How to make the best of the Small Business Administration's loan program in the US

Angelica A.
May 19, 2020
  |  

How to make the best of the Small Business Administration's loan program in the US

Angelica A.
May 19, 2020
  |  

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The Paycheck Protection Program (PPP) and Health Care Enhancement Act passed by the House of Representatives on Thursday, April 23rd, 2020, just restocked a lending program for small businesses with a new set of 310 billion dollars. This decision is the 4th time Congress passes bills hoping for economic rescue and stimuli due to coronavirus. Always trusting our content to assist startup founders and entrepreneurs, we’ll cover how to make the best of the Small Business Administration’s loan program in the US now. This reading should clarify queries. It should also relay some pieces of advice and overall spare up on a few official document readings for business entrepreneurs. We hope it’ll come handy. 

The controversy behind loan grants

The first batch of funds in the Paycheck Protection Program has caused riots by going to large businesses, which included hotels and restaurants. Smaller companies were left out of the benefit. The controversy made it clear that funds need to be better distributed amongst small businesses now. Because of that, though primarily hoping to tackle unemployment, it is now harder for publicly traded companies to access these loans.

File as early as possible 

26 million have filed for unemployment, and many small business owners didn’t get allocated during their first application. It’s natural to be discouraged from trying a new request this second time around. Yet, with the given adjustments, it’s also worth filing a new loan application as soon as possible. The recommendation is that early timing helps small business chances to get financial assistance. 

If you filed the first time, chances are you can just wait

In fact, those who already filed the first time are likely to still stand automatically in line for this next fund grant. Just make sure to contact the bank with which you were working to ensure that the documents are still in order. Also, double-check the status of your application. 

As an essential piece of advice, stay away from making any unnecessary changes. Reports indicate that those could push your request to the back of the line again. And the latest word by the Chicago Sun Times is that JP Chase is ready to file “at least 150,000 completed loan applications” on Monday, April 27th, 2020. 

What are your chances, do you wonder? 

Let’s just say the same source as above says that “there were 1.6 million loans approved” during the PPP’s first round. And the mentioned measures seek to keep prior applicants in place with minimal to no work required. So, it’s plausible for the next round to fund more of the smaller businesses. Also, some of the large corporations that got funded are giving amounts of those back, which include Shake Shack, Ruth’s Chris Steak House, Kura Sushi USA, and Sweetgreen chains. 

Who fits the bill?

Contrary to common assumption, not only companies with less than 500 employees are eligible for a loan under this program. The requisite is to meet the SBA’s employee-based or revenue-based size standard for the business’ primary industry. You can check the linked resource to define if your business qualifies as small. 

There’s also a size standard tool available to help you determine the same. You’ll need to know your 6-digit NAICS (North American Industry Classification System) code for that, which you can also look up as you launch the tool. 

It’s also a requirement for the business not to register more than $15 million as its maximum tangible net worth. And the average net income after federal income taxes with carry-over losses excluded and for 2 fiscal years before the application date can’t exceed $5 million. 

If you still have questions, head on over to the SBA’s website for more resources. 

How a not so enviable past affects eligibility

Also, think of anyone currently holding 20% of your company equity. We just need to make sure there aren’t any incarcerations, probation, or parole in that person’s history. That would make the company ineligible for these loan programs. 

The above includes convictions and guilty pleas, as well as any prior placements on pretrial diversion, parole, or probation for a felony. 

The PPP loan’s forgiveness option

If the granted PPP funds keep your workforce on payroll, as an employer, you can be excused of as much as $10 million. The amount of forgiveness of a PPP loan will depend on payroll costs over eight weeks as of the time of the first disbursement. Just in case, this means no later than ten calendar days from the date of approval. 

How much can be requested?

PPP loans go for 2.5 times a business’ monthly payroll costs. There’s not much else to it than that. And we’ll touch upon calculations of payroll costs next when we cover what’s the required payroll documentation. 

How to apply for a loan with the SBA?

Small businesses that didn’t apply for the first set of the Paycheck Protection Program funds need to find an eligible lender that can take their application. A local bank that holds a corporate account or loan is the best option to meet that eligible lender requisite. 

Try not to be a new client now

Letting the institution with which you usually do business take you under their wing can be of benefit—especially compared to looking for a new financial institution to take you on as a new client. These times are too hectic for banks to assist in that sense. 

Also, saying a bank would take your business on, there’s more scrutiny to undergo as a new customer, which takes added time. 

Required documents and forms

Small businesses will also need to submit a Paycheck Protection Program Application Form, one that’s titled the SBA Form 2483. 

Aside from that, there’s payroll documentation to submit. You’ll need to attest to accurate calculations of payroll costs on the form. And a faith review is required in a reasonable time. This review calls for supporting documentation, such as average monthly payroll costs. 

To help, the US SBA’s FAQ for lenders and borrowers gives “minimal review of calculations based on a payroll report by a recognized third-party payroll processor” as a reasonable example of how to meet this requirement. 

Also, note you can calculate aggregate payroll costs through data either from the previous 12 months or from 2019’s calendar year. Yet, you could also apply for an employee-based size standard with an average employment figure over the same periods. 

The SBA’s usual calculation is the average number of employees per pay period in the 12 completed calendar months before the date of the loan application, or less if operations haven’t run as long.

What about employee benefits and the PPP?

Employee’s vacation and family time, medical and parental care as much as sick leaves, are covered by the PPP. You can even add housing allowances as payroll costs. However, the measures apply as long as wages for sickness or family leave weren’t granted in credit as part of the Families First Coronavirus Response Act.

Just in case, your teammates on payroll can still apply for unemployment. It does not affect whether they ask for the partial, temporary, or permanent kind. Doing so will not affect the company’s ability to receive a PPP forgivable loan. 

The IRS also has an FAQ section on COVID-19-related tax credits for required paid leave provided by small and midsize businesses that can help. 

Reselling PPP loans into the secondary market 

Now, here’s a big part of how to make the best of the Small Business Administration’s loan program in the US. Small businesses need no SBA approval for selling a PPP loan into the secondary market once fully disbursed. Better yet, it’s 100% SBA guaranteed. It can even be sold at a discounted to par value or at a premium. 

And, as the loans are federally-guaranteed, they’re interest-free. Payments on them have been deferred for a year, and the grant is also, of course, tax-free.

Heads-up on refinancing 

As permissive as the PPP and EIDL programs are, the second of which we’ll speak in a few lines, refinancing is not part of its allowances. So, if lining up debt with this government grant crossed your mind, it’s best to refrain from that. 

Let’s continue with considerations on how to make the best of the SBA’s loan programs, instead. 

Consider which lender to use.

There’s more to one of the areas we mentioned above on lenders, and we don’t want to leave it out for you. 

Unfortunately, no measures are being taken to guarantee that financial institutions go by a “first come, first serve” basis when they process applications. The regional administrator for the SBA’s Great Lakes Region, Robert Scott, recently gave a briefing that was reported by the Chicago Sun Times. In it, he told reporters that “There was nothing in the law and nothing in our regulatory authority under the U.S. Small Business Administration that would allow us to force a bank [...]” not to act differently from a first-come, first-serve order.

So there’s still another action to consider. Since Congress put $60 billion on the side for lenders who have less than $50 billion worth in assets, a business could decide to play their options at a loan by resorting to smaller lenders on their application. Those mean microloan institutions, for example. Or think about federal and state credit unions or even community development organizations in the financial sector. This list is not exhaustive. 

Maybe EIDL is best for you

As we define how to make the best of the Small Business Administration’s loan program in the US, we should also consider another loan program. Depending on your circumstances, it might also be very convenient for small businesses, perhaps more so than the PPP. 

To keep meeting payroll and staff, the PPP is a great resource. Yet, if meeting expenses, leased equipment, and other concerns are more what’s drawing you to this search right now, then perhaps you should give the Emergency Injury Disaster Loan (EIDL) a chance. This loan program is more aimed at working capital and equipment. 

You could even apply for both programs as long as you don’t use them for the same purpose. Note, though, that any EIDL funds will reduce the PPP forgiven amount if both qualify for forgiveness. 

The EIDL gives up to $2 million maximum. Contrary to the PPP, you don’t request this one at a financial institution. For it, you need to go directly to the SBA. And, unfortunately, it’s taking longer than expected for businesses to get a hold of the granted funds with this one.

Yet, not for profit organizations (NPOs), sole proprietors, 501(c)(3) status qualifiable churches, for example, and the self-employed aren’t left out of this benefit. On the contrary, the US declared the entire nation a disaster area. So, any of these organizations anywhere in the US can now apply for an EIDL. 

To expand on the differences between EIDL and PPP, we need to clarify that the EIDL is intended to cover 6 months of operational expenses. The PPP, on the contrary, is supposed to help with payroll for eight weeks.

The Employee Retention Credit or ERC

Still uncertain about PPP and EIDL? Especially if the PPP to meet payroll is unconvincing to you, take a look at the SBA’s ERC with us next. 

Just as heads-up, a business that received a PPP loan can’t be approved for the ERTC. 

Yet let’s begin with what an ERC is. This bill focuses on a headcount and paid total wages. And the maximum an employer can get for qualified wages paid to a single employee is $5K.

ERC’s main requirements can be broken into 2. One is for the business to be wholly or partially suspended this quarter due to COVID-19. The other is for a company to have gross receipts for 2020 below 50% of the comparable quarter in 2019. 

To calculate the ERC, we must know what happened with paid wages during every calendar quarter after March 12th of this year and before January 1st of the coming one. That’s why, typically, the ERC is available during Q2 through Q4. 

Also, take note that this credit is refundable if the amount of it exceeds owed federal employment taxes. 

So far, the best of criteria

We know there are tons to consider as you look at how to make the best of the Small Business Administration’s loan program in the US. Fortunately, application times were cut down from 2 hours to a max of 10-15 minutes.