Editor’s note: Has your business been affected by the recent pandemic? Learn about COVID-19 relief for small businesses and the self-employed: SBA Paycheck Protection Program (PPP) For Self Employed, 1099’s
The U.S. Small Business Administration partially guarantees SBA 7(a) loans, making them typically more flexible and with lower interest rates than traditional bank loans. The loans are issued by a lending institution, traditionally banks, however there are several non-bank SBA lenders in the market. SBA loans are one of the best ways to finance your business due to generous terms.
Because of these favorable terms, and a fair amount of red tape, it can be tough to be approved for a loan from the SBA, which leads us to the million dollar question: Is an SBA 7(a) loan right for your business?
How SBA Loans Work
The SBA does not lend money to small businesses. That part is undertaken by an SBA approved lending institution. When applying for an SBA loan, you submit your application to the lending institution, and that lender then applies to the SBA for a loan guarantee. If you default on the loan, the SBA pays the lender the guaranteed amount (85% for loans up to $150,000 and 75% for loans greater than $150,000).
The SBA always requires a personal guarantee from every owner with at least a 20% of the business. This guarantee holds the signee personally liable for repayment of the loan if the business defaults and is insolvent.
If you are approved, your lender will proceed with closing and disbursing the loan proceeds. You will directly repay the lender monthly.
SBA loans can be used for many reasons: starting your business; working capital (for example, inventory & payroll); growing your business; or establishing a safety net.
In keeping with SBA regulations, participating lenders set their interest rates based on the prime rate + a markup rate.
The APR on a loan is different from the interest rate. The APR is a percentage that includes all loan fees + the interest rate.
Fees for SBA loans are typically comprised of an upfront guaranty fee, based on the loan amount and the term length of the loan, and an annual service fee, based on the guaranteed portion of the outstanding balance.
SBA loans typically offer longer terms in comparison with other loan types, which means you will have additional funds available for other business needs. The loan term will depend on your use of funds as stated in the application. The current maximum maturities are:
Real estate: 25 years
Working capital: 10 years
Equipment: 10 years
Types of SBA Loans
The SBA’s primary way of providing financial assistance to small businesses is the 7( a) loan program, however there are other types of SBA loans, each with its own terms and conditions.
Applying for an SBA Loan
Verify eligibility of your business. If your business is experiencing hardship, an SBA7(a) loan is probably out of the question at the moment. There are other SBA loan types for businesses in need of disaster relief. You should also confirm your business is not an ineligible entity, such as charitable and religious institutions.
After confirming your eligibility, make sure you have all necessary documents to submit your application. Here are some of the documents you will need before applying:
- SBA’s borrower information form
- Statement of personal history
- Personal financial statement
- Personal income tax returns
- Business tax returns
- Business license
- Lease agreement if applicable
- One-year cash flow projection
The time it takes to get approved for an SBA loan will depend on the lender processing your application. Traditional banks can take from 30 days to several months.
If you do not want to wait that long, the SBA has another 7(a) financing program called SBA Express, which aims to respond to loan applications within 36 hours. The maximum amount for this type of financing is $350,000.
You can apply directly for an SBA 7(a) Express loan as well as a commercial real estate 504 loan through G-Force Funding here: APPLY HERE
Most organizations will at some point need cash to grow. Lenders will scrutinize both you and your business to see if you’re a viable borrower before loaning to you.
Typically what the lender uses to make a credit decision will be, your company’s history, business credit, revenues, balance sheet, and your equity contributions. If you pass a credit check and you operate a healthy business, many banks will also require an additional, and tangible, guarantee that their loan will be repaid, i.e., collateral.
The U.S. Small Business Administration (SBA) defines collateral as “an additional form of security which can be used to assure a lender that you have a second source of loan repayment.” In other words, collateral ensures a lender will either be repaid by you or they can recoup the money in another way, such as liquidating the assets you offer for collateral Collateral can include assets owned by by you personally or your business. Below are some examples of types of collateral to consider using when approaching a bank for a loan:
Asset-based lending can be a great way to get a fast cash for your business, however there are precautions to take to protect yourself and your business. Below are a few tips on how you can use your assets as collateral, and how you can mitigate the risks associated with defaulting on a loan.
1. Find The True Value of Your Assets
Lenders tend to be conservative about valuing a borrower’s assets for collateral. After all, if the borrower does default, the lender must take the asset, find a buyer, and liquidate it. If you’re not sure what your assets are worth, it could be worthwhile to find an independent appraiser to give you an idea of how the lender will value your property.
2. Your Best Option For Collateral
Essentially, there are two main types of collateral: assets that you fully own and assets that you still have a lien against. If you still have a lien on an asset (e.g., a mortgage for a house), the lender will be able to recoup the loan by refinancing with the lending institution and claiming the title.
A viable asset to use as collateral will have a title of ownership, and lenders will only lend if they can get a title back. Real estate and automobiles are the most common types of collateral, however you can also use pieces of equipment that have a title of ownership.
3. Knowing the Risks
Loss of Assets: Taking a loan using assets as collateral presents the risks of losing the assets if you default on the loan. It’s important to discuss the risks of using certain assets as collateral with a financial advisor, as well as people that could be affected by the loss of that asset. It comes down to being honest with yourself, knowing your situation, and knowing what the funds will be used for. If you really need the money, you might to find alternatives, because you will lose what you’ve leveraged in the unfortunate event of default.
Unsecured Loans: If you choose not to use collateral to secure a business loan, there are also risks in that decision. Lenders can charge higher interest rates for unsecured loans. You need to assess what your company can afford. You can find out about G-Force Funding’s unsecured loan options here: APPLY HERE
4. Understand Terms
Qualified borrowers with good business credit should be able to secure a loan with collateral. Remember, you can gather loan offers from multiple lenders to compare your options.
One thing to consider is the loan-to-value ratio of each offer. This is the percentage of the asset’s value against which the lender is willing to advance funds. Loan-to-value ratios generally range from 50 to 98 percent. The higher the percentage the less collateral you’ll need to put up to cover the value of the loan. For example, if you need a loan for $80,000 and you have an asset valued at $100,000, you ‘d prefer a loan-to-value ratio of 80% over one of 50% as the latter will require you put up additional collateral to cover the full loan value. You can find out about G-Force Funding’s secured loan options here: APPLY HERERead More
Waiting on outstanding invoices to earn money has long been a huge pain for small businesses. It’s approximated that at least $3.1 trillion in receivables is owed to businesses in the U.S. right now. When companies pay late, the issue gets compounded. Access to capital is especially vital throughout the COVID-19 economic environment. This demand for quick cash has led many businesses to think about invoice factoring (offering receivables to an invoice factoring company at a discount rate, plus a cost).
Why companies use factoring
Receivables factoring is when a company purchases a debt or invoice from another company. In this purchase, accounts receivable are discounted in order to permit the purchaser to earn a profit upon the settlement of the debt. Basically factoring transfers the ownership of accounts to another party that then chases up the debt. Factoring for that reason relieves the first party of a financial obligation for less than the total amount providing them with working capital to continue trading, while the purchaser, or factor, chases up the debt for the total and profits when it is paid. The factor is required to pay additional costs, usually a small percentage, once the debt has actually been settled. The factor might also offer a discount to the indebted party.
Factoring has been a common B2B practice for more than 3,700 years. Basically, it’s a method for SME to obtain cash money earlier instead of having to wait for their clients to pay on net terms, pay past due, or otherwise in any way.
What is a Factoring Advance Rate?
A factoring advance rate is the percentage of the amount you receive when factoring the invoice. Advance rates generally vary from 80% to 90% of your invoice amount. Meaning, if you factor an invoice for $100,000, you typically are advanced $80,000( 80%) or $90,000( 90%).
Your factoring advance rate is the most important number when taking a look at factoring expenses, it’s even more important than the fees. Why? The reason you are factoring in the first place is to enhance your cash flow. The advance rate must be high enough to cover your cost of goods sold. Otherwise, the benefit of using factoring for your capital concerns would not be viable.
How do Factoring Costs Work?
Bear in mind that a factoring fee is not an APR or interest rate. Often times business owners are confused and use interest rate formulas to factoring, however it simply does not work that way. A factoring fee resembles how your charge card may charge a monthly or daily set charge to have the account open. This resembles how a factoring fee works. It is a percentage of the invoice amount. A factor uses a percentage of the invoice quantity as their cost to you as low as 0.79-2.29% as much as 30 days.
If you are interested in applying for receivables factoring or would like to find out more about our factoring programs, please APPLY HERE
Everyone knows your personal credit score is essential when applying for commercial credit, however personal credit scores don’t reveal the whole story of your business. The other score you need to be on top of is your business credit score, also known as the FICO SBSS score.
Why is the FICO SBSS Business Credit Score Essential?
When applying for a business loan or line of credit your FICO SBSS score will be taken into consideration. FICO stands for the Fair Isaac Corporation, the largest and best known of several companies that calculate credit scores. SBSS stands for the Small Business Scoring Service.
This score is one element that helps lenders determine how likely your business is to make timely loan payments and eventually pay back the loan in full.
How is the FICO SBSS Score Calculated?
Your FICO SBSS score is calculated by evaluating personal and business credit history. Other business financial details also comes into play like the age of your company, number of employees along with financial data, like revenue and assets.
The SBSS score ranges from 0-300 with the higher your score, the better.
Why Increase Your Business Credit Score?
According to the Small Business Administration (SBA), insufficient or delayed financing is the second most common reason for business failure. Because anyone can view your business credit score (it’s not confidential) it’s important to establish business credit from the start to help you obtain better interest rates, loan terms, and negotiation leverage on payment periods with suppliers.
8 Ways to Improve Your Business Credit Score
If your business credit score needs work, review these 8 strategies to help strengthen yours.
Check your business credit report
If you find any errors, dispute them immediately. Incorrect information can impact running your business.
Pay your bills on time
Lenders or vendors don’t want to work with a business that is slow when paying bills. Use these strategies to avoid paying late and incurring penalties.
Make a list of every bill
Find out when your payments are due
Add your payments to a calendar
Decide how much you want to pay
Set up automated payments whenever possible
Devise a system for manual payments
Sign up for reminders
If you’re unable to make a timely payment, see if you can negotiate so your business doesn’t get reported to the credit bureaus.
Decrease your credit utilization ratio
The credit utilization ratio measures the amount of your credit limit that’s being used. For example, if your balance is $30 and your credit limit is $100, then your credit utilization for that credit card is 30%. The lower your credit utilization, the more attractive your business is to lenders.
Establish credit accounts with suppliers
If you work with vendors or suppliers, you can build your business credit by opening accounts with them. Before you do, make sure they report payments to credit bureaus. That way, your timely payments will be reflected on your credit reports and lenders will have access to them.
Add positive payment experiences to your credit file
The credit card issuers and lenders you have accounts with send accounts updates to credit bureaus including your current balance, payment history, and other details. This information is added into your credit report and used to generate your credit score when it’s requested by businesses and yourself.
It takes time to add positive information to your credit report, so try to be patient with the process.
Dispute any errors and inquiries
If you haven’t reviewed your credit report recently, now is the time. In a Wall Street Journal survey, 25 percent of small business owners who checked their business credit reports found errors that put them in a riskier category.
There’s a reason why your credit report might be incorrect. Unlike consumer credit, business reports are not covered by the Fair Credit and Reporting Act.
If you’ve reviewed your report and found inaccuracies, contact Experian, Equifax and D&B immediately to make corrections on your report.
Avoid closing accounts
If you pay off and cancel the old credit cards, you can risk of lowering your business credit score. This is because your cards could be having a good history but now that you do away with them, you automatically remove the good years of credit that had contributed to the current good score that your business is having. Retain your old credit cards by keeping them open. Even if you pay off any credit card, do not close it no matter what as this could really hurt your business credit score.
Fix your personal credit
Some lenders check personal as well as business credit so it’s important to keep that score high. A FICO personal credit score is a personal credit scoring system created by the Fair Isaac Corporation. It’s presented as a 3-digit number derived from detailed information about your credit history. Your personal score can affect things like car loans and mortgages as well as your ability to qualify for a business loan.
Your personal credit score is a number that represents your creditworthiness and tells lenders the potential risk of lending you money. In other words, how likely are you to pay back the money you’ve borrowed. Your FICO score is usually the first detail lenders review to determine creditworthiness. Important to note: A credit inquiry can lower your score.
Here’s the good news. If your personal score isn’t high enough to qualify for a low-cost loan, you can raise that number. Take these steps ASAP.
Pay your debts on time and as agreed. Debts can include credit cards, car payments, your mortgage, other business loans, etc.
Continue to use your credit cards but pay them off each month
Don’t get anywhere near your credit limits
Open new accounts as a last resort
Deal with any judgments, liens, or other negative marks on your report
Credit reporting agencies are required to remove most derogatory items from your credit history after seven years, including late payments, defaults, collections and foreclosures. If you have these marks, do you best to dispute and have removed.
Keep revolving debt low
Revolving debt is the kind of debt that credit cards offer and is usually an easy way to get credit. It can be a useful tool when used with discipline. The lower your monthly balances the lower your utilization percentage will be.
Stay on the right side of the law in terms of business taxes, business licenses, insurance policies, etc.
Most small businesses need a combination of licenses and permits from both federal and state agencies. The requirements, as well as fees, vary based on your business activities, location, and government rules.
Some types of insurance are also required. Most businesses need to purchase at least the following four types of insurance: Property Insurance, Liability Insurance, Business Vehicle Insurance and Workers Compensation Insurance.
Apply now for a business loan or line of credit with one of our specialists here: APPLY HERERead More
Learning that you’ve been approved for a business loan can be a very exciting occasion for your business.
It may mean growth is on the horizon; that the big plans you’ve been dreaming up for ages are at last coming to fruition.
While the small business loan application process will hardly ever be completely stress free, there are a few things you can do now to better your possibilities of getting approved for the funding your business requires.
Here are five ways you can prep your small business loan application to set yourself up for success.
1. Analyze Your Personal Credit
As you’ve probably heard by now, your credit score is one of the main criteria that creditors look at when deciding to approve or deny you for a loan. It’s better to be proactive than reactive and so we suggest pulling your credit report (do a light pull) before submitting your loan application to check your approximate score. There are three main credit reporting agencies that lenders use, Experian, Equifax, and TransUnion. They all have slightly different reporting systems, so your results may differ with each one, however pulling your report from one agency should suffice.
Check your credit report for any disputable errors. These may include judgements or collections you never knew about, or that are just plain incorrect. If you do find any errors, contact the reporting agency in writing to get it resolved. This process can be tedious, but it can greatly improve your credit score.
If your credit score is accurate, but it’s still not as high as you would like, there are other ways to improve your credit score, including paying down your balances and always paying your bills on time, now and going forward.
For online lenders, your credit score should be no lower than 550, but the higher, the better– as it will affect both your chances of approval and your interest rates. If your credit score is low, it may be worth delaying your application while you take steps to improve it.
2. Improve Your Cash Flow
Lenders pay close attention to your company’s cash flow when looking over your loan application. Owning a small business can be costly; you can have business expenses like rent, inventory, payroll; and the list goes on. Lenders want to know how these costs will affect your ability to pay back your loan on time.
Since lenders are usually the last priority on that list, they want to make sure your cash flow margins are wide enough to cover their loan costs. If, after all your monthly expenses are paid, you don’t have much cash left over– your chances of getting approved for a loan won’t be great.
Big expenses will inevitably come up unexpectedly, so lenders want to see that you’ll be able to consistently make your loan payments even if you get stuck with a leaky roof. If you would like to increase your chances of getting your loan application approved, increase your cash flow!
To increase your cash flow quickly, focus on collecting receivables faster. You can achieve this by sending invoices electronically, offering online payment options for customers, or even offering a discount to customers who pay early. If all else fails, you can also improve cash flow by slowing down payables so your cash isn’t going out the door quite so fast. (But if you take this latter approach, don’t take it too far. Getting in a delinquent payment situation will only hurt your credit!).
3. Evaluate Your Debt Service Coverage Ratio.
The best way to determine how much loan you can afford where you stand in terms of cash flow before handing in your application is by calculating your debt service coverage ratio (DSCR). This ratio tells you and your lenders how much cash you have remaining after all your monthly expenses are taken out, and will give you a better idea whether you can meet the extra cost of a loan.
Your DSCR can be calculated on either a monthly or annual basis using this simple formula:.
Cash Flow/ Loan Payment = DSCR.
All lenders will require that you have a DSCR of at least 1. However, most lenders will require that you have a DSCR of at least 1.5 or greater.
4. Offer Collateral.
In order for lenders to safeguard themselves from loan defaults, they often require that you put up some form of collateral.
Sometimes this collateral can come from your business– such as company inventory, cash savings, equipment, or deposits. If lenders find your business assets to be inadequate, you may be asked to put up personal assets– such as your car or your family home.
If you don’t have collateral to offer, it doesn’t necessarily mean that you will be ineligible for a loan, but lenders may require that you have a cosigner who can offer some of their assets as leverage instead.
Now is a good time to make yourself aware of the particular risks associated with your potential loan. Even though you don’t plan on defaulting on payments, expected events do happen.
5. Know Your Options.
Remember, as much as you want to appeal to your lenders, you want to make sure any loan you take on is a good fit for your business. Pay attention to the options and rates available to you to make sure you’re getting the best loan for both you and your business.
Knowing what loans you ‘d like to apply for will help you further tailor your application to meet that lender’s specific requirements. With the right loan product paired with your stellar application, you’ll be approved in no time! You can apply for a business loan today with G-Force Funding here: https://gforcefund.com/apply/
If you are struggling with cash flow, one way to get you through a difficult financial time is to refinance your business debt. Here’s are some basic points to help you understand more regarding refinancing debt.
The differences between debt consolidation and debt refinancing are such:
Consolidation combines multiple loans into a single one. So instead of being responsible for several separate loans, monthly payments, and billing statements, you bundle everything and pay it down it with a single payment.
Refinancing is when you replace one or more loans with a completely new loan with better rates and terms. Businesses benefit from a lower interest rate to reduce interest costs and bring down monthly payments.
There are three main reasons small business owners should consider refinancing business debt with a low-cost loan:
Lower monthly payments
High monthly payments can negatively impact your business. With business debt refinancing, you’ll benefit immediately from lower monthly payments-often as much as 50% to 80%. The money you save can be reinvested in the business.
Lower interest rates
The total cost of an expensive loan can be high. A new lower-cost loan decreases the interest rate, meaning you pay less for the money you’re borrowing.
Positive Credit Score Impact
Your credit score can decrease due to high credit utilization ratio if you have multiple loans. This ratio will go down when you pay off debt, . The credit utilization ratio is typically focused on a borrower’s revolving credit. This calculation is representative of the total debt compared to the total revolving credit the business has available for all open accounts.
When is the right time to refinance debt?
The right time to refinance debt is when you can qualify for a lower-cost loan. It’s important to know that there will be costs associated with a refinance. Make sure you’re aware of the following:
Total cost and terms
Annual interest rate
Total finance charge
Debt reduction fee
Do the math to get the result you want from a refinance.
Options for refinancing existing debt:
SBA 7( a) loans are typically a great option if you can get approved for one. They have comparatively low rates and 10-year terms. This leads to small monthly payments that are manageable and don’t impair cash flow. SBA loans have gotten a bad rap in the past as being too time intensive when trying to get approved. However, G-Force Funding can help streamline the application process. To learn more about this debt consolidation option, visit submit a preliminary inquiry on our website here: APPLY HERE
Bank term loans
Bank Term loans are term loans meant to be repaid in a shorter amount of time than the 10-year term of a typical SBA loan. This type of loan can be a great way to get the funds you need until you can qualify for an SBA loan.
The following Bank Term loans are available through G-Force Funding’s marketplace banks for debt refinance. You can also use the proceeds for working capital and new equipment purchases:
$ 30,000 to $400,000 loan amounts
2– 5 year repayment terms
Fixed interest rate as low as 4.99%.
No pre-payment penalties.
* Interest rate depends on loan term and the applicant’s credit and financial profile.
Alternative lending is a broad term used to describe the wide range of loan options available outside of a traditional banking. Alternative lenders will consider borrowers who don’t qualify for bank loans due to time in business, poor credit, debt to income ratio, or other reasons. Many alternative loans have high interest rates and short loan terms that can make them less suitable for low cost debt refinance.
The SBA debt consolidation loans offered through G-Force Funding marketplace banks can be used to refinance:.
Merchant cash advances.
Short-term business loans.
High-interest business loans.
Daily or weekly payment loans.
Business credit cards.
To learn more about G-Force Funding Loans and our streamlined application process, visit our website here: APPLY HERERead More
On Saturday July 4, 2020, President Donald Trump signed a new law extending the deadline for applying for a Paycheck Protection Program (PPP) loan from June 30 to August 8. This extension comes on the heels of new Interim Final Rules (IFR) released by the Small Business Administration (SBA) on June 22, clarifying some issues and attempting to make complete loan forgiveness possible for most borrowers.
In addition, on July 6, 2020, the SBA and the Treasury Department released the complete database of all PPP loans issued to date– roughly 4.9 million. For loans exceeding $150,000, the data includes company name, address, NAICS codes, demographic information, date the loan was issued, number of employees, and congressional district. For loans less than $150,000, the name and address were left out.
In a July 6 press release issued by the SBA, Treasury Secretary Steven T. Mnuchin specified, “The average loan size is approximately $100,000, demonstrating that the program is serving the smallest of businesses.” He added that, “Today’s release of loan data strikes the appropriate balance of providing the American people with transparency, while protecting sensitive payroll and personal income information of small businesses, sole proprietors, and independent contractors.”
The release of the data came at the request of many groups and politicians seeking transparency for the $650 billion loan program created under the CARES Act. There is apprehension among some that the program is subject to widespread fraud and misuse, and they desire accountability. Already, many companies receiving negative press coverage and fearing audits and penalties returned $30 billion in PPP funds, although arguably they received them legitimately under the guidelines.
On the other side of the debate are many business groups who want to see a “safe harbor” that all borrowers who received the loans, or at least those under a specific threshold such as $1 million, will receive loan forgiveness for portions of the loan they use according to regulations– 60% on payroll and 40% on expenses such as rent, mortgage payments, utilities, and interest payments on loans.
The release of the data caused immediate apprehension among borrowers as the data seemed incomplete. After reviewing the data, many companies were reported having none or one employee, even though their loan amounts exceeded $150,000, signaling many more employees. This raised considerations that inaccurate data would cause audits or adversely impact a review. The reality is the data demonstrates the input from lenders who were working around the clock to issue the loans as fast as possible and, as per the CARES Act, gave borrowers the benefit of the doubt that the loans were necessary and employees were to be kept on the payroll.
For most borrowers, the inaccurate data will be of no consequence. Businesses with 10 or fewer employees, sole proprietors, or independent contractors will not be the target for harsh reviews or audits, and while those borrowers who received over $2 million in PPP funds have a much higher likelihood of audit, the real targets will consist of fraudsters lying on loan documents.
While the program has been filled with complications, confusion, and new regulations being released almost weekly, the reality is, it has had the desired effect of injecting liquidity into the economy and maintaining workers on the payroll. While approximately $130 billion remains in the program, necessitating the extension to August 8, the federal government moved at an unprecedented pace and scale on this program. Considering that the SBA issues about 1,000 loans in a typical year, 4.9 million PPP loans in three months is commendable.
The fact that funds remain is the result of a slowdown in applications as many borrowers were worried that audits would leave them keeping a loan they thought would become a grant, or worse, civil or criminal penalties. So, in addition to the extension, the new guidance from June 22 was also meant to assuage the worries of many businesses and increase applications.
While it remains to be seen whether the new guidance will boost loan applications over the next month, the new guidance and future regulations sure to come still create as many questions as they seek to answer. Here are some of the most frequently asked questions on PPP loans and forgiveness: https://gforcefund.com/ppp-loan-forgiveness-6-26-2020/
Should I be worried about an audit on my PPP loan?
The new guidance did not provide any specific safe harbors for an audit. The SBA already provides a safe harbor, whereby loans less than $2 million will be considered made in good faith based on economic uncertainty, so there will not be much reason to audit these loans. With government mandated shutdowns, ongoing cases of COVID-19, and a rocky reopening of the economy, economic uncertainty remains for all businesses.
The main concern with audits of loans over $2 million will remain the issue of the “credit elsewhere” test and the liquidity of the borrower. Unlike traditional SBA loans, business owners didn’t have to document a lack of credit elsewhere, and only certify if they did not have sufficient access to credit. At this point, it appears that short of venture funding available or access to public capital markets by virtue of a stock exchange listing, most companies that are audited will likely be able to reasonably claim a lack of adequate credit elsewhere, even with traditional lines of credit.
What can I expect next for any easing of restrictions on PPP loans?
The main issue still remaining in the program is around taxes. PPP loans do create adverse tax consequences, mainly that expenses, including federal payroll taxes paid by the employer with PPP funds, are not deductible. So, while PPP funds that are forgiven are not taxable, businesses will lose these deductions.
Business groups are lobbying intensely to make changes to PPP, especially on the payroll tax issue, in what’s being called Phase 4 legislation. The new law could also offer new funds focused on certain demographics or allow companies a second PPP loan. Negotiations for the new law are underway and should conclude before the Congressional August recess.
The extension of the PPP program until August 8 and the new guidelines should incentivize more businesses to apply for loans. Despite the confusion, the program is largely functioning as designed, which is to provide small businesses with emergency funds to weather the coronavirus storm. While the possibility of an audit remains very real, there is likely more regulations to come that will, hopefully, explain and define what that looks like so businesses have the certainty they need.
In the meantime, with COVID-19 cases surging in many parts of the country, businesses may be facing a new wave of full or partial shutdowns. That prospect will likely accomplish two things: One, remove the issue of “economic uncertainty” from the discussion; and two, lead to a robust new package of economic stimulus.Read More
If you’ve secured an SBA Paycheck Protection Program (PPP) loan, you’ve likely calculated your payroll costs and decided on how you will spend the funds to keep your business stable.
However, that is not the end of your required documents if pursuing loan forgiveness. There are necessary steps to take to bring in sure your PPP loan is completely– or partially– forgiven. Here is a breakdown of the forgiveness process so you can get a clear picture of your loan forgiveness obligations and make a list of specific questions. A good start in answering your questions is to look at the Treasury guidance issued May 5 and then talk to your banker and your accountant.
Is PPP loan forgiveness automatic or do I have to take action?
Paycheck Protection Program loan forgiveness is not automatic. You must submit a request for loan forgiveness through the lender you obtained for your PPP loan with. The application for forgiveness is due within 90 days of the expiration of the eight-week post-funding period. The approval process is expected to be completed within 60 days of the application.
Who is eligible for PPP loan forgiveness?
If you received an SBA PPP loan during the two rounds of funding, you are eligible. Forgiveness of SBA 7( a) loans or other funding received before or during the pandemic is not part of PPP forgiveness.
What is the process for PPP loan forgiveness?
Your lender will provide a form for loan forgiveness documentation, calculations and certifications for accuracy. Forgiveness calculation is based on the eight (8) week period from date of final loan disbursement (not the approval date).
Loan forgiveness details
Employers can apply for full or partial forgiveness if they spend their loans on qualifying expenses over the eight weeks after receiving a loan. Qualifying expenses include:
- Payroll costs (Business owners must spend at least 75% of their loans on payroll costs)
- Mortgage interest (not including principal payments)
- For in-depth information of qualifying expenses and calculations, review the U.S. Treasury guidelines PDF
What documentation should I gather?
- Employee pay records for 2019 and 2020 by pay period (to assist with baseline wages before the covered period starts)
- Employee pay records for each week when the covered period starts
- FTE count for 2/15/2019 through 6/30/2019 and 1/1/2020 through 2/29/2020
- FTE count for each week when the covered period starts
- Supporting documentation for payments of non-payroll costs (invoices, checks, proof services in place prior to 2/15/2020)
Special rules for PPP loan forgiveness
- Loan proceeds are used to cover “payroll costs” (the same definition as the loan application), mortgage interest in place prior to 2/15/2020, rent paid on leases in place prior to 2/15/2020 and utility costs (generally electricity, gas, water, telephone, and internet) for services in place prior that are paid over the eight-week period that begins the date the loan is made (the “benefit period”)
- At least 75% of the loan proceeds must be used for payroll costs. The 75% spend on Payroll Costs Rule published by the SBA on April 2 directs that not more than 25% of loan forgiveness can be for non-payroll costs, hence 75% of forgiveness must be for payroll costs (likely subject to additional guidance)
Employee headcounts maintained
Compensation levels are maintained for employees earning $100,000 or less
What reduces PPP loan forgiveness amounts?
- If full time employees and compensation are restored, loan forgiveness reductions listed above may not be applicable according to the SBA you have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020
- Compensation for individuals earning more than $100K annually
- Employees residing outside the United States.
- Qualified sick and family wages paid under the Families First Coronavirus Response Act (FFCRA) where the business may claim a credit
- There is an additional reduction calculation if you bring back workers but reduce their pay from the pre-pandemic time-period by more than 25%
What if I’m an independent contractor or sole proprietor?
PPP forgiveness is slightly different for sole proprietors and independent contractors. The biggest difference is “owner compensation replacement” which simplifies the loan forgiveness process.
The amount of “owner compensation replacement” you’re eligible to claim is calculated by multiplying your reported net income in 2019 on your Schedule C by 8/52 (or 0.154).
What happens if I don’t get full PPP loan forgiveness?
PPP loan terms are generous and offer the lowest-cost working capital around.
If you don’t get a portion of your loan forgiven, you’ll be responsible for paying back the loan with a 1% interest rate. PPP loan payments are deferred for six months and payable within 2 years.
What if I want to return my PPP loan?
May 14 was the deadline for returning funds is provided by the SBA for companies that received PPP funds but later found that they were unable to certify in good faith that their PPP loan was necessary. One reason to return the funds is if you feel like the forgiveness guidance is too stringent.
Are there other options for impacted businesses who did not receive PPP funding?
After PPP loan funds have been exhausted, there are options for small business owners without a PPP loan.
Term loans and other financing may be tough to get in this economic environment. However, the SBA 7( a) loan program will likely continue and is a low-cost option for businesses who qualify. You can apply today with G-Force Funding to be considered for an SBA 7( a ) loan.Read More
The Paycheck Protection Program (PPP) was designed to support American small businesses with immediate cash support during the COVID-19 pandemic. If you are a sole proprietor, an independent contractor, or a gig worker, here’s what you need to know, and what you’ll need to apply.
Almost all small businesses qualify for the Payment Protection Program.
- Sole proprietors who report income and pay taxes on a Schedule C in your personal tax return
- Independent contractors who collect 1099-MISC forms
- Gig economy workers who take on-call jobs provided by companies such as Uber, Lyft, and Instacart
The only restriction is that your business was operational before February 15, 2020. If you started your business after that date, you will not be eligible for this program.
What is the benefit of the Paycheck Protection Program?
This program was designed to help Americans remain employed and retain their salaries. As the name implies, this is a payroll-focused program. The payout you receive will be based on your average monthly payroll expense multiplied by 2.5. Under the PPP, your payroll expense can include your salary expenses and health insurance premiums.
The biggest benefit of this program is that it can be almost entirely forgiven. You do not have to pay tax on any portion of the loan being forgiven (meaning the loan becomes tax-free grant). If you keep your payroll expenses consistent to what they were before the COVID-19 pandemic for a further eight weeks, including the salary paid and the number of employees paid, you could be eligible to have those expenses forgiven from your loan amount, as well as certain other expenses such as rent and utilities.
The good news is that if you are self-employed (and you are your only employee), this should be easy to achieve.
However, it is important to note that you can not receive both Unemployment Benefits and a PPP loan at the same time. You should consider the payout of each program to determine which is the best fit for you.
What if I don’t use a payroll service?
If you own a business and do not give yourself a salary through a payroll service, you are likely still eligible for the Paycheck Protection Program – with one exception. Businesses that are structured as C corporations or S corporations must use payroll to pay their owners, because the corporation is taxed separately from the individual. If you own a corporation and have not been paying yourself a salary through payroll, you will not have a salary covered through the PPP This is because distributions or dividends from a corporation are not considered to be a salary or self-employment income.
Payments made to contractors aren’t considered payroll and aren’t eligible under the PPP.
Sole proprietors and the PPP
If you run a business on your own, your business is a sole proprietorship even if you haven’t formally let the IRS know.
Since you don’t have employees, you won’t be reporting your payroll costs for the PPP loan. Instead, you’ll be reporting your net business income, which will be reported on a Schedule C. As long as your business was operational prior to February 15 of this year, you can apply to the Paycheck Protection Program.
According to the U.S. Treasury, “regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application.”
If you’ve already filed your taxes, this should be easy: just submit your filled-out Schedule C with your application. If you haven’t filed your taxes yet, you will likely need to get retroactive bookkeeping done so you can calculate your net income and fill out your Schedule C properly.
If you don’t have bookkeeping or a tax return, we strongly recommend that you get caught up with your bookkeeping. Without a payroll service, bookkeeping is the best way to determine your net profit as a sole proprietor (which is what the PPP will ask for).
Your monthly average payroll expense will be your annual net profit divided by 12. If your annual net profit is over $100,000, you may only claim up to $100,000 divided by 12.
Sole proprietors who are married
If you run a sole proprietorship informally with a spouse, you will only apply to the PPP once, and your spouse would not be considered to have a salary through the business unless he or she was paid as a contractor prior to February 15, 2020.
If you own more than one sole proprietorship, you may apply separately for each – but only if these sole proprietorships have separate EINs. The general rule of thumb is that you can apply separately for as many businesses you own that have separate identification numbers, or separate tax reportings. You may apply for the PPP once with your SSN as a sole proprietor, and then separately for any other businesses you own using their EINs.
Independent contractors and the PPP
If you work as a 1099 independent contractor, you are by default considered to be a sole proprietor in the eyes of the IRS. This means your freelance income gets reported annually on a Schedule C within your personal tax return. You will have a Schedule C even if you pick up odd jobs or do freelance work, and this Schedule is based on the 1099-MISC forms you collect from the companies or individuals who have hired you as a contractor.
Your salary is most easily determined by looking at the net profit listed on your Schedule C. If you have already filed your 2019 taxes, or prepared a 2019 return, this will be reported on line 31 of the Schedule C. If you have not filed your 2019 taxes, you will still need to fill out a Schedule C in order to qualify for the PPP.
Proof of income
The lender will want to see all documents related to any wage, commission, income, or net earnings from self-employment that you have received. This means that you’ll need to collect any earnings reports, pay stubs, or invoices you have.
Sole proprietorships will need to submit a Schedule C from their 2019 tax return filed (or to be filed) showing income and expenses from the sole proprietorship.
Independent contractors will need to submit schedules from their 2019 tax return filed (or to be filed) as well as Form 1099-MISC from 2019.
All self-employed individuals will need to submit 2019 payroll tax filings reported to the Internal Revenue Service.
Rent, mortgage, and utilities expense
The Paycheck Protection Program funding can cover your office lease, rent, or mortgage interest, provided that you had it before February 15 2020. If you have a home office, you can claim a portion of the expenses (the percentage of your home that’s used as a home office).
Again, collect any paid invoices, statements, lease agreements, or cancelled checks that will help prove you had these expenses.
However, if you want to have your loan forgiven, you must spend 75% of the loan funds on payroll costs (and the remaining 25% on rent, mortgage interest, and utilities).
If you’re a sole proprietor, 75% of the loan acts as a replacement for lost profit and does not need to be spent in a specific way. The remaining 25% must be spent on mortgage interest, rent and lease payments, and utilities in order to be forgiven.
How do I apply?
Here is a the PPP application form from the U.S. treasury: PPP_LOAN_APPLICATION.pdf
Financial records you’ll need
You’ll need to provide payroll/bookkeeping records to prove your payroll expenses.
That could include:
- Payroll processor records
- Payroll tax filings
- Form 1099-MISC records
- Schedule C for a sole proprietorship
- If you don’t have access to those kinds of documents, you can also provide bank records.
If you own more than one business
We are also hearing reports that entrepreneurs who own more than one business are having difficulty getting relief funding when their businesses don’t have cleanly separated finances. If you own more than one business, it’s important to get separate bookkeeping done for each business. This will become doubly important when it comes time to prove your expenses for loan forgiveness.
The Paycheck Protection Program (PPP) ran out of money last week. Despite its bumpy start, the program had approved more than 1.5 million applications from distressed small businesses in less than two weeks. As a result of the funding shortfall, the Small Business Administration (SBA) ceased taking applications from lending institutions.
After negotiating all weekend, the White House and Democrats are reporting that they are near a deal. Dubbed Stimulus 3.5, the new round of funding includes another $300 billion for the PPP, $50 billion for disaster relief loans (Economic Injury Disaster Loans), $75 billion for hospitals and $25 billion for testing. It’s being predicted that the new bill will be approved as early as today. Given the dire straits many of the nation’s 30 million small business find themselves in, hopefully businesses will be approved shortly afterward. For the moment, some banks will continue to accept applications for when the pipeline opens again. Others may tell small business owners just to have their applications ready.
PPP loans are a much needed lifeline. They can be for 2.5 times payroll costs, up to $10 million, and feature a streamlined application process and fewer conditions. Most importantly, PPP loans can be forgiven, fully or in part, depending on if borrowers maintain head counts and payrolls at pre-pandemic levels and use their loan for authorized expenses.
If you were going to apply for a PPP loan, which the SBA classifies as a 7( a) loan, you should still get your paperwork ready. Read on to understand what is required, how much you can borrow, how forgiveness works and other key specifics. You should also research other business relief options.
Do You Qualify for a PPP Loan?
Almost any small business with 500 or fewer employees may be eligible. This includes small businesses, corporations, LLCs, private nonprofits, faith-based organizations, tribal groups and veteran groups. Self-employed individuals who file an IRS Schedule C with their Form 1040, such as independent contractors and sole proprietors, are also eligible. (Partners who report self-employment income, however, are not eligible as self-employed individuals.).
Restaurants and hospitality businesses may qualify if they have 500 or fewer employees per location. Details on the size standards and exceptions are on the SBA website (www.sba.gov).
Ineligible enterprises include those engaged in illegal activities, owners more than 60 days delinquent on child support obligations, farms and ranches, sex businesses, lobbyists and gambling establishments.
Terms of a PPP Loan
The government’s aims to aid businesses have resulted in reasonable terms for PPP loans. Borrowers can receive two and a half times their average monthly payroll costs (excluding compensation in excess of $100,000 per employee) incurred 12 months before the date the loan is made (some lenders are just using 2019 numbers). For example, if your monthly average payroll (excluding compensation in excess of $100,000 salaries) in the last 12 months is $10,000, you may borrow up to $25,000. Furthermore, you can include as payroll costs: payment for vacation, parental, family, medical and sick leave (that is not covered by another emergency loan/grant); payment for dismissal or separation; payment for group health care coverage, including insurance premiums; payment for retirement benefits and payment of state and local taxes assessed on employees’ compensation.
Also, you can add to your total loan amount the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less any “advance” that is forgivable under an EIDL COVID-19 loan.
With most Americans under some form of lockdown and businesses across the country closed, PPP loans are a necessary lifeline. They can be for 2.5 times payroll costs, up to $10 million, and feature a streamlined application process and fewer requirements. Most significantly, PPP loans can be forgiven, fully or in part, depending on if borrowers maintain head counts and payrolls at pre-pandemic levels and use their loan for permitted expenses.
If you were planning on apply for a PPP loan, which the SBA categorizes as a 7( a) loan, you should still get your paperwork prepared. Read on to understand what is required, how much you can borrow (use our PPP calculator, below), how forgiveness works and other key details. You should also research other business relief options. If you’re feeling overwhelmed, you can contact a representative from G-Force Funding for assistance by phone (877) 406-4218 or email: email@example.com
PPP Loan Forgiveness
Small businesses will have their loans forgiven if they use the money for designated expenses. Participants are eligible for loan forgiveness for the amounts spent on authorized expenses over the eight weeks after the loan is disbursed.
The total payments for payroll over the eight weeks after the loan is disbursed may be forgiven. Mortgage interest, rent and utilities are also forgivable, up to 25% of the PPP loan.
To get the entire amount of the loan forgiven (assuming that at least 75% is spent on payroll and the rest on permitted expenses), you must meet two criteria. First, the full-time employee headcount can not decline from average monthly levels during 2019 or during the past 12 months. If your business started in the H2 of 2019, you can use average headcounts from January 1, 2020 to February 29, 2020. If you have a seasonal business, you can base your monthly averages on numbers from February 15, 2019, or March 1, 2019 to June 30, 2019.
Second, for loans to become full grants, employers can not cut salaries or wages. If they do, the forgiven amount will be reduced. Employers who already let workers go have until June 30 to restaff. The SBA has yet to issue guidance on how a smaller staff or payroll will reduce the amount eligible for forgiveness.
Another provision of the program allows borrowers who already have disaster assistance loans to defer payments through Dec. 31. This is an automatic deferment. Borrowers don’t have to do anything to qualify for it.
The SBA has a summary of loan terms here: https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf
How to apply for a PPP loan
Banks, primarily community banks, began accepting PPP loan applications from small businesses and sole proprietorships on April 3. Independent contractors and self-employed individuals, including freelancers, could apply starting April 10. The program ends June 30, though borrowers are encouraged to apply as soon as possible. Note that many lenders are limiting eligibility to those businesses with whom they have a pre-existing relationship, such as previous loans or a business checking account.
You can apply immediately for the PPP Loan program with G-Force Funding here: www.gforcefund.com/apply
Here is our current required document list:
- Completed SBA Paycheck Protection Program Application Form: https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf
- 2018 (or 2019) personal and biz tax return
- Last 6 months bank statements and MTD
- All owners’ Driver’s Licenses (front and back)
- IRS Form 940 and 941 (as of 12/31/19 and 3/31/20, respectively)
- Payroll Report for February 15, 2020 (or closest date).
- Annual Payroll Report for 2019 (calendar year through December 31, 2019)
- If an SBA EIDL loan was made between 1/31/2020 and 4/3/2020, a copy of the note
Here is a side by side comparison of the PPP loan & EIDL loan:Read More