In light of the economic fallout from the COVID-19 pandemic, the United States has unveiled several large-scale assistance programs for small businesses. For more in-depth information on these, check out the guides we’ve put together below:
For many small businesses, these various forms of assistance have been absolutely critical to their continued existence. Widespread closures and loss of foot traffic have left many businesses reeling.
Yet, there is still a whole lot of uncertainty surrounding these loans, particularly the Paycheck Protection Program (PPP). As part of the CARES Act, the PPP was the largest loan program offered to businesses. And many business owners are worried about how to legally proceed with distributing the money and applying for loan forgiveness. Though their promise of simplicity was kept for the rollout of the loans, it hasn’t with their guidelines regarding loan forgiveness. And with over 4.4 million loans totaling over $500 billion dollars, it will be quite the mess to clean up in the coming months and years.
So, in hope of making this process a bit more transparent for small business owners, we’ve compiled some best practices surrounding the PPP loans and how to ensure that they’re forgiven in full. Remember to consult legal advice when necessary, and keep your small business protected.
- Review Your “Good Faith” Certification
- Record Your Finances From Before Your Application
- Use a Separate Bank Account
- Apply the Loan Dollars to Working Capital
- Ask Your Bank for Advice
- Be Careful About Using Other Loans
- Have a Plan to Repay the Loan
1. Review Your “Good Faith” Certification
Given the immediacy and scale of the situation, the Small Business Administration (SBA) simply required that business owners act in “good faith” when applying for a loan. The government simply did not have the time or resources to comb through millions of applications.
Instead, the good faith request meant that businesses should only apply for and accept the loan if they truly needed it. Of course, this left a whole lot of room for interpretation. Traditionally, borrowers of SBA loans were required to have sought loans elsewhere but unable to obtain them. While this aspect of the application was withdrawn from requirements, the SBA did advise that businesses be prepared to demonstrate their grounds for the loan at a future time.
It seems the SBA is mainly addressing larger businesses that requested a substantial loan (PPP loans were up to $10 million and based on the average monthly payroll, so bigger businesses received bigger loans). The Treasury Department added that any businesses that any loan of less than $2 million will be deemed to have been in good faith, seeming to suggest that they will be spared an audit down the road. This DOES NOT mean you should be unprepared for an audit.
Either way, be prepared to show ample evidence that your business required the loan. If you don’t feel like you have adequate evidence, then be prepared to repay the loan in full.
2. Record Your Finances From Before Your Application
Relatedly, you’ll want to have your finances prior to the loan well-documented. Again, the PPP’s good faith requirement means that businesses must show that the loan was necessary.
This is frustratingly vague, of course. What does “necessary” mean for your business? Keeping all current staff? Continuing to expand? Offering benefits to employees? Paying back existing loans?
So we can only assume that you must simply be able to show that the COVID-19 outbreak had a direct financial impact on your business. So have paperwork together to document this. These might include bank statements, canceled order, fewer orders from vendors and suppliers, or furloughed staff members.
Get these together now so you’re ready to produce them immediately if requested.
3. Use a Separate Bank Account
Though administered by the SBA, PPP loans were distributed by banks. Each small business, yours included, was required to apply for the loan through your existing banking institution. So, if you haven’t done so already, open a new business account with your bank to use strictly for the PPP loan money.
Doing so will keep your finances in better order, allowing you to document exactly where every dollar of the loan is going. Should you be audited to prove your good faith claim down the road, this step will be critical for saving you a whole lot of time and head ache.
As it stands right now, businesses also cannot deduct any expenses paid for by a loan from their taxes. Using a separate bank account will prevent you from having to go through expenses one-by-one when filing your 2020 taxes.
4. Apply the Loan Dollars to Working Capital
As you, hopefully, already know, the PPP loan can only be used for specific purposes. If you’re planning on repaying the loan, you are able to use the money for just about anything that is included in the operating expenses of your business. Check with your lender to be sure, however.
If you hope to have the entirety of the loan forgiven, you’ll need to be more careful about how you spend the money. The SBA carefully enumerated the possible uses of the loan.
75% of the loan can be used for the following:
- Payroll (not over $100,000 salary per year)
- Paid sick leave
- Insurance premiums
- Taxes on payroll
The remaining 25% can be applied to non-payroll related expenses:
- Mortgage interest
5. Ask Your Bank for Advice
Details surrounding the PPP loan are being continually updated and released, so keep an eye on it and speak with your lender about how to best proceed. Hopefully, the coming months bring more clarification for small businesses.
Congress may yet change details on terms for forgiveness, interest on the loan should it need to be repaid, the amount that can be used for rent and mortgage payments, how long the loan can be used for, and more. Even a slight change is worth being informed on.
Your bank is likely to have the most up to date information on the matter. Check in with them frequently to stay informed. Banks want to protect their clients and are likely to help minimize your paperwork so use them as a resource to avoid PPP fraud or negligent use.
6. Be Careful About Using Other Loans
Even prior to the loans surrounding COVID-19 were available, the SBA has been strict about businesses not receiving multiple loans at the same time. This is still the case.
Businesses are forbidden from applying for and accepting the same loan through multiple banks.
It’s also illegal to “double-dip” with multiple loans. For instance, a business that received the PPP loan cannot also receive the employee retention credit.
If you received the EIDL and PPP, you cannot use the EIDL for any payroll related matter.
7. Have a Plan to Repay the Loan
Most small businesses will have no problem qualifying for loan forgiveness. There are a few rules that must be followed to ensure that the entirety of the loan is forgiven, including the items mentioned above. Additionally, SMBs must abide by the following:
- Only portions of the loan spent within 8 weeks of receiving the loan will be repaid.
- At least 75% of the loan must be spent on payroll expenses.
- You cannot fire, lay off, or furlough any staff member during the 8 week period.
- No salaries or wages can be cut.
- If your business had already laid off staff by the time the loan was received, they must be rehired by June 30, 2020.
- And, of course, the loan must have been requested in good faith and your business is subject to an audit.
So, considering that the terms of the loan are complex and dynamic, be prepared to repay the loan if necessary. It’s important to plan for worst-case scenarios, and this is no exception. While it’s unlikely to happen, have a contingency plan.
To get started, check out the SBA’s loan forgiveness application. And for more details, check out their cheat sheet for borrowers.