No one is immune to hard times, especially now when the outbreak of COVID-19 has plunged the whole world into uncertainty. During such a period when the virus is on the loose and all of us are trying to stay safe, startups and small businesses have additional struggle - to stay aloft despite economic injuries.
Recently, everyone interested in the government’s efforts to subdue negative outcomes has heard the good news that a $2 trillion coronavirus stimulus package has been assigned to help startups and small businesses during these exceptional times.
We understand that things got really chaotic lately, so to simplify them a little bit we wanted to share with you key points of the PPP loan for startups. The government’s response may assist businesses and support employers and employees, so having a simple overview will certainly prove useful.
Here we will cover all you need to know to have a general understanding of the matter, however, to get legal or financial advice, we recommend you to turn to your lawyer or other qualified advisors.
What is a PPP loan?
The CARES (Coronavirus Aid Relief & Economic Security) Act offers $2 trillion to businesses and individuals who were affected by COVID-19. A part of this sum, particularly $310 billion in a new round, is given to support small businesses based in the US under the loan program called Paycheck Protection Program.
Its main goal is to keep more workers employed in the times of pandemic. The US government wants to ensure that employees aren’t being laid off and also that businesses don’t become broke, but are able to pay.
To prevent massive unemployment insurance claims new measures had to be taken. The Small Business Administration (SBA) is responsible for managing the PPP loan money, which applicants can receive in an authorized bank.
Who can apply?
According to the given information by SBA, any business can apply with no more than 500 employees. That includes nonprofit and veteran organizations, sole proprietorships, self-employed individuals, and independent contractors. In some industries it is possible for businesses to have more than 500 employees and receive the PPP loan, if they meet size standards stated by SBA for those specific industries.
How to get an SBA loan provided by the COVID-19 relief package?
If your business has greatly suffered because of the Covid-19 outbreak and it means that you can’t keep employing people without additional financial help, then you might be eligible for the PPP loan program. If the money the government offers can help you keep more workers employed, you should 1) study the rules for applying to be sure you don’t violate anything, 2) consult with others if you are not alone responsible for the business and 3) make certain that you really need this money before making the final decision.
What are the benefits for startups?
The Small Business Administration has always been able to assist small businesses through some loan programs managed by the US government. However, the PPP loan is different. Take a look at these reasons, which play an essential role in making this loan stand out:
- This loan can be forgiven, so if the startups apply and meet all the requirements, this money can act as a grant, which can keep businesses running in the most uncertain times. Startups can receive 2.5x their average monthly payroll (up to $10m), but some restrictions may apply to the loan forgiveness.
- If it is not forgiven, or at least not the whole sum, such loans are provided at an interest rate of 1%. Those who borrow money have some time before they are required to pay back, from six months to one year.
- The PPP loan doesn’t need a personal guarantee from the business owner. It is an important point that makes the loan much more appealing. It requires only limited documentation, as well as what you need to prove historical payroll (with benefits) during the period of the previous twelve months of work.
- You need to spend money in 8 weeks for the loan to be forgiven. But consider that the amount of forgivable sum may become lower due to the downsizing or reduction in salary.
However, not every startup is eligible for the Paycheck Protection Program loan. Some may not receive this money because of certain ownership issues, others because the funds ran out.
Here operates the rule first come first served, so if you are eligible, apply for the PPP loan as soon as possible. The first round of program money ($349 billion) ran out on April 15, just after thirteen days of functioning, but there is an additional sum of $310 billion assigned on April 24.
Just remember, that if you apply, you have to honestly confirm that your loan request is vital to keep your business operating, which was made difficult by the present state of the economy in COVID-19 times. One more thing to verify is that you will take this money for the advantage of your employees, to keep them at work and with a salary.
What is the amount of the PPP loan?
As was mentioned above, the PPP loan can reach up to 2.5 times each business’ average total monthly payroll costs, but not exceed the sum of $10 million. To calculate the amount of the average, look at the average total monthly payroll costs in the previous twelve months. If you didn’t have business last year, in 2019, you should look at the average in January and February 2020.
One more important thing you need to pay attention to if you have employees who receive more than $100k per year, is that their annual salaries in the whole amount shouldn’t exceed $100k. Their part in calculations needs to be limited. All these factors impact the loan, so to learn the amount you might be eligible for, gather information, and create a report.
What can you use a PPP loan for?
If you want the loan to be forgiven, there are two main points to keep in mind:
- You have to spend it on payroll costs, utilities, rent, or mortgage interest, but at least 75% of the forgiven amount must be used for payroll.
- You need to spend the money during eight weeks from the day of the beginning of the loan
As these areas are what most startups spend lots of money on, it shouldn’t be difficult to meet these requirements.
What counts as payroll costs for PPP loans?
Payroll costs include:
- A sum of salaries, wages, commissions and tips, which an employer receives per year not exceeding $100,000 in total
- Each employee’s benefits, which include health care benefits, retirement benefits, payment of vacations, parental, family, medical or sick leaves, dismissal or separation allowances
- State and local taxes on employee’s total compensation
Sole proprietors and independent contractors cannot be included in payroll costs. They are not eligible, because they can apply for their own PPP loan. If you want to know more about how you can calculate the loan amount by business type, check out the official SBA page.
What can lessen the chances of your loan forgiveness?
If you do one of the following things, your chances to receive a fully forgiven loan will decrease:
- If the number of employees working for your company drops
- If you allow salaries reductions at 25% or more for any worker who earns less than $100k. The reduction in the forgiven amount will be proportional to the decline in payroll costs.
For the U.S. Small Business Administration to forgive your loan, businesses have to submit a request for forgiveness to the lender that gives them money. As reported by the Treasury, the request must include documents confirming the number of employees and their pay rates, along with what the loan was used for.
What about VC-backed startups?
Eligibility of VC-backed startups is really complex, so to learn whether you comply with the rules, discuss this with your lawyer or a law firm. There is some general information available, that states:
- You may receive a PPP loan if no one who owns more than 20% of your company is an owner of other companies.
- You will violate the Affiliate Rule, if one VC is able to veto specific actions, which are supported by the board (or if a single company owns more than 50%).
If you have problems with the Affiliate Rule, your lawyer may give you advice on whether it is possible to amend your documents to become eligible. The investors may approve the changes or may not. It is easier for several VCs to amend the documents if there is no great majority ownership of one over the others. Therefore a change in the documents to a “majority of the shareholders” rather than a single firm, can help avoid this Affiliate Rule. If you have just one VC who owns more than a majority of the preferred shares, then he would need to give up the right entirely.
So, how to apply for a small business loan - PPP?
When you have counted your average monthly payroll costs, the next step is to complete and submit the PPP loan application with the necessary documentation. To apply you will need to provide:
- Tax returns from 2019
- Payroll records to validate the amount of money you are asking for is accurate
- Documentation showing that your company is legal
- Some proof of the damage COVID-19 has done to your business
You can deliver it to an authorized bank or submit online through approved nonbank lenders such as PayPal or BlueVine. Get the application form or reach an SBA-approved lender to receive more information. Keep in mind that it is the responsibility of a borrower to provide an accurate calculation of payroll costs and by applying you confirm that your calculations are precise.
To stay up-to-date and learn more details about Coronavirus Relief Package and Payroll Protection Program by SBA, visit their website. Please, don’t hesitate to consult your legal advisor if you have more questions about your business or carefully study the detailed information provided by the Treasury and the SBA.
Consider the additional option: EIDL Funds
Along with the original PPP funds, the new bill also has $60 billion for the Economic Injury Disaster Loan (EIDL) program, administered by SBA. It provides two options available for small businesses:
- $50 billion for EIDL Loans of up to $2 million each
- $10 billion for $10,000 forgivable loan advances
Though the EIDL loan can offer additional help, you cannot use it for the same purpose as a PPP loan. With this in mind, it would be better if you use the PPP money to cover any payroll expenses and the EIDL loan to pay for the operational costs. This way, you may get your PPP loan forgiven and, in addition, your business expenses managed.
You can apply for both these programs if you really need EIDL money on top of the PPP loan. Otherwise, decide which one is the best for your specific business needs. The amount of EIDL loan depends on the extent of the economic injury your business underwent because of the coronavirus.
To apply for these loans, there are different channels. You can submit an application for an EIDL loan directly on the official website. To receive a PPP loan, business owners should contact their current bank or lender, authorized by SBA. Don’t forget to do it ASAP, as the funds are running out fast.
Unlike many other downswings, Coronavirus affected not just one business but changed the game for almost everyone. Though we live in such uncertain times, still it’s not time to despair. All we need is to organize our lives and thoughts and plan the next steps.
Every crisis offers new opportunities to look around, learn from your experience, and keep growing. Take advantage of this time to improve and upgrade your approach, so that when things change your business will come forth stronger than before.Business growth