April 3, 2020 is the first day to apply for the new “Paycheck Protection Program.” This new loan program from the Small Business Administration will cover up to 8 weeks of payroll payments during the COVID-19 crisis. Self-employed folks can apply starting April 10th.
I’m impressed the fast track bank loan is this short and easy to fill out. If you have the Average Monthly Payroll number and your Business TIN or EIN number, the loan should take you under 15 minutes to fill out. Send the loan application to a bank where you already have a good customer relationship. The roll-out program is messy and choatic. Give yourself a leg up from the competition and apply to the bank where the tellers greet you by your first name.
In case you are sheltering in place at home and don’t have quick access to business records, the EIN number will be listed on the electronic copy of your 2018 or 2019 taxes.
Here is my personal struggle to get the “Average Monthly Payroll” number. In my self-employment business, I only take out money to pay myself when times are “good.” I make more money in the summer as a lawyer than I do in the winter. To get the “average monthly payroll, “ I’m taking the “profit” from my 2019 taxes and dividing that number by 12. I will let you know if the banks accept this formula. I’m hopeful that becuase my calucation is so closely tied to my 2019 self-employment taxes, this formula won’t be a problem. If anyone has suggestions for a better formula, I’m eager to learn.
The total loan amount for the Paycheck Protection Program is up to 2.5 times the “average monthly payroll.”
Now, I’m going to explain how the structure this potential loan into something more like a “gift.”
Let’s pretend a small business has an average payroll of $1,000 a month. The total loan funds under the Paycheck Protection Program (PPP) would be times 2.5 or $2,500.00. If a business, pays an employee (like an administrative assistant or a waitress) the whole $2,500.00 in wages over the 8 week timeline and sends the correct documentation to the Small Business Administration, then the PPP “loan” will turn into a “gift.” In order words the federal government is making a deal with you. If you borrow money to pay an employee, you don’t have to pay it off. In banker terms, the loan is “forgiven.”
You could also use 25% of the $2,500, or $625.00 to pay for certain overhead expenses like rent, mortgage payments or utility payments. This $625.00 payment would be “forgiven".
Whatever money you borrow under the PPP, that doesn’t get used by these “acceptable expenses” will turn into a loan at a very low interest rate and very favorable terms. I think you get 6 months before you need to start paying back the loan.
Now, I’m not 100% sure how paying myself as a self-employee works under this new law. I’m not making any payments to myself until I’m reading all the fine print. The short application process and the promise that I can pay some of my commerical rent during this challenge of COVID-19, means I’m most likely going to apply on April 10. I hope other people do too.
I will include a direct link to the Paycheck Protection Act Program. Please let us know about your experiences with this program.
Let’s make it through the storm, together!
https://content.sba.gov/sites/default/files/2020-04/Paycheck-Protection-Program-Application-Fillable.pdf