How to Apply for the Paycheck Protection Program SBA 7(a) Loan
Covering Your Business During COVID-19
It’s an uncertain time for everyone, and many business owners are scrambling to figure out how to provide for themselves and their employees during the COVID-19 crisis. This month, I’m sharing the resources I’ve found to help my clients and others protect their financial futures.
I’ve gotten a lot of questions about applying for the U.S. Small Business Administration (SBA) loans recently made available under the CARES Act. In our last post on the subject, I covered the SBA 7(b) loan; here, I’ll walk you through the SBA 7(a) loan, also known as the Paycheck Protection Program (PPP).
I’m hosting a free webinar at 10:00 AM (PDT) every Friday starting on April 17th, 2020 to cover the SBA 7(a) and (b) loans in detail, which you can register for here. However, as you’ll see in this post, the 7(a) loan requirements can be confusing, and the application is difficult to fill out. I want to help you apply correctly for all the loans you can; to see whether the 7(a) is right for you, schedule a free consultation with me.
In the meantime, here are some key considerations when deciding whether to apply for this funding:
Who can apply?
Any business owner who has been substantially impacted by the COVID-19 crisis and who was in business on March 1, 2020. What constitutes a “substantial impact” may vary, but could be as little as a 5% reduction in income.
Any business structure is eligible for the loan, whether you’re a sole proprietor, an LLC, an S-corp, a C-corp, a business with or without employees or an independent contractor.
When can I apply?
Applications are open now and will only be accepted until June 30, 2020.
How much can you borrow?
This loan allows you to borrow the lessor of $10 million, or 2.5 months of the prior year’s average monthly payroll, mortgage, rent and debt — plus the outstanding amount of any loan made under the SBA’s Disaster Loan Program between Jan. 31, 2020 and the date on which that loan might be refinanced as part of this new program. Clear as mud?
When you apply, the SBA determines which of these amounts is less and what you qualify for based on the information you provide.
What can I use it for?
You can only use the loan money to pay for:
You can’t use the loan for other personal expenses or for refinancing, expansion or growth.
What are the loan terms?
There is a 2-year payment term for this loan, with up to one year of that deferrable. It comes with a 1% interest rate.
Is there a grant component?
While the SBA 7(b) loan comes with a $10,000 grant, there is no grant component of the Paycheck Protection Program. Unless you get the loan forgiven, you must repay every penny.
Is loan forgiveness available for the SBA 7(a) loan?
The good news is, up to $100,000 per employee can be forgiven through this loan. The forgiveness amount is excluded from your income, so it’s also tax-free.
However, money will only be forgiven if at least 75% of the funds have been spent on payroll costs, contractor expenses, mortgage interest or rent and utility payments — with the remainder spent on certain operating expenses. Your forgiveness amount will also be reduced if you fire people or reduce wages, since the funds are intended to help you keep your business afloat and your workers employed.
If you don’t have employees, you’re still eligible for forgiveness, you just won’t get as much.
What is the funding source?
The funding comes from the banks, and the SBA 100% guarantees the loans, meaning they will repay the bank regardless of what you do. That means that when you apply, it’s the banks reviewing your application and making the decision, not the SBA.
In the case of loan forgiveness, the SBA will pay the forgiveness amount directly to the banks.
Is there a personal guarantee?
Another upside is that there is no personal guarantee required — meaning, if you close your business, the SBA has no recourse to get its money back. You can even shut down your business and open up another one that’s only slightly different, and you still won’t have to pay back the loan. While this is a drastic step, it allows you to start over if times get rough. Most importantly, it’s confirmation that it’s okay to make mistakes; we’re all liable to in this new environment.
These loans are complex, and I want to help you understand your options, how to apply and what will best keep your business going. To learn more about the SBA 7(a) and 7(b) loans, sign up for my free, comprehensive webinar. If you have questions, or want to discuss how to secure your financial future in these unprecedented times, schedule a free consultation.
Isaiah Gresham | 04/20/2020