Top 5 Tips to Make Your PPP Business Loan Forgivable
Have you applied for a Payroll Protection Program (PPP) loan?
Have you received PPP loan funds?
Are you waiting on PPP loan approval?
Or are you thinking about applying for a PPP loan?
If so, you undoubtedly have questions.
In this video, Patric McCallum, principal attorney of Drew|McCallum, and Wendy Bowser, Houston business owner and founder of Bowser Insurance, discuss PPP loans, how to use the funds, how to make the loan forgivable, and how repayments are calculated. They also discuss 4 frequently asked questions about PPP.
Tip #1: Have a 75/25 Strategy
Under PPP rules, at least 75% of the loan must be spent on payroll and up to 25% of the loan can be spent on business mortgage, rent, and utilities.
Tip #2: Know Your Spending Timeline
Payroll Protection Program funds must be spent within 8 weeks of receiving the loan proceeds.
Tip #3: Keep Records of Expenditures as You Go
In order for a PPP loan to be forgiven, the business must provide detailed records showing that the funds were spent in accordance with the rules and within 8-weeks of funding. If you can, keep records as you go to avoid last minute scrambles and missed documentation.
Tip #4: Track Your Deadlines
Interest (currently set at 1%) begins to accrue from the day the loan is funded. Payments on the loan begin 6 months from funding and must be repaid in full within 2 years. Concrete processes for loan forgiveness haven’t been set, but you should expect to have your loan forgiveness documentation together no later than 6 months after you receive the loan (which makes tip #3 so important!).
Tip #5: Watch the Fine Print
Like most contracts, there is fine print in the terms and conditions of the PPP. For instance, the business must agree to buy American-made products to the extent possible. It’s not clear how that provision will be enforced and what documentation, if any, will have to be produced. But we shouldn’t assume that the requirement can be ignored. Other issues from the fine print are also discussed in the FAQ’s discussed at the end of the video.
BONUS: 4 Frequently Asked Questions
Patric and Wendy also discuss 4 frequently asked questions about the PPP and:
- independent contractors;
- Economic Impact Disaster Loan (EIDL);
- returning PPP loans; and
- using PPP loans for other business expenses.
Watch the full video above to hear the conversation. If you have more questions about any of these topics or if you would like help resolving a problem you are having, schedule your free telephone consultation today. We are here to help.
Prefer to Read the Transcript?
Wendy: Thank you so much for joining us today. Patric and I are here to discuss a lot of the business impacts, the things that are going on, the programs that are available out there to folks in business that are a result and impact of the COVID-19 virus.
Patric: So Wendy, tell us what we're talking about today.
Wendy: Well, the Payroll Protection Program is top of mind for so many folks in the small business space. So much of it in the news, so I thought it would be a very timely discussion to go through a few things and kind of get your legal expertise on some things. And in fact, I have a real-time question for you at the end that we didn't talk about, ha! Okay. I can't wait to hear that. Awesome. So for those who aren't necessarily familiar with the PPP, can you tell us a little bit about what it is and really who's a good candidate to apply?
Patric: Sure, so PPP is Payroll Protection Program, and the name really kind of tells you what it is. It is designed and intended to help small businesses, meaning businesses with 500 or fewer people or that meet a couple of other criteria, keep employees on, keep employees paid, is really what it is designed and intended to do. And it a very limited program. It's a very limited benefit for a very limited period of time. So when we're talking about who should apply, that's actually a really good question that's more about individual strategy and your individual business over just a global should you or should you not. PPP is a loan, it's a SBA loan. It is not a grant. It is not a gift. It's not something that you should treat like something like that. You should really give some very careful deliberation to whether or not the loan is right for you. And that's really the guiding factor in whether or not you should apply is you really need to take a hard look at your books, take a hard look at your forecasts, and take a hard look at your needs and figure out do you actually really need it or do you not. Is it really something that maybe you should pass over?
Wendy: Yeah, that could be-- So you talked about forecasts. So if it is a good fit for somebody to apply for this and they do receive the funds, what kind of strategy do they need to have in place to use the money? Then can you speak to the impact that it could have on their financial outlook for the next few months?
Patric: Oh, absolutely. If you're going to apply, then you're going to want to be in a place where you know, and understand, and have a strategy for devoting the lion's share of this to payroll. The loan documents and the information out there say that you can use it to pay rent, you can use it to pay business mortgage, you can use it to pay utilities. But the fine print of this thing, and some of the not-so-fine print, tells you that only 25% of the loan proceeds can be used to pay those things. You have to shown and demonstrate that 75% of that loan or more are used to pay payroll. And "payroll" means wages, salaries, tips, health insurance costs. There's a lot of those kinds of costs. There's a list of things that go into what constitutes payroll. But for business owners, this isn't something that is going to last you longterm. This is literally an eight-week window. Once you get that money, that starts your clock. The money is used and has to be used in that eight weeks once you get it, because when you submit the paperwork to have this loan forgiven, either in whole or in part, you're submitting documents from that eight-week window. If you're trying to go beyond that eight-week window, you're going to risk that you're going to have to pay some or all of this loan back. So that's why it requires a little bit of strategy because it's not just money that you get and you can just spend on your business, when your business needs it. It is an immediate influx for an immediate need, and a very specific need. That's why you have to look carefully at what you've got going on to figure out is it right for you and do you need it?
Wendy: Wow, so they actually have eight weeks from the time that you receive the funds to do all of this? And then what kind of checks, and balances, or whatever, at the end does the employer have to fill out, do we even know yet because all of this is so new, to have the loan forgiven?
Patric: Yeah, that's going to be an interesting question. Right now, hang on I'm just checking my notes to make sure I get all this right 'cause I don't want to misspeak. Yeah, I'm guilty of that so often. I'm seldom in doubt but often in error a whole lot. So right now, what the guidance that the SBA and the rules that are out there are giving people is that you're going to have to submit an IRS Form 941 which is a quarterly tax form. You're going to have to submit state quarterly wage unemployment, insurance tax reports, forms or equivalent payroll, processor records, and evidence of retirement and health insurance contributions. You're going to have to submit evidence of business rent, business mortgage, mortgage interest payments, business utility payments during the covered period which is this eight week period if loan proceeds were used for any of those. I'm kind of curious to see how it is that people are... Whether or not the SBA is going to actually require a specific showing that this money came into this account and from this account, this money was distributed and used to pay these things. And here are the checks, and here are the transfers, and here are the documents that literally show the transfers. Because what they're talking about it you have to spend 75% of this money on your employees.
Wendy: On your payroll, yeah.
Patric: And trying to show that, I think, might be a little bit of a challenge. So it's going to be interesting. I think a lot of business owners are going to wind up getting with lawyers, getting with bakers, CPAs, and figuring out what this presentation ultimately has to look like so that loan forgiveness is on the table, and they don't default, and have to start paying back the loan.
Wendy: Sure, so once... How long do they have, do we know yet? To pull all the documentation together in order for it to be processed on the back end so we know whether or not the loan is forgiven?
Patric: That's a great question. So my read of this right now is you've got until probably six months from the time that you get the funds.
Patric: Because that's when payments on this loan start becoming due. And interest on this loan starts accruing the moment you get the money.
Patric: There's no deferment on the interest. And there's actually a pretty aggressive, I think, window on paying this back. The information that I'm reading is saying that the government and the SBA feel like with the way things are going six months is appropriate. There might be a way to defer some payments up to a year, maybe a little bit beyond, but then that's going to get into more paperwork. So again, this is going to be a very paperwork-intensive endeavor. And you're going to have some very strict, very on-top-of-you-right-now deadlines. So it's one of those things where I'm recommending that people that take this money out already be working on this, already be getting all the stuff together. As you go, pull the documents that you need to demonstrate how you've spent the money.
Wendy: Yeah, that's a great suggestion. That way we're not scrambling at the end to try to get everything in. The interest rate, at what point, you said it starts the beginning of when you receive the funds, and the interest rate is... Is it at 1%, is that correct?
Patric: Yeah, that's what I'm reading, yes, is 1%.
Wendy: Okay, great. Is there any other fine print? You had mentioned something about if you're going to purchase equipment, maybe it had to be a certain type of product or whatever? There's always the devil in the details. So can you talk a little bit about that?
Patric: Yeah, that's one of the most interesting ones that I saw, and I think it speaks to me as being wholly political. And that is that in the application itself, it says that you must affirm that you will, to the extent possible, buy American-made products for your business. I'm not really sure how that would be enforced. I'm not really sure even if it were going to be enforced, how you would prove that. But nonetheless, it's in there. And in my legal brain, the legal brain says, "Well, it's in there for a reason." It could be political. It could just be somebody wanted to be pro-American about buying American-made stuff, especially right now, and I can understand that. But when you put it into a contract and it becomes a term of the contract, in my legal brain, that elevates it to a little bit different animal. And I start looking at that and thinking, "Okay, now where is that going to come up and bite me?" That's what the fine print of contracts oftentimes does to people. So that was one of the more interesting things that's actually in the application. Some of the other details are independent contractors don't count toward your employee, toward your payroll obligation. So if you have a bunch of 1099 contractors, those are not going to count.
Wendy: So it's just the W2s and the owners that count in that calculation?
Patric: Yeah, the SBA says well, but as independent contractors they can seek their own relief and their own funds, you don't get to... We're not going to double-dip there. We're not going to pay them and then pay you basically. The loan matures in two years. So you've got to be done in two years. The Act says that it can go up to 10, but the government is not at that place right now. They're saying they think two is sufficient. And there was one other... Oh, if you've gotten the EIDL benefit and you've used any of the EIDL benefit toward payroll, then under this program, the proceeds from any EIDL advance are deducted from the loan forgiveness amount on the PPP. In other words, you can't use EIDL and PPP on payroll. It has to be PPP, PPP is designed for this. EIDL was not, so if you unfortunately use that for payroll, you're going to have some extra administrative headache and potential paperwork because you're going to have to jive those two together because of some of that fine print.
Wendy: So no double-dipping there.
Patric: Double-dipping I don't think is fair because I don't think your paying someone twice. I think payroll and rent are the two biggest expenses that most any business has. And so if the EIDL was available faster, and you could use it to make payroll and keep the doors open, and then you're still down, and so you get the PPP, and you're going to have to use it for the same thing. I think that you're going to be a little bit stuck, and you're going to be caught. And I don't know that you could have anticipated that as well as maybe you would like to have been, kind of given the way that things have developed with PPP.
Wendy: So at the point that we're having this conversation, the EIDL is, the Economic Impact Disaster Loan, is no longer available for application, right? Those funds are exhausted, but we still have money in the coffers, if you will, for PPP, and business owners should look at that if they're a good candidate for that.
Patric: That's right, and I think some of that is attributed to the fact that some of the larger businesses that this wasn't designed or intended for are giving the money back. And there are a list of reasons for that, but I think that one of the bigger ones is going to be that you have to affirm in the application that your business needs the funds. And some of those larger businesses I think have a much harder time demonstrating need.
Patric: And rather than having the SBA audit that, I think they made a wise choice to say, "Hey, maybe we're not hurting "quite as much as we think we are, "and maybe we really don't need this quite so much "and some of the smaller businesses really do," and so that's helped to ease that burden I think.
Wendy: Sure, what about if, I don't know, maybe somebody received it and then realized, "You know what, I'm going to be okay." Can they too return the funds, or how does that work? How does that impact them?
Patric: No, it's a great question. I'm still actually trying to figure that out because...
Patric: I am actually getting some communication from some of the folks that I'm working with that maybe we don't need it. We've applied for it. We thought we would. But maybe things didn't quite go the way we thought they were going to, and maybe we don't need it. And if we're going to give it back, what does that process look like? You certainly would want to talk to your banker and your CPA about that. And I'm that as well to see what it is that needs to be done in order to give those things back if you decide you don't need them and don't want the burden.
Wendy: Sure. And then I mentioned I had a real-time question, and I think we might have already addressed this in the conversation, but it was from one of my clients. She got the PPP. She had a couple of consultant and attorney invoices that were for months December, January, and February. She was wondering if she could use some of the PPP funds for that? And if she did, would it be forgivable or not?
Patric: My guess is going to be no, that you can't. And if you do, it's not forgivable because an attorney is not an employee. An attorney is a contractor.
Wendy: Okay, yep, okay.
Patric: I don't get W2s from my clients. I get 1099s because I'm a contractor, and contractors don't count. My suspicion is is no, that's not going to be forgivable and that's not going to be an accepted use of the funds.
Wendy: Okay, and then her other question was if she were to buy supplies now for a program that starts in the fall, under that 25%, since 75% is going to the payroll expenditures, the other 25%, if she were to use those for supplies and what not, would those expenses be forgivable?
Patric: Well, it's sounding to me like maybe not because we're talking about you can use it for rent, mortgage, and utilities. That's not supplies, that's not...
Wendy: True, true.
Patric: That's not office supplies. That's not equipment. That's not software. That's not a lot of those things. It's really meant to literally keep the people--
Wendy: Keep the lights on.
Patric: And the lights on, yeah. And the people inside.
Wendy: Yes, awesome, well this has been a very informative conversation. Thanks for letting me pick your brain this afternoon.
Patric: You're so welcome. I've enjoyed it, and I'm so glad to get some information out there about this program. I've been telling people that have been talking to me that government assistance is never free. It's never easy. And more often than not, people regret having done it because of the administrative burdens that come with it. But if you need it, if your business is really suffering, it can be the lifeline that you need. You really just need to look at what your need is and what your forecast looks like for the next eight weeks because that's what this money is going to pay for and cover.
Wendy: Awesome. Well, thank you so much.
Patric: Thank you Wendy.
Wendy: So everybody, please turn on your notifications so you know when our next conversation will be up. We will continually be striving to include important information to help you in your business. And we would be so grateful if you would share our video and follow us on all of our social channels. And you'll see that information at the end of this video. Thank you so much for watching, and until next time, bye.
Our Guest for this Video
Our guest for this video is Wendy Bowser. Wendy is the owner and lead agent at Bowser Insurance. Bowser Insurance offers both group and individual health insurance. Putting together a benefits package can be a challenging task, and Bowser Insurance can make it easier for you. Whether you are starting from scratch, creating a plan for your organization for the very first time, or taking a look at you existing plan to enhance it or save on premiums, Bowser Insurance can help.