Small-business owners skipping PPP loans could be making a big mistake
Small businesses have until August 8 to apply for the Paycheck Protection Program. If they haven't yet, they should. It's an easy application. And it's likely to be forgiven.
The Aug. 8 deadline for applying for a Paycheck Protection Program loan is quickly approaching and there’s still about $130 billion remaining of the $660 billion authorized by Congress. If you’re one of the millions of small-business owners who haven’t applied, then you could be making a big mistake.
The money won’t be there forever. The program is designed to provide forgivable loans for businesses with generally fewer than 500 employees to pay their staff and overhead costs and help them navigate through this significant economic downturn. Whatever funds are not used by the application deadline will either be returned or more likely be applied to another stimulus program. Unfortunately, many businesses have been reluctant to participate in this program. If you’re one of them, you should reconsider, and here are a few reasons why.
Some business owners I know don’t think they would qualify for a PPP loan. That’s probably not true. Most small businesses, as well as independent contractors and sole proprietors, are eligible for these loans. Even if you don’t have an official “payroll,” you can still borrow up to 2.5 times your prior year earnings (but no more than $100,000) that were subject to self-employment tax and even include related payroll costs such as health insurance and retirement payments. You don’t necessarily need to have filed a 2019 return or have the best credit record. There are some restrictions, so what you should do is talk to a financial lender authorized by the Small Business Administration to find out exactly what you need to apply. It’s worth a conversation.
Second, many business owners who haven’t applied tell me they’re concerned about not getting forgiveness. Yes, it’s true that this is a loan program. But thanks to the Paycheck Protection Program Flexibility Act, the requirements for getting loan forgiveness have been significantly relaxed. You can now submit up to 24 weeks of eligible expenses (payroll, rent, utilities), which is up from the original eight weeks. You can include a higher percentage of non-payroll expenses than before. The definition of rent and utilities has been expanded to include more items. You now have until Dec. 31 to restore your headcount to pre-pandemic levels. And even if you don’t, you’ll still get some forgiveness.
A few small-business owners say that they don’t want to incur more debt. Initially, you’ll have debt, but as mentioned above, you’ll likely get most, if not all, of that forgiven. Whatever remains won’t be due for five years and the interest rate is only one percent. So, basically, it’s free money. Just about all of the bankers I’ve spoken to said they are prepared to offer refinancing terms for any remaining balances (at higher interest rates, of course) to customers that still have a loan open in five years.
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Also, the paperwork for applying for forgiveness is much easier than you may think. Besides the standard form that you must fill out, the SBA has issued an EZ form, which can be used if you’re self-employed or did not reduce the salaries or wages of your employees by more than 25%, among other requirements. The forms require that you submit evidence of payroll, which can be easily documented by your payroll company or accounting system. If you’re submitting non-payroll expenses for forgiveness, you just have to show invoices or evidence of payment. You also don’t need to file the paperwork until 10 months until after the forgiveness period is over, so that gives you plenty of time to get things together.
A few clients I know are concerned that getting a PPP loan will subject them to scrutiny from the federal government. I believe the likelihood for that, especially if you’ve borrowed less than $2 million, is extremely low. Of course, you want to avoid making fraudulent claims and to submit accurate and complete information. But future loan reviews will likely be focused on higher-dollar transactions and more visible companies. Not only that but in an appearance before a House Committee last week, Treasury Secretary Steve Mnuchin said he supports waiving all loans below $150,000 so that the majority of small businesses who received PPP money won’t even need to go through the forgiveness process.
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Finally, some small-business owners say they don’t need the money right now. Maybe that’s because they’re running a business that hasn’t fully emerged from shutdown. Or that things are going OK currently. But my position is that if you’ve been affected by the pandemic (and most of us have) and you think you could use the funds within the next six months, it’s prudent to have the money in the bank. Even if you don’t use the money, you can pay back the loan early with no penalties.
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If you’re holding back on getting a PPP loan for any of the above reasons, you should seriously reconsider your decision. The economic downturn is far from over. Cases continue to rise and more shutdowns are possible. If there’s one thing I’ve learned from the business owners who survived the toughest economic times, the ones who had cash were always better off. If you can raise cash through the PPP, it’s a good idea to do so. But time is running out.