By Joni Foster, EGBI Program Director
Applications for the new $900 billion COVID-19 small business relief package begin for new borrowers the week of Jan 11, 2021 from community financial institutions like PeopleFund in Austin. What this means for small business owners:
- If you did not apply for a SBA Paycheck Protection Program (PPP) loan in 2020, you could be eligible for a First Draw PPP loan under this new legislation starting Jan 11, 2021.
- If you received a PPP loan in 2020, you could be eligible for a Second Draw PPP Loan under the new COVID-19 relief package starting Jan 13th.
- If you did not apply for an SBA Economic Injury Disaster Loan (EIDL loan) in 2020, there is additional money in the legislation to fund new loans.
Major rules relevant to EGBI small business clients
The following is a quick glance at the Interim Rules for the PPP. Please refer to the SBA for the complete regulations or talk to your lender about your specific situation.
- Small businesses apply for PPP loans from financial institutions. Talk to your lender. If you don’t have a lender, the SBA will roll out funds to community financial institutions like PeopleFund, LiftFund, BCL of Texas before banks and credit unions. Use this link to get on PeopleFund’s waiting list for a PPP loan: https://peoplefund.org/covid-19-loan-programs/
- The loan is guaranteed by the SBA. No collateral is required. No personal guarantee is required. The borrow will not pay any fees for the loan. Lender must make a one-time disbursement of the loan within 10 days of approval.
- The full amount of both First Draw and Second Draw PPP loans may be forgiven if used according to law. The interest rate is 1% for 5 years for any part not forgiven.
- Small businesses are eligible if you were in operation by February 15, 2020 and have less than 500 employees. Documents that can establish your eligibility: payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expenses from a sole proprietorship, or bank records.
- Second Draw Loans have special eligibility criteria:
- Borrower for a Second Draw Loan must prove a revenue reduction of 25% or greater in any one quarter in 2020 compared to the same quarter in 2019. This provision appears to make start-up businesses ineligible for a Second Draw Loan if they did not have significant revenue in 2019.
- Business has 300 or fewer employees.
- Borrower must use the full amount of the First Draw Loan on eligible expenses before the second loan is disbursed.
- You don’t have to apply for forgiveness for your First Draw loan before you apply for a Second Draw Loan. The forgiveness process for the First Draw Loan should be clarified and simplified by the end of January 2021. You have 10 months from the end of your loan forgiveness period (typically 24 weeks after disbursement of the loan) to apply for forgiveness. Contact your lender to apply for forgiveness.
- The FORMULA for PPP loans is the same as last time, 2.5 times your monthly payroll costs and may include owner’s net profit in lieu of payroll as calculated on the Schedule C for 2019 or 2020.
- Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, 62 including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.
- USES of the loan: At least 60% of the loan must be used for payroll costs; the remaining 40% may be used” to support the ongoing operations” such as:
- Mortgage interest payments
- Interest on debts prior to Feb.15, 2020
- Refinancing an SBA EIDL locan made between Jan 31, 2020 and April 3, 2020
- Covered operations expenditures such as business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses
- Property damange related to vandalism and looting due to public disturbances that occurred in 2020 that were not covered by insurance
- Certain supplier costs that were essential
- Certain worker protection expenditures
As background, the Relief legislation will be administered by the US Small Business Administration (SBA) and included:
- $284 billion for a second round of the Paycheck Protection Program (PPP). The new relief package includes:
- additional funding for new PPP loans
- the ability to obtain a second PPP loan for small businesses facing significant revenue declines in any 2020 quarter compared to the same quarter in 2019
- clarifications providing for the deductibility of business expenses paid with forgiven PPP loans (a material change from existing IRS guidance)
- loan eligibility for Section 501(c)(6) not-for-profit organizations for the first time
- $15 billion for live venues, independent movie theaters and cultural institutions
- $20 million for the Economic Injury Disaster Loan Program
For more information about the Interim Rules:
Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act
Second Draw Loan provisions
How to calculate maximum loan amounts by business types (particularly self-employed)