I have heard that the application process has had its fair share of hiccups. I, personally, have had to apply to two different banks. The first bank I applied to was initially happy to help me and then changed their policy to only work with pre-existing clients. Fortunately, I have a line of credit through another bank so I was able to apply through them. I don’t hold banks responsible for this confusion. I’m sure they are grappling with the federal government and a system that previously only handled 60,000 loans a year. I’m sure that the number of applicants is staggering.
In any case, I wanted to take a chance to walk you through the types of things you should expect to see on the application. If you need additional help, please don’t hesitate to call us. We are available to provide assistance.
How much can you apply for through the SBA loan?
Your payroll expenses are the focus of most of the documentation required by the application. That is because the amount of the loan is based on your payroll. You average your payroll expenses over the last year and multiply that times 2.5. That is the amount of loan you are qualified to take.
What if you are self-employed and don’t take a salary? My understanding is that you do not count towards your payroll expenses. However, employees and 1099 independent contractors do.
You will need to provide documentation as to your payroll expenses. You will need to submit a 2019 W-3 and/or a Form 940. Both of those show your payroll expenses for 2019. They may also ask for monthly payroll summaries.
What can I use the funds for?
The funds can be used to pay payroll, mortgage interest, rent, and utilities for 8 weeks following the issuance of the loan.
You cannot reduce your workforce or reduce workers’ salaries by more 25% between February 15 and June 30. If you do, you must rehire your staff before June 30, 2020.
If you follow the guidelines, the principle of the loan can be forgiven. I don’t consider this a guarantee, and please note that the interest is not forgivable. The interest rate I have seen varies. I have seen as low as 0.5% and the law says not to exceed 4%.
What other documents should I have?
One application I saw required general business documents including Article of Incorporation, By-Laws, and Partnership Agreements. However, not all applications require that information.
Some lenders may request a profit and loss statement and/or a balance sheet. I have also seen requests for 2019 corporate tax returns. Depending on the size of your company, they may also request personal returns. Though, to be clear, I have seen no requirement that you provide a personal guaranty for the repayment of the loan.
Are these SBA loans free money?
Not necessarily. I am a firm believer that there is no such thing as a free lunch, and I would not assume that this money has no strings attached. First, the government has outlined very specific things that much be done to qualify for forgiveness (like not laying off workers). Second, the interest is definitely not forgivable.
The fact is that even if you do everything correctly, the loan MAY be forgivable. The language in the statute says that you will qualify for forgiveness, but I’m not sure what that means. My advice is to take the money with the understanding that it may not be free and clear from other requirements.
All that said, I think the SBA loan is a good option for all companies struggling during this time. Frankly, my office is requesting a loan as well. I think it’s a smart move in a very uncertain economy.