As the COVID-19 pandemic continues to affect industries across the U.S., businesses are entering the third round of the Small Business Administration’s Paycheck Protection Program, as a result of The Consolidated Appropriations Act 2021 signed into law Dec. 27, 2020.
If a business was unable to secure a PPP loan during the first two rounds, $284 billion is available for businesses to claim, even if they previously received funding.
But how do you know if you’re eligible? And more importantly, how do you best spend it?
According to Steve Levy, senior vice president, commercial banking at Erie Bank in Independence, and Steve Skaggs, senior vice president of Peoples Bank in Beachwood, business owners should remember what the first word of the PPP acronym stands for.
“We all refer to it as PPP but the first word is ‘paycheck’ and that drives the program,” Skaggs said. “It is an idea for business owners to protect the paychecks of their employees. There are some carve-outs for independent contractors and self-employed individuals. But at the end of the day, it’s the payroll protection program.”
Levy explained the SBA requires a majority of funds to be used for payroll costs. In round one of the funding, the expectation was 75% usage for payroll and included taxes and benefits, like retirement and medical. Round two was reduced to 60%, where the other 40% could be made up of eligible expenses, defined as rent, lease payments, loan interest and utilities.
“For the vast majority of our clients who have used this, a substantially large percentage has been used on payroll costs, and in many cases, 100% of it was used in payroll costs in calculating forgiveness,” Levy said.
Before determining how funds are used, the financial professionals said business owners must first know if they are even eligible for a loan.
“I recommend a lot of borrowers work with their payroll partner, accountant or CPA, or even an attorney to make sure they’re eligible,” Skaggs said. “The bank’s role is not to confirm eligibility. Our role is to make sure the information you provide is something we can submit to the SBA.”
Levy stated the program dictates how you use the funds, but it is more important to track what you’re using it on to qualify for loan forgiveness.
“A number of my clients put funds into a segregated account and use that account solely for their related expenses, which is not always necessary as long as you’re a good record keeper,” he noted. “The SBA wants to make sure you’re using it for the right things when you apply for loan forgiveness.”
While banks can only give so much advice, Skaggs doubled down on individuals meeting regularly with their advisers to ensure they’re correctly using the loan.
“I remind them to work with their financial professionals as they will be more familiar with what is acceptable and what isn’t,” he explained. “At the end of the day, every client that gets the PPP loan wants to be forgiven. They don’t want to have a loan at the end of the day.”
Levy suggested applicants go through their regular bank to apply for the loan, as they know the way their business operates. And in the event a loan isn’t forgiven, the bank would be prepared to work out repayment strategies with a client they are familiar with.
“So, your best bet is your existing bank,” he said.
Skaggs said, “You are obligating your business that if you don’t qualify for forgiveness, you have to pay that back. And if payments aren’t made to our bank or any bank, it will go into collections.”
But the most important thing is to interface with your financial professionals during the application process, even if you’ve applied before.
“Banks can guide you through the information you’re going to need to present, and you should check in with your advisers to make sure you’re getting the maximum amount you qualify for,” Levy said. “That is the value your banker brings to the table, guiding you through the process.”
Skaggs stated, “Your team should be your accountant, attorney and banker. When you have those three, you have a pretty stable stool and then you know you’ll be able to sit on it. If one of them is not there, it’s not stable. So, I always say use your partners.”