This article aim to provide guidance to address borrower questions concerning the implementation of the Paycheck Protection Program (PPP), established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act).
Funding is essential for starting or expanding your small business or start-up. Even if you have started with your savings, you might require funding for the smooth running of day to day operations or your expansion plans and even the unforeseen emergency. When we think about financing or funding for business, we think of loans naturally. In fact, they are the easiest and most common way of business funding – both large and small. Small business has different set of loan requirements from the large-scale ones and need a more relaxed and convenient approach. Here is all you need to know about funding for small businesses from Government and private lenders, especially the measures adopted by the Government in the present economic scenario like the PPP program.
What is a Small Business Loan?
In simple words, a loan is a borrowed amount that has to be repaid after the term with interest. Many different kinds and types are available to suit most of your needs if you are planning to start or own a small business. A small business loan can range from a few thousand to a few million dollars. By nature, these loans have less stringent requirements and are more flexible and convenient enabling the small business to avail the funds. Often, they also provide an incentive for the borrower, which minimizes the expenses for the business and helps it run smoothly.back to menu ↑
What are the Qualifications or Eligibility for a Small Business Loan?
Any business across the country, with up to 500 employees is eligible for a small business loan. Apart from that, self-employed individuals, independent contractors, and sole proprietors are also eligible. A good credit score or history both personal and business is required to avail of a loan easily.back to menu ↑
Where Can You Apply For a Small Business Loan
You can get a loan from anywhere. You can secure it from your friends and family, crowdfund it, or approach organizations like Banks and online alternative lending agencies. Alternatively, you can also apply for a Government small business loan.back to menu ↑
What are the Best Alternative Business Loans?
Typically, when you think of loans you think of banks. Apart from banks, you should also consider private financing agencies and Government loan programs, especially for small business loans. They offer more flexibility and convenience and can customize the offers more to cater to your need.
Loans offered by private Funding Agencies
Funding agencies and banks also offer finances for your small business. They are often more flexible, quicker, and customizable than Government loans. However, their interest rates are higher than Government small business loans. One of the best financing agencies Kabbage offers unmatched convenience and versatility. You only need to apply for a Kabbage loan online and get an approval within minutes if all the papers are in order. The funds are also disbursed within the same day, which for a Government loan can take days or even weeks.
Kabbage offers a business line of credit and the requirements are quite simple – you just have to be one year in business with $50K annual revenue to be eligible for a credit up to $100,000. They don’t need a minimum credit score and look into your business revenue and cash flow for assessment and approval. Kabbage funding is one of the best options for entrepreneurs with low personal credit ratings. The money is disbursed in your PayPal account, bank account, or a Kabbage card. This offers unmatched convenience for the customer. Apply for a kabbage business loan if you are looking for –
- A fast and automated approval
- Quick disbursement of funds
- The convenience of accessing cash
- Loan assessment on the strength of your business.
- Funding for small business without considering your personal credit score
Recommended Reading for You:Small Business Loan Terms - What to Know
Federal Government Small Business Loans
Government loan programs offer to fund to people starting or expanding a business. These loans are particularly helpful for them who might not qualify for a traditional bank loan. You can use these loans for –
- Purchasing new equipment, machinery, parts, supplies, etc.
- Financing leasehold improvements
- Paying the commercial mortgage on buildings
- Repaying existing debt
- Establishing a line of credit
You can use these government resources and services to find a loan that best suits your business needs:
- Small Business Administration (SBA)– loans for starting and expanding a business, handling disasters, and exporting goods.
- S. Department of Agriculture (USDA)– Government-guaranteed loans for developing rural businesses.
- The Treasury Department Small Business Lending Fund (SBLF)– funding for community development loan funds and community banks.
- PPP program is also a form of a small business loan from the Government.
Why Go For a Government Loan to Small Business?
There are few reasons for selecting a Government small business loan –
- Private lenders put more emphasis on your credit report and financial history, which might be a problem with a startup or a new venture. The private lenders want to minimize their risk, but this is not the case with the Government loan programs. However, you will still need a decent credit report and fulfill other guidelines set by the Government.
- The interest rate set by the government is much lower than in the private sector. This matters for a startup with limited resources.
- If your business has a jittery start but you develop a recovery plan and need finances to roll these plans, Government loans can be easier to get.
- These loan programs are created to promote economic growth and create new jobs in different areas including fringe areas like rural business, economically backward communities, and others.
A grant is a way the government funds your ideas. They are for non-profit and educational institutions, focussing on projects to provide public services and stimulate the economy. Grants support critical recovery initiatives, innovative research, and other related programs. For a full list of grants, visit the website of Federal Domestic Assistance (CFDA).back to menu ↑
Are Government grants 0 interest in small business loans?
The grants offered by the Federal Government are not for starting or growing a business, but several state and local programs offer business grants. They are not Government benefits and usually are set up for a specific purpose with specific rules. You are required to match the expectations and requirements of the funds in order to avail them. Often, they are also given in addition to or in combination with other forms of funding like a loan.
Recommended Reading for You:Small Business Grants to Grow Your Business
Small Business Administration (SBA) loans and grants
The SBA is a U.S. government body, that supports all small businesses and entrepreneurs. SBA partners with banks and other organizations to offer you Government loans. The Government will guarantee a portion of the loan and will pay that amount to the lender if you default. This guarantee by the Government increases your chance of receiving the loan as it lessens the risk to the lender. This arrangement benefits both the small business and the lender. You get the capital to start or grow your business and the lender gets more approved small business loans increasing its business.
Some of the more popular SBA small business loans are:
- 7(a) Loan Guarantee Program: This is for starting or growing a small business, with a maximum loan size of $5 million. The uses of proceeds include: starting a business, expansion/renovation, new construction, purchase of land/ buildings, purchase of equipment, improving lease-hold, fixtures, refinancing debt, seasonal line of credit, or inventory.
- Express loan program: This program allows loans up to $350,000 for a maximum period of 7 years. There is an option to revolve the loan after completion of the term. The uses of proceeds in this loan program are the same as the standard 7(a) loan.
- Microloan Program: This program offers loans through non-profit lending organizations to under-served markets. The use of proceeds includes working capital, supplies, fixtures, machinery & equipment but does not include real estate. The maximum loan amount is $50,000, with an average loan size of $14,000.
- 504 Fixed Asset Program: these are fixed-rate, long-term loans that are aimed at business models directly benefiting the community. This aims to foster economic development, or bring in much-needed service to the area or create/retain jobs in the area. The maximum loan amount is $5 million and the use of proceeds is limited to an acquisition or refinance of fixed assets.
- Community Advantage loan pilot program: This program allows lenders to help small businesses in under-served markets with a maximum loan size of $250,000. The uses of proceeds are the same as the standard 7(a) loan.
How Do I Apply For a Small Business Loan First Time?
Most of the loans are an online process, but there are certain important steps you should follow before you submit your application –
- Know the reason why you want a loan and the exact loan amount – this sounds easy but is tricky as for a new business the actual loan amount can only be anticipated. For a running business, the required loan amount can only be determined after consulting the yearly balance sheet.
- Review your credit history and credit score – if your business is more than three years old then your business credit history will also be taken into account apart from your personal credit history
- Prepare your business plan – This is the most important step as it will accompany your loan application and will be majorly responsible for a small business loan A good plan will have a financial record of your business over several years. It will also have details of the collateral or assets you will use to secure the loan. Last but not the least, it should include a detailed analysis of the market You will need to include an analysis of the market you intend to serve, the business projections you are looking at and your own experience in the business.
- Review your loan options – when you are clear about your requirements, look at all the lenders to know the best deal. You can also consider talking to funding consultants for professional advice. You can also avail of free consultation on your small business loan from non-profit organizations like SCORE and SBDC.
- Meet your lender and present your case – It will be convenient if you plan a presentation which states your case. Work on the presentation so that the concerned officials understand and appreciate your requirement.
- Apply for the loan – fill in the application form, check all the required documents, and apply.
What is the Minimum Credit Score for a Small Business Loan?
Your credit score is measured in the FICO score, which ranges between 300-850 for business loans. You need a score of around 620 to qualify for an SBA small business loan and 640+ for SBA 7(a) loans. In most cases, though a good and steady business credit report is enough to qualify. Moreover, it gives confidence not only to the lender but also to you.back to menu ↑
How to Apply for a SBA Small Business Loan?
The loan application process is completely online. Every state of America has at least one SBA office, and they will provide you with the details if you contact them with your business model and plan. If you are contacting a lender like Kabbage, then the experts will be able to guide you to the best plan.back to menu ↑
How Do I Get SBA Small Business Loan Application Form?
The whole process is online so you can download the loan application forms from the SBA site. The process requires some amount of paperwork and so if you are intimated by it then it is better to take the help of loan consultants who will make things easier. Your lender can also help you – the consultants at Kabbage will not only guide you but also have your forms filled in, have your documents verified, and get approval for a Government small business loan easily.back to menu ↑
What Documents Are Needed For a Small Business Loan?
For an SBA loan application, you need to prove your eligibility. The lenders want proof that you and your business are a good risk and they want to check the 5C’s –
- Capital (down payment)
- Credit (credit score and history)
- Capacity (ability to pay off the loan)
- Collateral (property or asset to guarantee the loan)
- Character (past business experience).
Having all the relevant paperwork ready will help to move the application forward and get the approval quickly. Here’s a list of the documents you’ll need to provide during the initial loan application process.
- SBA Form 413 – Personal Financial Statement
- SBA Form 1919 – Borrower Information
- SBA Form 912 – Statement of Personal History
- 3 years of personal tax returns
- Management Resume
- Personal identification card
- Business plan
- Financial projections
- Information on any affiliated businesses if you have a controlling interest in any other business.
If you need a loan to buy an existing business, you’ll also need to provide the following document in addition to the above list:
- 3 Years Business Tax Returns
- Current Interim Financials or balance sheet showing profit & loss.
- Letter of Intent or Purchase Agreement
If you need a loan to expand or maintain an existing business then you will need these documents:
- 3 years business tax returns
- Current interim financial or business balance sheet showing profit and loss.
- Business debt statement
What Happens If You Default On a Business Loan?
When you default on your business loan or don’t repay the loan, the lender will initiate legal proceedings to recover the loan amount. If the loan is secured with collateral or assets, then they will be seized. If the lender is still not able to recover the loan amount, then your business can be filed for bankruptcy. defaulting eats into your reputation and credit score. This will make it difficult to get a business loan in the future.
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Emergency Small Business Loans
These are Government funding for addressing a disaster that can be physical or economical. These are applicable in special situations and Presidential declaration of emergencies
Economic Injury Disaster Loan Program (EIDL)
The SBA disaster loans are the primary Federal assistance to address economic injury to private and non-profit organizations from a declared disaster. The Economic Injury Disaster Loan Program (EIDL) can provide up to $2 million of financial assistance. The actual loan amount however is based on the amount of economic injury sustained. An EIDL provides relief from the direct economic injury from the disaster and it can also help you attain the financial obligations, had the disaster not occurred. However, they do not replace lost sales or revenue.
The EIDL program also provides a loan advance for businesses losing money due to the coronavirus. The main features are
- Advances up to $10,000.
- Money is available within three days of a successful application.
SBA Express Bridge Loans
The SBA Express Bridge Loan (SBA EBL) provides direct loan assistance to small businesses located in communities impacted by disasters declared by the President and also by SBA under its authority. The EBL Pilot Program authorizes SBA Express Lenders to provide funds up to $25,000 on an emergency basis to small businesses in the affected communities.
From March 25, 2020, SBA expanded the program eligibility to small businesses across the country, who are adversely affected by COVID-19. Normally, EBL loans can be distributed for up to six months after the date of a Presidential Disaster Declaration. But the expansion for the COVID-19 scenario, allow loans to be made through March 13, 2021. The maximum loan term is seven years, but your lender may allow a longer-term if you haven’t received long-term disaster financing.
SBA Debt Relief
The Federal Government has provided immediate relief to small businesses that are funded under with SBA 7(a), 504, and microloans program. For all these existing borrowers, SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be extended to new borrowers who avail of an SBA loan within six months of enacting the CARES Act. This program will also defer loan payments on disaster loans made earlier till December 31, 2020.back to menu ↑
Who Is Eligible For Debt Relief?
You are eligible if –
- You have an existing SBA 7(a), 504, or microloan loan (other loans are not eligible) but payments are already deferred under those loans.
- You apply for and receive an SBA 7(a), 504, or microloan within six months of the CARES Act (between March 27, 2020, and September 27, 2020).
To check your eligibility please consult the SBA website.back to menu ↑
Paycheck Protection Program (PPP)
We are facing an emergency now as the Coronavirus (COVID-19) outbreak has caused an unprecedented economic disruption. On Friday, March 27, 2020, the President signed the CARES Act into law. The Act contains $376 billion in relief for American workers and small businesses.
PPP stands for Paycheque Protection Program (PPP) and is a temporary program under the CARES Act, aimed at offering direct relief to businesses to keep their employees on the payroll.
In early May 2020, Congress provided an additional $320 billion in funding for PPP loans apart from the $349 billion sanctioned earlier.back to menu ↑
What Can I Use a PPP Loan For?
You should use 75% of the PPP loan for Payroll costs including salaries and other benefits.
The remaining 25% can be used on
- Interest on mortgages, acquired before February 15, 2020.
- Rent, under lease agreements, started before February 15, 2020.
- Utility bills which started before February 15, 2020.
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Who Is Eligible For The PPP Loan?
The PPP loan is for –
- Organizations with 500 or lesser employees, who primarily reside in the US.
- Self-employed individuals.
- Private non-profit organizations
- Veterans organizations.
- Tribal business concern.
- Sole proprietorship concerns
- An organization that was in business before 15th February 2020 and had independent contractors as its suppliers.
- Seasonal businesses if the business was in operation for any 8-week time between May 1, 2019, and September 15, 2019
- Farmers, ranch workers, and agricultural producers.
SBA has waived the affiliation standards for small business in the PPP program in
- Hotel and food services Industry
- SBA franchises
- Small businesses that receive financial assistance from business investors licensed by SBA
What Counts As Payroll Costs?
Payroll costs for the PPP program include –
- Salary, wages, commissions, or tips (capped at $100,000 annually for an employee)
- Employee benefits including parental, family, medical, or sick leave; Group health care benefits including insurance premiums; and payment of any retirement benefit. Costs for vacation and allowance for separation or dismissal are also included.
- State and local taxes assessed on compensation.
For a sole proprietor/self-employed or independent contractor, payroll costs mean wages, commissions, income (net earnings from self-employment) This is capped at $100,000 on an annual basis for each employee.back to menu ↑
What is The Loan Amount and Interest Rate of a PPP Loan?
The maximum loan amount is 2.5 times of the 2019 average monthly payroll cost of the business. The maximum amount of the loan is $10 million. The interest rate of PPP loans is 1% with a 2 years duration. Also, they don’t require any collateral or personal guarantees, and there are no fees charged to borrowers.
All payments are deferred for 6 months although the interest will continue to accumulate over this period. If you want to pay the loan back before the two-year term there are no prepayment penalties or fees.
Also, any outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, can be added to the PPP loan amount request.back to menu ↑
What is Compensation For Employee Owner?
Apart from business organizations, the PPP program also includes employee-owner compensation up to $100,000 per person. Independent contractors and self-employed individuals employed by the organizations should apply for their own PPP loan starting from April 10, 2020. The program is open until June 30, but you need to apply quickly as there are a funding cap and high demand for these loans.back to menu ↑
Is a PPP Loan For Startup Small Businesses?
The PPP loan is aimed at existing businesses and attempts to retain the workforce of the business. The main stipulation of the PPP is that businesses must keep employees on the payroll, or re-hire by June 30, and must maintain their salary levels at 75%. Businesses who use the funds to do this will be for a 100% forgiveness incentive. If you reduce your full-time employee headcount or decrease salaries and wages by more than 25% for any employee that made less than $100,000 annually, the forgiven amount will be reduced.
In short, this is a Government financial support so that the small businesses survive the crisis, employee headcounts remain stable, and businesses bounce back when the economy improves.
Recommended Reading for You:Best Options For Startup Business Loans
How Do I Apply For a PPP Loan?
You have to apply through any existing SBA lender. Since all loan terms will be the same for everyone receiving PPP loans, irrespective of the amount of the loan or their lender, there is no best lender for PPP loans or best bank for PPP loans. You should contact your local lender with whom you have an existing relationship to have your loan processed and approved. For example, if you have a relationship with Kabbage then you should apply through their portal for convenience. The famed simple online application and fast processing make the Kabbage PPP loan application and approval as convenient as possible. The application is available on the Treasury Department website (home.treasury.gov).
Important: If you receive funds under both EIDL and PPP, then you cannot use both the loans for the same purpose. The EIDL advance will be subtracted from the forgiven amount of the PPP loan. The PPP loan can, however, be used to refinance the EIDL loan.back to menu ↑
When Can I Apply For a PPP Loan?
- Small businesses and sole proprietorships can apply and receive for the loan starting April 3, 2020.
- Independent contractors and self-employed individuals can apply and receive the loan from April 10, 2020.
What Do I Need To Apply For a PPP Loan?
For any COVID-19 funds, you will have to specifically mention how you are going to utilize the funds. For PPP loans, you have to submit the loan application along with the payroll documentation of your business by 30th June 2020. Remember that under the PPP program you can make only one loan.
As part of your application, you need to certify in good faith that:
- How the loan is necessary for your business/ operations in the present economic uncertainty.
- That you will use the funds to retain workers and maintain payroll or to make a mortgage, lease, and utility payments incurred before February 15th, 2020.
- You have not and will not apply for another loan under the PPP program.
- Detailed documentation of the number of full-time employees on payroll along with the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
- Your tax documentation (same that you submitted to the IRS so that the lender can calculate the loan amount you are eligible for.
- A declaration that all the information you provided in your application and all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program or using the loan for fraudulent purposes, is punishable by law.
What Is PPP loan Forgiveness?
SBA has issued the PPP loan forgiveness application, working with the Department of the Treasury. There is an in-depth instruction on how to complete it. The document specifies how a recipient can apply for the PPP loan forgiveness and also allows them to calculate the amount forgiven. The instructions summarize eligible and non-eligible payroll costs, mention the documents that need to be submitted by borrowers with the PPP loan forgiveness application and also provide a step-by-step direction for completing the forms.
If during the period of loan utilization, 75% of the amount was used for payroll maintenance then the loan amount will be fully forgiven. You will owe money after the term ends
- if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utility payments over the 8 weeks after getting the loan.
- If you use more than 25% of the forgiven amount may be for non-payroll costs.
- If you do not maintain your staff and payroll.
How Much of My PPP Loan Will Be Forgiven?
The amount of your PPP Loan that can be forgiven will depend on –
- Maintenance of your staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount after 15th February 2020. After this period the only exemption will be in case of retirement both normal or voluntary or a voluntary request for reduction in work hours and payment by an employee.
- Maintenance of Payroll: Your loan forgiveness will be reduced if you decrease salaries for any employee that made less than $100,000 annually in 2019 by more than 25%.
- Re-Hiring of your employees: You have to restore your full-time employment and salary levels by June 30, 2020. This will apply to any changes in the employee and payroll status made between February 15, 2020, and April 26, 2020.
How Can I Request Loan Forgiveness?
You can submit a request to the lender that is servicing the loan. The request should include
- documents that confirm the number of full-time equivalent employees and their pay.
- Documents confirming the payments on the eligible mortgage and/or lease.
- Utility obligations and bills.
- The employee application, in case of any voluntary retirements or request for reducing work hours and pay.
Consultation for PPP loan forgiveness
You can consult an expert if the paperwork is too much of a burden. When you are consulting a PPP loan forgiveness consultant, the services would typically include –
- A review of your PPP loan application funding
- A review of the projected spending of PPP loans with a focus on how to maximize the loan forgiveness amount.
- A review of the FTE workforce and salary reduction and, if applicable.
- Estimating the amount of PPP loan which can be forgiven and ways to maximize it.
- Calculate the payroll cost according to SBA guidelines.
- Assistance with the SBA’s PPP loan forgiveness application submission
While consulting an expert on PPP loan forgiveness can yield the desired results remember that they will charge a fee. You can avail the free resource like the forgiveness calculator provided in the SBA website if the calculations are too overwhelming for you. You can find similar free resources in the sites of other lenders too.
It is always better to look into the loan before availing it. Be sure about what you need and how much. For a first-time business venture, an extensive research before applying for a small business loan always pays off.
If you are in an existing business then it is advisable to apply for the PPP loan as it is designed to pull us out of the economic crisis due to unprecedented circumstances.back to menu ↑
Small business owners may rely on the answers provided in this document as interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rules (“PPP Interim Final Rules”). Bizit is reviewing online lenders that support relief efforts by the SBA by offering reviews to help small businesses get fast access to this critical funding. Small businesses can now apply for PPP through Kabbage, Bluevine. Lendio and other online alternative lenders.