Small business is the backbone of the U.S. economy, and it's no secret that COVID-19 continues to leave a trail of financial despair in its wake. The JPMorgan Chase Small Economic Activity Research report shows that over 99% of the 28.7 million firms in the U.S. are small businesses, and more than 48% of all U.S. employees work for a small business. Needless to say, providing aid to struggling SMBs should be paramount to most people.
However, the first round of Paycheck Protection Program loans was anything but smooth. Big business cashed in, small businesses struggled to navigate a clunky and confusing process, and indications of foul play seemed to be all over many questionable loans. Now, the country is taking a second stab at the PPP, with a new round of much-needed loans having opened this week. So, what's different this time around, and how can you use the funds to qualify for forgiveness?
What is a PPP loan?
To quote the Small Business Administration, a PPP loan is an "SBA loan that helps businesses keep their workforce employed during the coronavirus crisis." The Paycheck Protection Program provides forgivable loans through SBA 7(a) lenders to struggling businesses for use on predefined eligible expenses. If borrowers meet employee retention criteria and restrict their use of the funds to eligible expenses, the SBA will forgive their loan. The premise of the program is to enable small businesses to keep paying their employees while we navigate the uncertainty that continues to surround the COVID-19 economy.
How much you may qualify for this time
According to the guidance issued by the SBA on Jan. 7, these are the steps to calculate the maximum loan amount you may qualify for this time around:
- Calculate your payroll costs from 2019 or the 12 months preceding your loan application. Only include employees with a principal place of residence in the U.S.
- Subtract any amount compensated to any employee in excess of $100,000 on an annualized basis.
- Calculate your average monthly payroll amount by dividing the amount from step two by 12.
- Multiply your average monthly qualifying payroll amount by 2.5.
- Add any outstanding amount of your Economic Injury Disaster Loan made between Jan. 31 and April 3 of 2020. Do not include the amount of the EIDL advance, as repayment is not required for that amount.
If you did your math correctly, the number remaining after step five represents the maximum PPP amount you may qualify for. This entire amount may be forgivable by the SBA as long as you reserve the use of your PPP funds for qualifying expenses and observe the 60/40 rule (more on this later). Make sure you keep clear and detailed records to help you navigate the forgiveness process, and consult a qualified financial professional if you have questions.
What are the qualifying expenses?
Like the first round of PPP loans, this round recognizes payroll, rent, covered mortgage interest and utilities as qualifying expenses. The 60/40 rule – mandating that borrowers spend at least 60% of PPP funds on payroll costs during the covered period – still applies to PPP loans this time around in order for businesses to qualify for loan forgiveness.
However, a few new expenses have been added, which you should take into consideration when deciding how to allocate your PPP funds. Here's a list of all the qualifying expenses, as outlined in the latest SBA guidance:
- Payroll costs
- Rent
- Mortgage interest
- Utilities
- Worker protection and facility modification expenses to comply with COVID-19 health and safety guidelines
- Property damage costs related to damage, vandalism, or looting due to public disturbances and not otherwise covered by other compensation or insurance claims
- Supplier expenses that are essential to the business's operations at the time of purchase
- Covered operating expenditures
Some of these categories are a bit vague, so talk to a qualified financial professional or your local SBA 7(a) lender to make sure you're in compliance with applicable SBA guidelines. You can read program details and the most recent guidance directly from the SBA here.
What are covered operating expenditures?
In response to criticism from small businesses during the first round of PPP loans, the SBA has expanded its list of qualifying expenses to include often-overlooked costs that are essential to the operation of many businesses. These expenses, among possible others, fall under the "covered operating expenditures" category:
- Business software
- Cloud computing service that facilitates business operations
- Product or service delivery
- Expenses for processing, payment or tracking of payroll expenses
- Human resources expenses
- Sales and billing functions
- Accounting or tracking of supplies, inventory, records and expenses
Not sure if an expense qualifies? Talk to your local SBA 7(a) qualified lender or a qualified tax professional before you use PPP proceeds on the expense in question. It's not worth jeopardizing your loan forgiveness.
How to apply for loan forgiveness
Now, the part that most business owners look forward to the most: that magical moment when, with the flick of a pen, your loan is forgiven and the responsibility to repay your PPP proceeds is lifted off of your shoulders forever.
Loan forgiveness is handled directly with your SBA 7(a) lender and involves a few forms and a lot of documentation. According to the official PPP forgiveness fact sheet from the U.S. Treasury Department, the loan forgiveness is a four-step process.
Step 1: Complete the correct form from your PPP lender.
Depending on your unique situation and lender, you may complete SBA Form 3508, 3508EZ, 3508S, or an equivalent form provided by your lender.
Step 2: Gather your documents.
According to the SBA, you'll need to compile documentation for all payroll periods "that overlapped with the Covered Period or the Alternative Payroll Covered Period." These records can include bank statements, tax forms or other payment receipts. Talk to your lender to get a complete list of documentation they'll accept.
You'll also need records for forgivable non-payroll expenses as well as evidence that those obligations or services existed prior to Feb. 15, 2020. Copies of utility invoices and/or receipts along with lease agreements, rent receipts, or mortgage amortization schedules are likely to be required. You can find the complete list of acceptable documents on the SBA website.
Step 3: Submit your form and supporting documentation to your PPP lender.
Your lender will let you know if additional documentation is required or if something is missing from your forgiveness packet.
Step 4: Keep in contact with your lender throughout the process.
After you submit your form and documentation, the SBA may undertake a review of your loan. If so, your SBA 7(a) lender will let you know and alert you to any decisions the SBA makes for your loan. You have the right to appeal some SBA decisions, and your lender is responsible for notifying you of the amount forgiven and when payments (if any) will be due.
You might have heard that loans under $150,000 tend to draw less scrutiny from the SBA, but don't be complacent that your loan won't be selected for review. Be extremely careful as you deploy your PPP proceeds, and work hand in hand with your lender to make sure you receive the maximum forgiveness amount possible for your situation. Keep great records, file your receipts, and be deliberate in all your other efforts to have your loan forgiven.
Need more cash? A few other options
While it's definitely one of the best options available, the PPP loan program is not the only way businesses can access capital and reach their goals. Here are some alternatives that could unlock the funding your business is looking for:
Economic Injury Disaster Loan
Another SBA loan program, the Economic Injury Disaster Loan, or EIDL, is one of the very few loan programs that is funded and serviced directly by the SBA, not through an SBA-qualified lender. According to the SBA, this program is intended "to meet financial obligations and operating expenses that could have been met had the disaster not occurred." These loans are not forgivable (other than a small EIDL advance) but are relatively affordable at 3.75% interest on a 30-year term.
Venture capital and angel investors
Venture capital and angel investors aren't reserved for your favorite episode of Silicon Valley or the next hyper-growth tech startup. Each VC firm has different investment objectives, so thorough research on each firm you're considering is a must. Get to know their investing style, what's worked for them in the past, and how you might align with those objectives. A little sweat equity and leg work could uncover some great funding opportunities and even better partners.
Angel investors often make investments in the pre-seed or seed funding rounds, which help small startups get off the ground and start bringing their idea to life. Research angel investor groups in your area or look to platforms like Crunchbase to identify a possible angel for your startup. They aren't always that difficult to approach.
You'll definitely need a top-quality and persuasive pitch deck to land any investment. Check out my other business.com article "How to Make a Great Pitch Deck" for tips.
Alternative options
You've probably seen an episode of ABC's Shark Tank, where small business owners and startup founders make their case to a panel of "sharks," just to be criticized and often have their business model picked apart, all vying for a coveted investment from one of the big-name investors. While this works great for select brands, the reality is that many Shark Tank "deals" never come to fruition for various reasons, and some fail to land any investment from the limited panel of "sharks." Regardless, if you're feeling lucky, you can head over to ABC's website to apply for Shark Tank.
Shark Tank isn't the only game in town, though. One banker turned billion-dollar startup founder – whom Professor Richard Sakwa once named the wealthiest man in Russia in his book Putin and the Oligarch: The Khodorkovsky-Yukos Affair – is flipping the script and delivering a Shark Tank-esque experience with a much larger pool of potential investors: its own accredited investor members. Unicorns.Show transforms the search for unicorn startups into an immersive entertainment experience, leveraging its long list of accredited investors to help startups execute a global private offering (GPO) and capture the cash they need to skyrocket to unicorn status. Want to be on the show? First, you'll have to work with the team to raise at least $1 million for your startup just to qualify. While it isn't the fastest route to paydirt, it could be one way to inject headline-worthy capital into your startup.
Whichever route you decide is best for your brand, always consult a qualified tax professional, licensed financial professional, and/or legal counsel before making any final decisions. [Looking for alternative lenders? We've reviewed the best business loans and financing options.]