With the recent passing of the new stimulus law, small business owners have another chance to apply for funding through the Small Business Administration’s Paycheck Protection Program (PPP). The deadline to submit applications is March 31, 2021. If you or one of your clients wants to apply for either a first PPP loan or take a second draw, then it’s critical to prepare a complete and correct application to ensure the process moves smoothly and efficiently.
My firm helped more than 1,300 small businesses secure over $150 million in PPP loans during the first round of PPP funding under the CARES Act, and we’re prepared to participate in the program again, particularly for our second-draw borrowers. We’ve reviewed and managed countless applications and counseled hundreds of small business owners throughout the process. With that first-hand experience, we’d like to share some common mistakes that applicants should avoid when applying for a PPP loan.
1. Math errors. One common mistake that applicants make is incorrectly calculating their monthly payroll costs to determine the maximum amount they can borrow. The PPP was intended to help employers keep staff on payroll during the pandemic by covering costs including wages, tips, vacation pay, benefits, retirement contributions and some taxes. Generally, a business can apply for up to 2.5 times their average monthly payroll costs during 2019 or no more than $2 million, whichever amount is less. Hard-hit businesses—those in the accommodations and food services industries—may qualify for second draw loans of up to 3.5 times their average monthly payroll costs. Applicants should double-check their math or, better yet, have a trusted source like a financial advisor, accountant or payroll processor assist them.
2. Inadequate documentation of 2019 payroll expenses. Another mistake we’ve seen is not submitting adequate documents to substantiate the amount claimed or requested, such as paid checks, payroll documentation, relevant receipts and billing statements. Proper documentation to fully justify the loan amount requested is critical.
3. Failure to adjust payroll for salaries exceeding $100K. The PPP rules stipulate that annual salaries are capped at $100,000 per employee for payroll calculation purposes. If borrowers fail to make this adjustment, the PPP application will likely be rejected and/or the forgiveness amount will be reduced. Applicants should carefully follow the rules regarding the $100,000 salary cap to avoid making this mistake.
4. Erroneous business names and TINs. One typo of a letter or number could create a serious processing issue for your loan application or forgiveness application—or both. Accurate business names and Tax Identification Numbers (or Social Security number, if applicable) are critical to establishing that your business exists, is active, and in good standing with the IRS.
5. Omitting evidence that the business was in operation on Feb. 15, 2020. To qualify for a PPP loan, businesses must have been in operation as of Feb. 15, 2020. The PPP was not designed to help owners launch new businesses during the pandemic; it was to help existing businesses continue paying their staff. Providing evidence that a business was in operation by the required date is a hard and fast requirement for PPP loan approval.
It all comes down to the details for borrowers who want to maximize their chances for PPP loan application approval, and errors can also ultimately cost them all or part of their loan forgiveness. Whether small business owners are seeking their first or second PPP loan, they can feel more confident if they take the time to pay attention to the details.
Mark Schmidt is CEO of Fund-Ex Solutions Group, an SBA Preferred Lender and one of only 14 non-bank lending companies licensed by the SBA to offer 7(a) loans and the Paycheck Protection Program. Visit fundexsolutions.com for more information.