Does Your Business Qualify for a PPP Loan?
The U.S. government has launched multiple relief programs to support its people during the coronavirus pandemic. Although the COVID-19 crisis began in 2020, these loans have continued into 2021 due to the severe economic disaster inflicted by the virus.
If your business has under 500 employees, you can qualify for a first draw PPP loan in 2021. Even if you are a single member LLC, you can still apply and will be eligible! You do not have to have run payroll before. You just need your 2019 Schedule C or 2020 Schedule C to determine eligibility. If you took a PPP loan in 2020 and would like to access a second loan in 2021, you can apply for the second draw PPP loan. However, second draw loans demand a maximum of 300 employees per location and a 25% reduction in revenue. The PPP loan applications close on May 31, 2021.
In this article, we will cover all you need to know about PPP loans, including differences between the first draw and the second draw. We have also included details about the application process, as well as links to the forms.
Moreover, we will cover alternative loans you can access in case you are not eligible for a PPP loan. Also, keep in mind that some businesses may face rejection from the PPP due to limited government funds or the inability of the enterprise to match SBA requirements, which is why it’s always smart to keep backup options open.
Introduction to PPP Loans
PPP, or Paycheck Protection Program, is a special agency that provides small businesses with loans at an extremely low-interest rate of 1%. The loan was created to support small businesses affected by the coronavirus pandemic in 2020. It is part of the U.S. government’s Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
These loans are typically employed for the following purposes:
- Payment of rent or mortgage
- General utility payments
- Employee protection costs, particularly those related to COVID-19
- Damage of uninsured property, especially that caused by civil unrest in 2020
- Production costs
The best thing about PPP loans is that borrowers can apply for loan forgiveness from the SBA or the U.S. Government's Small Business Administration. This, paired with a low-interest rate, has made the PPP loan one of the most lucrative business opportunities out there.
In fact, the PPP loan was so popular in 2020 that all of its government allocated funds for 2020 were dried up in just a few weeks after loan applications were first released in April last year.
Unfortunately, many small businesses could not get their hands on a small loan in the first round (2020). By the time they applied, all the funds had been used up by competing enterprises.
To combat this disappointment and help strengthen the economy, the Biden presidency has launched the second round of PPP loan applications for 2021. The last date to apply for these is March 31.
Currently, there are two types of PPP loans available: first draw and second draw. These are discussed in detail below.
First Draw vs. Second Draw PPP Loans: What’s the Difference?
First draw PPP loans were initially released in April 2020. Where some businesses were able to access financial support from the PPP, others were not.
Those who received a loan in 2020 can apply for their second loan or a “second draw PPP loan” in 2021.
Those who did not receive PPP financial support in 2020 can now apply for their first loan or “first draw PPP loan” in the second round of PPP loans being given out in April 2021.
While most of the application requirements are the same for either loan, be it the first draw or second, a few differences do exist. Be sure to take these into account when applying for a PPP loan.
PPP Loan Eligibility Requirements in 2021
Before applying for any financial loan, you must check and verify whether or not your business meets the loan requirements.
We’ve made lists below concerning everything you’ll need in order to qualify for a PPP loan this year:
First Draw PPP Loans
Please bear in mind that the following requirements only apply to those small businesses that are applying for their first PPP loan in 2021:
1. Started Before February 15 2020
Your business should have been up and running before February 15, 2020. In other words, your small business can only apply for a PPP loan if it was active before the coronavirus pandemic.
This is because PPP loans were created to support those businesses that were hit by civil unrest and/or economic disturbances caused by COVID-19. If your business was launched after the WHO declared a pandemic, the PPP loan isn’t for you.
Also, your business should be active as of March 2021 (and planning to stay on the market) if you want the PPP loan.
2. Less Than 500 Employees
Small businesses applying for loans should also have below 500 employees. If the enterprise employs more than 500 workers, it does not qualify as a small business according to the SBA and hence cannot apply for a PPP loan.
If the business is based in more than one location, each location should not have over 500 employees.
Second Draw PPP Loans
Accurate bookkeeping is an essential requirement for the PPP loan.
This is especially true for those applying for their second PPP loan. Where first-timers can get away with very few documents, second-time applicants need to provide additional information, as noted below.
If you are applying for a second draw PPP loan, your business must fulfill the following requirements:
1. Consumed The First PPP Loan
Your business has fully consumed its first PPP loan and now needs a second one to stay afloat. Many small businesses are applying for a second loan because the pandemic significantly slowed down their financial growth, hence making it challenging to meet ends.
Many small enterprises have suffered the same fate, so there’s no shame in taking out a second loan to help your business stay on the market.
2. Running Before February 15
The business was up and running before February 15, 2020, and is still fully operational. (All those taking out their second loan automatically meet this requirement as it was also requested for the first draw)
3. Maximum Of 300 Employees
You have a maximum of 300 employees. For businesses that span across multiple locations, each location should not have over 300 employees.
If you’re wondering why first draw loans cover businesses with 500 employees, but second draw loans are only available for enterprises with 300 (or fewer) workers, remember this: The policy for PPP loans in April 2020 declared that only businesses with a maximum of 300 workers could take out a PPP loan.
This policy has carried on into 2021 but only applied to those who took a loan last year and now want a second draw. By default, only enterprises with under 300 workers could access PPP loans in 2020, which is why the same 300 employee-limit rule stands for these small businesses if they want to access a second loan this year.
3. 25% in Gross Revenue
You also need proof of at least a 25% reduction in your business’ gross revenue. This will show the government how badly you need the loan.
The government has limited funds available for PPP loans. Loan funds were drained extremely fast in 2020, which is why the SBA has raised the bar for PPP loan applications in 2021. As a result, only those small businesses that desperately need the loan will receive it. This will prevent the SBA’s PPP loan funds from draining too fast.
Those businesses that have managed to partially or fully recover from the financial despair the pandemic put them through are not eligible for a second draw PPP loan.
How Can I Show a Minimum 25% Reduction in Gross Revenue?
So, you’re wondering how to show proof of a reduction in your business’ gross revenue? As long as you’ve done your taxes and have stable accounting skills, this shouldn’t be too hard.
Here are two ways to do it:
- Compare tax returns from 2019 and 2020. Remember that you need to show proof of a reduction in gross revenue, so scan your tax returns for data that can prove this. Once you’ve tallied the right values, do the math by comparing gross revenue in 2019 with gross revenue in 2020. If your business has shown a decline in gross revenue by 25% (or more), you can successfully apply for a second draw PPP loan in 2021
- Alternately, you can compare your business’ gross revenue from any quarter of 2020 with gross revenue generated within the same quarter of 2019. For example, if you’re comparing this value from January to March of 2020, do it against the same months from 2019.
So, if your gross revenue in the first quarter (Q1) of 2020 was, say, $7,500, but your gross revenue in Q1 2019 was $10,000, you have successfully qualified for application of the PPP loan.
Who Cannot Apply for the PPP Loan?
As highlighted above, the PPP loan is not for everyone. You cannot apply for the PPP loan if:
- An owner or business shareholder (of 20% or more) has a criminal record relating to fraud. Or if they have a history of defaulting on an SBA or Federal Agency loan (save for student loans) in the past seven years.
- The business or its owners are bankrupt or nearing bankruptcy. In such cases, it is highly unlikely that the business will be able to regenerate itself and reach its full potential. As a result, the loan would go to waste, which would be a shame because the SBA already only has limited funds available for PPP loans.
- You and related to or employed at the lender you’re accessing the PPP loan through. The SBA demands you work with a legitimate PPP loan lender who has no prior employment record nor family ties with you or any of your business’ co-owners.
Certain businesses cannot apply for PPP loans regardless of the aforementioned statements. These include hedge funds, private equity firms, speculation firms, and multi-sales distribution entities.
How to Apply for a PPP Loan
If your business meets the requirements for a PPP loan, or if you have questions if you are eligible, reach out to the team at Hall Accounting Company. They have processed hundreds of PPP applications over the past year, and can answer based on your current situation.
What to Do If Your Business Does Not Qualify for a PPP Loan
If your business does not meet the minimum requirements for a PPP loan, try accessing one of these other financial aid options.
Economic Injury Disaster Loans
Many people appreciate the SBA’s economic injury disaster loan because it has a low-interest rate of 3.75% and 2.75% for non-profits. While it certainly is much higher than the PPP's 1% interest rate, it still makes for a suitable loan because it allows for payment terms of up to 30 years without the burden of prepayment penalties.
Main Street Lending Program
This program was launched in June 2020 by the U.S. Federal Reserve to support small businesses that were seriously affected by the coronavirus pandemic. If you choose to access this loan, you can repay it over 5 years and access a deferral of interest payments for one year and principal payments for two years.
If your small business is on its way to becoming a mid-sized enterprise that makes over $2 million a year, the Main Street Landing program could be the best option for you.
SBA 7(a), 504 Loan, and Microloans
Why not look into any of these three SBA-backed loans as an alternative to the PPP loan? They are all part of the government’s Debt Relief program and will get you access to six months of principal, interest, and fees on behalf of the SBA. Just be sure to stay current on your loan!
Hold Out till the Next Stimulus Package
If you’re not keen on taking a loan unless it is through the PPP loan, your best bet is to wait it out till the government releases new stimulus packages. However, be sure to go over your business's current financial status to see whether or not you can hold out that long.
Also, stimulus packages generally do not contain enough financial support to resurrect a roughed-up business. So, if your enterprise has suffered extreme damage during the pandemic, it’s best to go for an SBA loan instead.
Granted, you will have to pay a higher interest fee than you would with the PPP loan, but it’s better to do this than see your entire venture sink while waiting for a new stimulus check.
However, if you feel like your business can wait a few weeks-or months-it may be smarter to wait for the new stimulus as the government is currently actively working on enhancing the coronavirus stimulus legislation.
Ultimately, whether or not you choose to wait for a stimulus package depends upon your business’ financial standing.
As you can see, the government has launched many remarkable loans to support small businesses that have been adversely affected by the coronavirus pandemic.
The PPP loan is the most beneficial option due to its low-interest rate (1%). You can apply for a second loan if your first loan has been fully consumed. However, if you didn't take a first draw loan in 2020, feel free to access it in 2021 as long as you apply before March 31.
For those who cannot access the PPP loan or are afraid they might face rejection: feel free to look into alternative loans like the Main Street Landing Program or Economic Injury Disaster Loans. Both these programs are supported by the SBA. Other options include micro-loans and waiting for the new stimulus package.
It’s best to consider alternative loans, too. This is because the SBA has limited funds available for PPP loans and, recounting the events that took place in the 2020 PPP loan, it is highly likely that these funds will drain remarkably fast. Therefore, everyone might not be able to get a PPP loan.
FUTURE IMPORTANT DEADLINES
Past due - 02/01/21
Deadline for employers to mail out W-2 Forms to their employees and for businesses to furnish 1099 Forms reporting non-employee compensation, bank interest, dividends, and distributions from a retirement plan
Past Due - 03/01/21
Deadline for businesses to mail Forms 1099 and 1096 to the IRS
Past Due - 03/15/21
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065) or to request an automatic six-month extension of time to file (Form 7004)
Past Due - 03/31/21
Deadline for businesses to e-file Forms 1099 and 1096 to the IRS, except Form 1099-NEC
Deadline to file individual tax returns (Form 1040) for the tax year 2020 or to request an automatic extension (Form 4868) for an extra six months to file your return, and for payment of any tax due, and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for corporations that use the calendar year as their tax year
Deadline for household employers who paid $2,200 or more in wages in 2020 to file Schedule H for Form 1040
Deadline for first-quarter estimated tax payments for the 2021 tax year
Deadline for second-quarter estimated tax payments for the 2021 tax year
Deadline for third-quarter estimated tax payments for the 2021 tax year
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020 for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065)
Final extended deadline to file individual tax returns for the year 2020 (Form 1040), and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020 for corporations that use the calendar year as their tax year