What, How and Where to apply for the PPP loan
The Paycheck Protection Program is a loan that becomes a grant. For example, if you have a payroll of $40,000 per month, you get $100,000. If you keep your payroll, the loan is forgiven. See a list of FAQ (section 5) and links to the most useful information (section 6).
1. How to apply
Must have documents
1. Payroll statements from January 2019 to March 2020. If you use ADP, the “Payroll Summary” is enough. If you don’t, any payroll statement showing total payroll cost and the number of hours worked (see point 4 on why this is important).
2. IRS form 941 (if you use a payroll provider, you can download it).
3. The SBA PPP loan form (see section 4 on why FTEE is important).
4. Bank statements from January 2019 to March 2020 showing payroll payments.
Good to have documents
Proof of payments for rent, utilities, and mortgage. If you use the same bank account than for payroll, they are already there.
2. Where to apply
Through the bank where you have a bank account. Banks get a 5% fee (paid by the Treasury), so they should make it easy. Unfortunately, some banks are making it difficult.
One solution is to go to TD Bank. If you are not a customer, you can open an account here and become one. Their checking account, in my opinion, is the best in the market (it’s free with a balance of $1,500). They also said that they would let non-clients apply in a few weeks.
The TD Bank application for Paycheck Protection Program loans is here.
Note: I don’t work for any bank nor get any fees from anyone. My opinion is that banks should be forced to process applications from anyone (more here).
You can also search for banks in the SBA application by zip code here.
3. When to apply
The advantage of applying right away is that there are limited funds.
The disadvantage is that the law requires businesses to use the cash during the 8-week period beginning with loan disbursement. If you get the cash now, when by law you must remain closed or sales have dropped 90%, there is a risk you will run out of cash before you are allowed to reopen. I explain why here.
4. What to be careful about when applying for the PPP
1. Be careful about the number of employees
Small businesses that want to get Paycheck Protection Program loan forgiven, need to prove they kept the same number of FTEEs. A common mistake when calculating the number of employees is to use payroll reports or form 941 instead of FTE. This could cost you 33%. Some CPAs, who are “away from the business” are not aware of this. In this post, I show you how to calculate Full Time Equivalent Employees.
2. Some employees may not be willing to come back
Why would someone making $24 with the unemployment incentive, go back to work for $16 and be exposed?
The problem if employees don’t come back is that then the loan is not fully forgiven. What I recommended in The Wall Street Journal article is to keep the $600 unemployment incentive, but to increase it to $1,000 for those who go back to work. Businesses will be able to attract workers back, won’t hurt workers or themselves financially, and will help grow the economy.
5. FAQ
What qualifies as payroll cost?
The IFRs from the SBA have clarified that:
What qualifies as “payroll costs?”
Payroll costs consist of: salary, wages, commissions, cash tips, vacation, parental, family, medical, or sick leave; an allowance for separation or dismissal; group health care, retirement; state and local taxes
For independent contractors or sole proprietors: wage, commissions, income, or net earnings from self-employment or similar compensation.
What is expressly excluded from the definition of payroll costs?
- Compensation of an employee whose residence is outside the US.
2. Annual salaries of $100,000 or more
3. Taxes withheld from employees
4. Sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).
Do independent contractors count as employees?
No
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Can someone who just started a business apply? We started an LLC recently. We have not yet filed a tax return and did not take any salaries last year. We have no income to report when filling out PPP. With no tax return and no income… are we out of luck for being eligible specifically for PPP?
The law doesn’t require to have filed taxes or have made money. You won’t have any problems qualifying for the loan based on that, because the loans are 100% guaranteed by the government so banks don’t care about your ability to pay the loan.
The complete Cares Act, including all details for the Paycheck Protection Program, is here.
The loan will cover 2.5 times your payroll (2 people). For example, suppose that you each made $40K per year. You can get a loan for $100K.
What you could do is to use the special treatment for a seasonal business. By doing that, you will provide the payroll for Jan-March 2020. Large companies sometimes hire people for such contracts and they get paid once per year. Thus, you could do the payroll now for Jan-March 2020 and pay that salary in June.
How does the PPP work for businesses that run payroll once a quarter?
That wouldn’t be a problem. The law requires to maintain the same number of FTEE. I explain how to calculate it here.
Here is an example:
Pay per hour: $23.
Hours worked per week: 40
Average Hours per month: 172
Monthly payroll: $4,000 (172X$23)
Loan (your number): $10,000
If when you do the payroll, you show that after you got the loan, the person worked 40 hours per week for 8 weeks and was paid the same, you meet the criteria for loan forgiveness. To note, the payroll expenses will be $7,360 ($23 times 40 times 8). The rest can be used for rent and utilities.
If the business applies for PPP loan now and the funds spent less than the amount received, what happens?
The proportion that is not used is not forgiven and needs to be paid back. The interest rate is relatively low (1%).
6. Other sources of Information
Interim Final Rules from the SBA (IFR)
The CAREs Act all the documentation and regulations (236 pages)
Bipartisan letter asking for greater flexibility
ABA guidelines. The document has answers to 76 FAQ. Fortunately, the government of Phoenix, AZ has made the content available to all of us.
About me
I worked as VP Finance, Global Controller and CFO at Procter & Gamble, Tetra Pak, and Nivea and now work in Private Equity (PE). I also teach Finance at NYU. We have created a program to help small businesses navigate the PPP process. This is part of that project.
Here is other material from my class that I have made available:
How to make/ read a Profit & Loss and Balance Sheet. This would help you to manage your business and your investments. Slides are here and P&L video is here. Balance Sheet video is here.