This article originally appeared in the April 27 edition of Northwest Arkansas Business Journal.
In less than two weeks, small business owners claimed all $349 billion allocated to the Paycheck Protection Program (PPP). The PPP officially opened on April 3, 2020; by April 16th, the Small Business Administration (SBA) notified lenders that the program had fully exhausted its funds. During that time, over 21,000 small businesses in Arkansas received approximately $2.7 billion in approved loans.
While PPP funds will provide a much-needed shot in the arm for those small businesses, most eligible borrowers, especially independent contractors and self-employed individuals, did not receive a PPP loan during this 14-day whirlwind. However, Congress and the White House reached a deal on April 21 that would provide another $310 billion.
So, what should small businesses do at this point? Well, it depends.
Businesses that did not receive a PPP loan
Businesses who submitted applications should communicate with their lenders and determine why their application wasn’t approved. Lenders were taken off guard by ever-changing, and at times contradictory, guidelines and loan requirements implemented by SBA, causing many banks and applicants to amend or withdraw applications altogether. Many applicants failed to submit the appropriate supporting documentation or complete the entire loan application, which moved them to the back of the line. Many others simply didn’t have enough time to complete the application process.
Whatever the reason, applicants should maintain an open line of communication with their lender and make sure their application is accurate, complete and ready for submission to the SBA (currently, there is no “queue” or waiting line for previous submissions). The second round of PPP funding is expected to include additional restrictions and regulations on lenders and applicants, which may add further complexity and delays. Each bank has its own process for PPP loan applications, and the most important thing a small business can do is to make sure it understands its bank’s application process and requirements.
Businesses that did receive a PPP loan
Businesses who were approved for a PPP loan should now focus on the next, and most critical, step of the PPP process: loan forgiveness. Subject to some exceptions, amounts spent on payroll costs, rent, utilities and mortgage interest during the 8-week period after loan disbursement are eligible for complete forgiveness. Borrowers must apply for loan forgiveness and must submit appropriate documentation to their lender verifying amounts spent on eligible expenses. To help with compliance, we recommend borrowers pay close attention to the following:
- Recordkeeping. Good recordkeeping will be critical for loan forgiveness. Borrowers should be prepared to provide (in digital form, keep the originals) account statements, payroll ledgers, health insurance invoices, support for interest paid on debt obligations, evidence of utilities paid, rent receipts from landlords, and state and local payroll tax payments supported by tax returns, vouchers or other documentary evidence.
- Separate bank account. Borrowers should set up a separate bank account for the loan proceeds so that the funds are not comingled with other accounts. Maintaining a separate bank account will aid in the recordkeeping process and will limit access to, and disclosure of, unrelated expenses and financial transactions.
- Separate principal from interest. Only the interest portion of a mortgage payment is eligible for forgiveness. Write two checks: one for the amount of principal and one for the interest.
- Timing. The “covered period” is the 8-week period following loan disbursement. Make sure the timing of disbursement maximizes forgiveness. For instance, if rent is due on the 15th, and disbursement occurred on April 17th, only one rental payment would come due during the following 8 weeks.
This article is not, nor is it intended to be, a discussion of all requirements or aspects of the PPP. Each borrower should consult with his, her or its attorney to determine the best course of action for that borrower’s specific situation.