Imagine a Black-Friday for Small Businesses… this is what the forgivable PPP loan is for small businesses.
Small businesses across America are rushing to the banks to apply for funding for their small business.
Most are responding to the coronavirus pandemic, which is forcing thousands of businesses to close and driving many completely out of business.
Most of these businesses are not mismanaged, but are victim to an unforeseeable global disaster that swept them out of nowhere. As a result, unemployment is rising at the fastest rate ever.
Millions of Americans are rushing to unemployment offices after being laid off by both, small businesses and large corporations.
After a back-and-forth battle in Congress, the federal government finally passed the CARES Stimulus Bill. This created over $2 trillion to be allocated to individuals and businesses to support them during this crisis.
This unprecedented bill allocated $350 billion in new loans to help small businesses – the backbone of the US economy. Over half of job creation in the US is created by small businesses.
And for one of the first times in history, the government is supporting small businesses in a major way to help them stay in business. So much so that billionaire Marc Cuban said that the stimulus bill is “literally the best stimulus bill ever for small businesses”.
The Paycheck Protection Program (“PPP”)
The most significant program created for small businesses and individuals is the Paycheck Protection Program (“PPP”).
The PPP loan is a forgivable loan to small businesses to help them pay their employees and other expenses for an 8-week period.
Any business is eligible as long as they have less than 500 employees. This applies to independent contractors, sole proprietors, corporations, LLC’s, and charities.
But what in the world is a forgivable loan?
Simply put, the PPP loan is like “FREE MONEY” for small business owners. But only if you use it correctly.
The loan operates like a grant if it is used for:
- Employee payroll and benefits
- Business rent/mortgage expenses
- Business utilities
It covers these types of expenses for an 8-week period. For all other businesses expenses, the loan will not be forgiven.
However, even if you do use the loan for other expenses, there are still some good characteristics of it like:
- No personal guarantee is required for the loan – it does not affect your personal credit
- No collateral is required for the loan – you do not lose personal property if you default
- Loan payments can be deferred for 6+ months
- It is a low interest loan – not to exceed 4%
At a minimum, your business should absolutely take advantage of the forgivable portion of the loan.
“Free Money for My Business… What’s the catch?”
While the PPP is a great stimulus program, you need to know that there are ways to lose your loan forgiveness.
For starters, the goal of this loan is to keep Americans employed. In the bill, it specifically states that your forgivable loan can be reduced if you:
- Layoff employees and reduce your total headcount
- Cut employees pay in excess of 20%
So this means that even if you use the loan on the correct expenses (payroll, rent, etc.), you can lose forgiveness if you make cuts to your payroll.
Why You Need to Apply Immediately
This loan works on a “first come, first serve” basis.
There is only $359 billion available for small businesses. Once this amount is exhausted, that is it folks!
Billions have already been approved and processed to small businesses.
— Steven Mnuchin (@stevenmnuchin1) April 3, 2020
Within 24 hours, Bank of America has already received 145,000 applications totalling $30 billion.
Update: We have received over 145K applications totaling $30B through the @USTreasury Payment Protection Program.
— Bank of America News (@BofA_News) April 4, 2020
There are talks about the Administration increasing funding for PPP, however, we do not recommend that you count on this.
Apply as soon as possible to take advantage of this!
Tips on How to Apply
You can review the application form for PPP here: Small Business PPP Loan Application
Most of the application asks for standard information, like your business name, tax identification number, address, and so on.
However, the most important part of the application is the loan calculation.
How to Calculate Your Loan
The formula to calculate your PPP loan amount is: 2019 Average Monthly Payroll x 2.5
“Average monthly payroll” may be calculated differently based on the type of business you are.
Companies with employees
- Take your W-2 payroll expenses and divide it by 12
- Insert this amount in “Average Monthly Payroll”
Companies without employees – Independent Contractors / Sole Proprietors
- Take your net income (2019 revenue minus expenses) and divide it by 12
- Insert this amount in “Average Monthly Payroll”
It is important to also note that employee expenses are only forgiven up to $100,000/year per employee.
Where to Apply for the PPP loan?
To apply for the PPP loan, it is advised that you apply at your current bank or lender directly.
Almost every major bank will be accepting applications. However, banks are already imposing their own rules.
For example, to apply for the PPP loan at Bank of America, they are requiring for applicants to 1) to have an open business checking account and 2) a current lending relationship (some form of debt) with the bank.
— Geoff Matous (@GeoffMatous) April 3, 2020
Other banks, like Chase, are only requiring applicants to have an open checking account with them.
What banks allow non-customers to apply for PPP?
Some of the banks that are currently allowing non-customers to apply for PPP are:
If you or someone you know does not have an active business checking account at a bank, then refer to the above links.
What else do you need to know about the PPP loan?
At this point, you should have what you need to know to apply for the loan.
However, you may need a little help along the way like:
- If you have not yet done your bookkeeping for 2019, it may be hard to compile your monthly average payroll reports. If you need help with this, please check-out our small business bookkeeping services
- If you need help completing your application, managing your loan expenses once approved, and applying for loan forgiveness, then consider using our small business tax planning services
- If you have questions about anything and just want to talk to a CPA, then schedule a call with one of our CPAs today.