If you’re a small business owner and haven’t applied for the PPP loan, I have one question for you: “Why not?”
The Paycheck Protection Program (PPP) was established by the CARES Act in March to support small businesses and help them survive the COVID-19 pandemic. The primary goal of the program is to provide small businesses with cash to keep or rehire their employees and cover certain overhead expenses. Allowable (and forgivable) expenses include payroll, benefits, rent or mortgage, and utilities – the most critical costs to cover and stay afloat during coronavirus.
If you’ve dismissed this program before or thought you wouldn’t qualify, don’t count it out just yet. Below, I’ll give you four reasons you should consider and apply for the loan before it’s too late – whether you’re a team of one, 50 or 500 (the max).
- Funds are still available. The first round of $349 billion PPP funding was exhausted in less than two weeks. It seemed like every small business in America (and some not so small) jumped on the application when it opened in April. In fact, so many small businesses were shut out that the government approved and released a second round of funds totaling $310 billion. These funds are moving much slower, evidenced by the fact that this round opened April 26 and applications are still open at the time of this writing. If you think the PPP might be a good fit for your small business, the money is still there for the taking. Coupled with reason #2 below, applying seems like a no-brainer.
- Your loan can be 100% forgiven. Your initial loan amount will be 2.5 times your average monthly payroll costs. With more flexible rules enacted, borrowers have 24 weeks from receiving loan funds to use them for allowable business costs. If you spend – and can document – at least 60% of your loan funds on payroll (including benefits) and the balance on rent and utilities over the course of that 24-week period, then your loan has a high probability of being completely forgiven. NOTE: At the time of writing this post, there’s pending legislation called The Paycheck Protection Small Business Forgiveness Act that proposes to allow automatic forgiveness of PPP loans under $150k. The bill has already been introduced to the Senate, so keep your ears open.
- The PPP loan is based on payroll costs, not credit. When we hear “loan,” the first thought might be that you have to personally guarantee that loan. Not so. The PPP is not approved based on creditworthiness, but on payroll costs that you can document and submit with your loan application. And that documentation does not need to come from a payroll processor or expensive accounting program. If you’ve been keeping records, you’re in good shape.
- Sole Proprietors can apply. If you’re self-employed and file a Schedule C with your taxes – as a sole proprietor or LLC – you can apply for the PPP loan. Instead of calculating payroll costs, your loan amount will be based on your “Owner Compensation Replacement” (see this link, page 3). Start by dividing your 2019 net profit by 12. This will give your monthly average net profit. Multiply this number by 2.5 to get the max amount of your PPP loan.
After helping a company apply for and receive funding under the Paycheck Protection Program, I can personally attest that the process is not as intimidating as it may sound. Do your research with the SBA and US Treasury to see if it’s a good fit for you, then apply before the August 8th deadline. You can apply through your local bank, QuickBooks (if you use it) and other entities approved to process the loans.
The next step would be applying for loan forgiveness, but don’t sweat that just yet. The 24-week covered period doesn’t begin until the day you actually receive loan proceeds from your bank. So don’t let that stop you from beginning your application. This could be the financial boost your small business needs to push through this pandemic. Good luck!
If you’ve applied for the PPP loan or forgiveness, share your experience in the comments below.
P.S. You should always seek professional guidance from an accountant or attorney. I’m neither. This post represents my opinions based on experience and research.