It wasn’t easy—but you survived 2020. Congratulations! You beat some significant odds. COVID-19 engendered an economic downturn of a size and speed we haven’t seen in our lifetimes. Mandated temporary closures in certain industries and stay-at-home orders, while absolutely in the public’s best interest, proved too great a challenge for many small businesses. As of September 2020, more than 100,000 businesses that thought they were closing temporarily have gone out of business permanently.
Even the federal government’s best effort to assist small businesses and their employees—the SBA’s Paycheck Protection Program (PPP)—was unable to stem the still-rising tide of closures. The program quickly exhausted the two rounds of funding Congress appropriated to it—the first in less than two weeks. Administration of the program fell short. There were delays. There was confusion surrounding eligibility and the program’s most noteworthy feature: loan forgiveness. Some of the borrowers who benefitted from the program raised the general public’s eyebrows on both sides of the aisle. And the PPP shut down entirely just four months after it opened.
But there’s reason to be hopeful. On December 22, 2020, Congress revived the PPP to the tune of $284 billion. We can expect that the SBA learned a few things from its first effort to lend aid to small businesses. Perhaps most importantly, today the infrastructure required to administer the program—the financial institutions who actually approve loans and provide funds to small businesses—is in place. Act Two of the PPP may play out a lot better than Act One and win over its many critics.
If your business is struggling, applying for a PPP loan might be a good idea. Arguably, it’s a good idea even if your business isn’t struggling, since PPP loans come with some impressive perks, like a rock-bottom 1% interest rate that leaves even the best small business loans in the dust. PPP loans also have the potential to be 100% forgiven at the end of your loan term. Let’s take a look at some of the things you need to know before you decide that a PPP loan is right for you and how to manage your loan when you get it.
Make Sure You’re Eligible Before You Apply
You have enough on your plate without spending time applying for a loan you’re destined not to receive. So pay attention to PPP eligibility requirements. Generally speaking, if you have 500 employees or fewer, you are considered eligible to apply for a PPP loan. Even if you received a loan in the first phase of the program, you may qualify for another one. But there are exceptions. A business that is a subsidiary of a larger company that arguably has access to liquid funds through its parent company may not be eligible.
There’s some good news for sole proprietors and gig workers under the new PPP guidelines. You don’t need to have employees to get a PPP loan. The program effectively considers you both an employer and an employee and paves the way for you to borrow. You will need to demonstrate, however, that your income decreased due to the global pandemic. Freelancers may also apply for relief under the Economic Injury Disaster Loan (EIDL) program, which, in some cases, provides outright grants, not just loans. Consider both options to see which suits you best.
Remember the PPP’s Primary Purpose
The PPP was designed to address the devastating increase in unemployment that followed in the wake of the coronavirus crisis. It was intended, at its core, to bring workers back on the job. If you’ve been fortunate enough not to lay off any workers, you should not apply for a loan. You can be prosecuted for knowingly using a PPP loan for unauthorized purposes.
To be eligible for loan forgiveness, employers must use 60% of funds received for payroll costs. Benefits such as health insurance are considered payroll costs under PPP regulations but bonuses, car allowances, and some other forms of compensation may not. The remainder of the funds must be used for qualified expenses such as mortgage payments, rent, and utilities. The program was not intended to fund capital investments like equipment purchases, for example.
PPP loans also come with a time limit. You must use your funds within 8 weeks of receiving them to take advantage of the PPP’s forgiveness clause. It’s critical that you understand which expenses are forgivable and use loan proceeds in compliance with PPP rules, lest you meet with some unpleasant surprises when your loan comes due.
Document, Document, Document
Once you receive funding under the PPP, it’s no time for slip-shod bookkeeping. Keep meticulous records of every dime you spend because you’ll be called to account for each one when you apply for forgiveness. A common complaint among first-round PPP loan recipients was that the forgiveness application process was cumbersome and confusing. The SBA has made some effort to streamline the application process but full accounting is still required. Thorough documentation will also come in handy come tax time. New PPP rules reverse the original program’s previous position on small business owner’s tax liability for loan proceeds. Loans that are used for regular business expenses are now considered tax-deductible by the IRS. The new rule is also retroactive to the first round of PPP loans so if you received one previously, you can also benefit from this change.
Find the Right Lender
PPP loans are guaranteed by the federal government. But the loans are actually administered by the same institutions that offer private loans. The first round of lending under the PPP was criticized due to how these lending institutions processed applications. Large lenders prioritized their existing customers—particularly those small business owners who had prior credit relationships with them. New businesses and those who’d not taken out a loan previously were routinely turned down during the original PPP. Many large, traditional lenders were overwhelmed by the sheer number of applications they received. Some stopped taking them shortly after the program opened. Moreover, loan processing was slow—and in some cases, funds arrived too late to prevent small businesses from closing.
When applying for a PPP loan, you might be better advised to seek out a smaller or non-traditional online lender. Innovations in the fintech industry, including the development of loan origination software, allowed local and regional banks to compete at a stronger-than-expected level and deliver PPP loan services much more quickly than banks that relied on outdated technology and traditional loan origination and practices. The new technology also made it easier for business owners with non-traditional credit histories to receive loans. Some of the criteria lending institutions normally used to assess risk undeservedly disqualified business owners. The fintech industry, by evaluating actual loan default statistics, demonstrated that some disqualification factors were not truly indicative of higher risk. They incorporated this data into the risk analysis portion of their software products and opened the door for many businesses that had been denied credit before.
The Early Bird Rule Applies
The amount of money appropriated by Congress to the PPP in December is less than half the amount the original phase of the program delivered. If you’re considering applying for a PPP loan, you can’t do it soon enough. Consider your choice of lender carefully. There’s no rule that prevents you from applying at more than one lending institution so you may want to file multiple applications to improve your chances of approval. Once you’re approved, you must withdraw your outstanding applications. The new PPP program, like the first, is a one-per-customer proposition.
If you’re not approved for a PPP loan, you still have alternative finance options, of course. Small business lines of credit, merchant advances, and even invoice factoring may help you weather the continuing economic storm. It’s worth mentioning, too, that many of the small businesses that have thrived during the pandemic have had to make wholesale changes to their business models. Think strategically. Imagination and resourcefulness are essential qualities during times of crisis. You may find your business is more resilient than you ever thought.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor LLC. She covers a wide range of topics including finance, technology, and government affairs. Follow her on Twitter @branddoktor.