In the wake of the COVID-19 public health crisis, the government has acted decisively to help small business owners. Through executive orders and massive economic stimulus bills like the CARE Act, eligible business owners hurt by the coronavirus pandemic have the chance to secure the working capital and financial assistance that they need to stay afloat.
The Small Business Administration (SBA), in particular, has been granted authority by the federal government to provide up to $377 billion dollars in emergency business loans and grants through the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL) program, and the EIDL 10K Advance program. These loan programs are designed to provide coronavirus aid to struggling small businesses that need working capital and economic security to get through the crisis. Both programs offer repayment deferral, at least partial loan forgiveness, and flexible application processes.
Time is of the essence. Small business owners should apply for as much capital as they can before these various loan options reach their deadlines. We’ve broken down the details of the programs and the documentation needed to successfully apply to these programs.
Paycheck Protection Program (PPP)
The Paycheck Protection Program has $349 billion dollars allocated towards guaranteeing forgivable loans for small businesses. The loan proceeds are meant to be used by small businesses to cover up to 8 weeks of payroll costs (including things like employee salaries, cash tips, and even retirement benefits!), and can also be used to pay some rents and utilities. Small business owners can request a loan amount of up to 2.5x their average monthly payroll costs when applying for a PPP loan.
Average monthly payroll can be calculated in one of two ways:
- For Businesses Opened Prior To This Year: Average of monthly business costs between February 15th, 2019 through June 30th 2019.
- For Businesses Opened This Year: Average of monthly business costs between January 1rst through February 15th, 2020.
PPP loan terms charge an interest rate of 1% and the maximum repayment period is two years. Repayment can be deferred for up to six months.
Eligibility for Funding and Loan Forgiveness
Businesses and nonprofits are eligible for PPP loans if they were operational on February 15th, 2020 and can demonstrate economic injury resulting from the COVID-19 pandemic.
According to documentation from the Treasury, all small businesses are eligible to receive funding. This means that any small business with 500 or fewer employees can, and should, apply for these loans. The following types of businesses with 500 or fewer employees are also eligible:
- Nonprofit organizations (they may have more than 500 employees if they otherwise meet SBA size standards)
- Foodservice or accommodation businesses like a restaurant or hotels with 500 or fewer employees at each independent location
- Veterans organizations
- Tribal small business concerns
- Independently owned franchise
- Self-employed individuals
- Sole proprietorships
- Independent contractors
The PPP loans are also potentially 100% forgivable. The forgiven amount of a PPP loan depends on whether or not a small business lays off workers and how they use the money they received.
- 100% Forgiveness for Full Employee Retention: The loan will be completely forgiven if a business rehires any laid-off workers by June 30th, 2020 or, better yet, don’t lay off any workers at all.
- Partial Forgiveness for Partial Retention: If you lay off workers but don’t rehire them, a part of the loan will not be forgiven.
- Penalty for Reduced Wages: If you reduce wages paid to a worker by more than 25% during the covered period (the time that you are using the funds provided by the loan), part of the loan will not be forgiven.
- Costs Other Than Payroll Won’t Be Forgiven: If the loan is used for business costs that are not approved by the program, these portions of the loan will not be forgiven and could be subject to separate repayment terms.
How To Apply
The PPP application for small businesses and sole proprietorships was opened on April 3rd. On April 10th, another PPP application was opened for independent contractors and self-employed individuals.
Small business owners can apply to any existing SBA 7(a) lender or through any other participating financial institution. The SBA recommends that you contact your local bank to check to see if they are participating.
Business owners can either apply directly through their lender of choice or by using this form with any participating lender. The form requires that you report the following:
- Business Information: You will have to indicate how your business is organized and report your business’s legal name, address, taxpayer identification number (TIN), contact information, and any owners with more than 20% equity.
- Payroll Information: The form will ask you to report your average monthly payroll and the number of people that your business employs.
- Questions and Certifications: The form asks applicants to certify a number of conditions including, but not limited to, a commitment to provide documentation verifying employment levels and the wage data used to make your monthly average payroll calculation. The other questions and conditions on the form should be reviewed carefully, as they could affect your ability to get funding.
Business owners should be prepared to furnish documentation that verifies your calculation of average monthly payroll costs.
The SBA recommends that you prepare the following:
- A full payroll register for 2019 and available payroll registers for 2020
- If payroll registers are reported as an Excel spreadsheet, it should be backed up by 12 months of bank statements
- Payroll tax filing for the previous and current year:
- 941 Quarterly Tax Filings for all 4 quarters of 2019 and Q1 of 2020
- 944 Annual Tax Filings for 2019
Independent contractors and those who are self-employed should also include the following:
- Independent Contractor: Copies of any and all 1099-MISC forms issued for 2019 and income and expense reports for 2019.
- Self-Employed: Your 2019 IRS 1040 Schedule C, a 1099-MISC for each reported owner, and income and expense reports for 2019.
In general, any and all documentation that you can provide that gives your lender a comprehensive verification of your payroll costs will smooth the process of obtaining funding. If you need help preparing these documents, consider the following options:
- Ask your lender for individual assistance
- Talk to a local accountant or bookkeeper
- Use the SBA’s dedicated assistance hotlines and local resources
Economic Injury Disaster Loan (EIDL)
The Economic Injury Disaster Loan program (EIDL) is an existing program administered by the SBA that is activated during times of crisis meant to provide working capital. The EIDL program, through cooperative efforts between state governments and the Trump Administration, has been widely deployed across the United States. The CARES Act funneled an additional $10 billion dollars into its accounts to keep up with high demand.
The funds provided through the EIDL program can be used for a much wider variety of business costs, while the PPP focuses on payroll costs. According to the SBA, EIDL funds can be used to cover “fixed debt payments, payroll, dealing with accounts payable, and any other bills that can’t be paid due to the crisis”. EIDL funding can be an excellent option for small business owners who are in need of relief to cover things like debt obligations, mortgage obligations, large utility payments, and other bills.
Small businesses can request up to $2 million. The loans charge a 3.75% interest rate and the repayment period can last up to 30 years. Loan payments can be deferred for up to a year.
Eligibility for Funding and Loan Forgiveness
Businesses and nonprofits eligible to apply for the EIDL program must have been in operation on January 31, 2020, be in a “declared disaster area”, and have experienced “substantial economic injury” as a result of the COVID-19 pandemic.
The SBA defines substantial economic injury as a business being “unable to meet its obligations and to pay its ordinary and necessary operating expenses.”
Businesses that qualify for EIDL funding include:
- Any business with 500 or fewer employees
- Any nonprofit organization that has 500 or fewer employees (or otherwise meet SBA size standards)
- Sole proprietorships
- Independent Contractors
- Tribal businesses, cooperatives, and employee-owned businesses
The only portion of the EIDL program funding that is forgivable is the emergency 10K advance, which we will discuss in more detail below. The rest of the loan is not forgivable.
How To Apply
The EIDL program and application have been up and running since early March. Unlike the PPP, the EIDL program is administered directly by the SBA, so there’s no need to connect to an affiliated SBA lender. To apply, visit the SBA EIDL website.
You can also complete a paper application that can be sent to the SBA’s processing and disbursement center:
U.S. Small Business Administration Processing and Disbursement Center
14925 Kingsport Road
Fort Worth, TX 76155.
The SBA West Virginia District Office has a great walkthrough guide that provides instructions for completing the application and solutions for common problems.
The SBA released an updated comprehensive guide detailing the EIDL program and the required documents needed for a successful application.
The basic filing requirements ask that you include the following documents in your applications:
- A completed SBA Loan Application (SBA Form 5C)
- A completed Tax Information Authorization (IRS Form 4506-T)
- Complete copies of your most recent Federal Income Tax Return
- You can also include a year-end profit-and-loss statement and balance sheet for that tax year in place of this
- A Schedule of Liabilities (SBA Form 2202)
- A statement of personal financials (SBA Form 413)
EIDL loan applications may also request that you provide a current year-to-date profit-and-loss statement and a report of monthly sales figures (SBA Form 1368).
Instructions for how to fill out all of the required forms can be found on the SBA’s website.
EIDL 10K Advance
The additional funding for the EIDL program from the CARES Act has also set up an emergency grant program that provides up to $10,000 that does not have to be repaid. The amount of the grant awarded to a small business depends on the number of employees. The grant will provide $1,000 for each full-time person that you employ, up to $10,000.
In order to qualify to receive an EIDL 10K advance, you have to fill out an EIDL application and indicate that you are interested in the emergency grant.
Getting the 10K advance requires no additional documentation or any separate applications outside of the normal EIDL application.
What Biz2Credit Recommends
For businesses looking for quick relief, we recommend applying to the EIDL program and indicating interest in the 10K advance program. Basically, any business that has been hurt by the COVID-19 crisis should be applying for disaster loans so that they can quickly access up to $10,000 in grants.
Small businesses with large payroll liabilities should also be taking advantage of PPP loans to retain employees at a VERY low cost.
While both loan programs offer streamlined application processes, the EIDL program application will require less time and effort to complete and has experienced fewer problems and disruptions.
Norbertus Robben, a private practice physician in the Greater Philadelphia area, spoke to the issues inherent in the current state of the PPP application: The PPP application saw a delayed and chaotic start with numerous technical SNAFUs. This included system overloads and crashes, or the bank’s deliberate shutting off the portal to prevent just that, even while people were in the midst of it. Timing-out with deletion of all input when scrambling to produce an unexpectedly needed documentation also occurred. The EIDL application was much smoother, and I was able to get confirmation of my application very quickly.”
In either case, coming to the (virtual) table prepared with the necessary documentation will speed up the process of securing funding through either program.