Guide to SBA Paycheck Protection Loans

Millions of small businesses across the country have received funding through the new Paycheck Protech program (PPP) due to the Covid-19 pandemic. By the time funding for round two runs out, the government will have guaranteed over $650 billion in loans for impacted small businesses.

The demand for PPP loans is the result not only of incredible need for emergency financing, but the fact that they are forgivable if used to cover payroll as well as rent, utilities, and mortgage payments.

Now that more businesses are being approved for PPP loans, their focus will turn to handling their loan responsibly. Unclear and uneven official guidelines from the Small Business Administration have led to confusion over how businesses can use their loan proceeds, what expenses will be forgiven, and how to manage the loan if it needs to be repaid.

We expect the SBA and the Treasury Department to issue more guidance surrounding handling your PPP loan in the weeks to come. In the meantime, let’s review best practices for using your PPP loan, as well as getting it forgiven and/or repaying the remainder.

Before Receiving Your PPP Loan

We’ve covered how to apply for a PPP loan as well as the most important calculation you’ll have to make in order to obtain one: calculating your average monthly payroll. The PPP loan amount will be 250% of your average monthly payroll from 2019 (or from January and February of 2020 if you have a new business).

When you apply for your PPP loan, therefore, you’ll already know how much you can expect to receive from your lender. While waiting for loan approval, start preparing for how you’ll use and track your loan expenses.

Make a Plan for Using Your PPP Loan

You can use your loan proceeds to pay your expenses—payroll, rent, utilities, and mortgage interest. These are the expenses that, according to the CARES Act, will be forgiven by the SBA.

In addition, there are other “eligible” uses of your PPP loan which, while allowed, will not be forgiven. These include making interest payments on debt accrued prior to February 15, 2020, and insurance premium payments.

Documenting every dollar allotted to you through your PPP loan will be crucial when applying for loan forgiveness, so it will help to prepare ahead of time for how you’ll administer your funds. Steps you can take include:

Write a Business Plan for Your PPP Funds

Due to a lack of issued guidance from the Treasury Department, most business owners can only use the rules outlined in the CARES Act—mainly that at least 75% of your loan must go toward payroll, and you can spend the other 25% or less on rent, utilities, and mortgage interest, in order to receive full forgiveness.

As a result, there are questions of whether businesses that knowingly use this loan for other purposes, such as maintaining payroll past the “covered period” (currently described as the eight weeks after you receive your loan), or as working capital, would constitute fraud. Businesses are only supposed to take out a PPP loan if they are “necessary to support the ongoing operations of the applicant,” but there are different nessary in this context.

Therefore, when applying for a loan, it will be helpful not just for your operations but in case of a future audit to have a written business plan for your loan, covering:

• How the crisis has impacted your business
• The steps you’ve taken to cut costs and increase immediate revenue
• How you’ll use your PPP funds

If there are questions of whether it was necessary for you to take out a loan for your business to survive, you will have an outline of where your business was at that moment in time, and a contemporaneous explanation of why a PPP was needed.

To support the claims made in your plan, it will help to have documentation such as profit and loss statements, balance sheets, a schedule for when invoices were sent and payments were received, and assessments of access to non-PPP capital, if possible.

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Open a Separate Bank Account

There’s no need to conmigle your existing funds with the loan proceeds you’ll receive from the PPP. Your loan proceeds are not taxable, so treating them as you would your existing funds will only lead to confusion, and potentially, trouble.

If you can open up a separate business bank account (particularly ayou’ll use to make your payroll, rent, and other eligible payments, you’ll have a much easier time reviewing your PPP-related spending.

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Utilize Accounting Software and/or Payroll Services

Manually managing your spending, particularly payroll, is not only a headache, but makes it easier for you to mismanage your PPP loan.

Third-party payroll services such as Gusto, Zenefits, or Paychex can automatically debit your new bank account holding your PPP funds, and many providers have rolled out PPP-specific reports that will make applying for loan forgiveness a breeze.

Additionally, accounting software such as QuickBooks—a helpful tool in any moment, not just in dealing with PPP—can help you earmark and track spending specific to your loan.

Have these tools and documents ready to go before you receive your loan for peak effectiveness.

After Receiving Your PPP Loan

Once your loan hits your back account, you’ll need to spend all of your proceeds during the “covered period” (again, as of right now, that period is the eight weeks after loan disbursement) to receive forgiveness.

There are a few ways that you can reduce your total PPP loan forgiveness. Forgiveness is not binary—you can reduce your forgiveness dollar by dollar depending on how you spend your funds and whether you maintain your payroll (by salary or by headcount).

Regardless of whether or not you plan to apply for full or partial loan forgiveness, you’ll want to track the following things during your covered period. Doing this will help you understand how much money the SBA will convert into a grant, and how much you’ll need to repay over the next two years.

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Track All PPP-Related Expenses

Using your payroll provider, accounting software, and/or your own tracking tools and techniques, record every financial transaction that you make using PPP funding—even if it isn’t a forgivable expense, such as paying off credit card debt. You’ll want to note:

• The expense amount
• The vendor or to whom you made the payment
• The category of the expense
• The date of the transaction
• The purpose of the transaction.

Keep official records of each of these transactions as well, whether it’s a payroll stub or a receipt. Put “PPP” in the memo of checks when possible.

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Document Your Payroll

Maintaining payroll is the intended purpose of the entire PPP program. The government would like to see small businesses keep workers employed—both because it will be easier and less expensive for a business to lay off and then rehire employees down the road, and because it keeps workers off of unemployment rolls.

You may or may not agree that maintaining, or rehiring, your staff is the right move for you at this exact moment. Many businesses applied for PPP funding right away due to the program’s “first-come, first-served” nature with a limited pool of funds, and not every business that was approved for a loan was ready to start using it to rehire or pay staff within eight weeks. In some cities, restrictions will remain in place into June and beyond.

That being said, keeping track of the number of full-time equivalent employees (FTEEs) and their wages is a crucial part of calculating your loan forgiveness. Even if you only maintain half of your staff, or a small portion of it, you will still be eligible for partial forgiveness. Of course, if you maintain your staff throughout the covered period (as well as meet other requirements), your loan will convert to a grant.

If not, you’ll deal with repayment after you’ve used all of your loan funds and/or the covered period ends.

Read our to learn how to calculate and compare your payroll costs from your covered period to your baseline period.

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After Using Your PPP Loan

Once you’ve used your PPP loan, it’s time to apply for loan forgiveness and, if necessary, make a plan for loan repayment.

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Apply for Loan Forgiveness

Each lender will determine their exact method of applying for PPP loan forgiveness. At this early stage, the government has not issued any official guidance for how lenders will receive funding for loan forgiveness, or even how to administer forgiveness on behalf of the borrower.

Therefore, keeping in touch with your lender and understanding what kind of documentation you’ll need to provide, on what timeline, will be crucial to receiving any kind of loan forgiveness.

In preparation, however, you should have this documentation ready:

• For payroll: Documents that verify the number of employees on payroll, with their salaries and wages. Examples include IRS Form 941; payroll reports from a payroll provider, income/payroll/unemployment insurance filings from your state; and documents regarding retirement and health insurance contributions.
• For rent, utilities, and mortgage interest: Payment receipts, account statements, canceled checks, and other documents showing your loan expense breakdown.
• For other expenses: Other expenses such as debt payments or payments on insurance premiums won’t be forgiven, but proof that you spent your loan proceeds on these costs (rather than, say, an all-expenses-paid trip for your staff, which is not an eligible or advisable use of your loan) will be helpful to have on hand.

Make a Plan for Loan Repayment

Technically, PPP loans are just that—loans. They are only converted to grants and forgiven if you use them exactly as described above.

The terms of a PPP loan are very generous. The interest rate on your loan is 1%, you’ll have a six-month deferment on making loan payments, and you can repay your loan over two years. There are also no prepayment penalties.

If business picks up for you quickly over the next few months, you may choose to pay off your loan principal and any accrued right away. Or, you may choose to take the entire two-year repayment term. This will depend on where your business is located, your industry, how the fight against the pandemic has progressed, and your specific situation.

When making a plan for repaying your PPP loan, we advise you to speak with a certified public accountant or other financial or legal professional to help you come up with a manageable repayment plan, as well as ensure your usage of your loan remains compliant.

The Treasury Department and the SBA, along with the rest of the federal government, may alter repayment terms for PPP recipients in the near future, extending the “covered period” or allowing for additional eligible expenses to be forgiven.

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Updates on PPP Loan Management, Forgiveness and Repayment

The Treasury and the SBA have a continuously updated document that covers questions about PPP loans, including eligibility, forgiveness, and repayment.

We expect the government to release more specific guidelines about how loans should be handled, forgiven, and repaid if necessary. It’s possible that they will alter some of the guidance referenced above. Already, advocacy groups and even U.S. senators have called on the Treasury to revise forgiveness standards and address questions that have emerged since the program launched.

We also recommend visiting  information on how best to obtain and use a PPP loan, along with other financial tools and options.

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