owners
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Your Company’s Future
We hope that this article has helped you make sense of what’s going on with the PPP loans and what else is out there. We know that small businesses are in the fight of their lives right now, and we’re rooting for you every step of the way.
Here are a few other ways we can help (if you need it):
- If you’re applying for a PPP or EIDL loan, give our free calculator a try. It should help you shave valuable time off the application process.
- If your books are messy and you’re worried about tracking your expenses properly for PPP forgiveness, talk to one of our accounting experts about how we can help.
- Check out our COVID-19 resources page and bookmark it. We’re regularly updating this with new blog content like this article.