If you received either (or both) the EIDL or the PPP loan, what’s next? Well, for one thing, if you were hoping for forgiveness on these loans, you might not want to bank on it.
When both the Economic Injury Disaster Loan (EIDL) and the Payment Protection Program (PPP) loan were announced as part of the CARES Act to address the economic concerns of the COVID-19 pandemic, one of the major pros of both loan programs was that of forgiveness. The loans would not need to be paid off, as long as certain guidelines were followed and met.
The attractiveness of the EIDL and the PPP
Both of these loans quickly became attractive to solopreneurs, gig workers, and other “1099” workers, as any sort of personal unemployment for the self-employed was difficult, at best, to get in most states. Some states, such as Illinois, has had trouble processing and paying the standard unemployed, let alone with keeping up with the demand of the self-employed, who must apply and be denied first for unemployment before they can move on to the next step to receive the self-employment funds. (CLICK HERE to read an article about the confusion surrounding such funds in Illinois by CBS News Chicago. CLICK HERE to read the latest document released by the State of Illinois as of May 11, 2020, regarding unemployment availability during COVID-19.)
The EIDL and PPP were designed to be extremely easy to apply for and not much documentation was needed. For a sole proprietor with only itself as an “employee,” only a 2019 Schedule C, which shows profit and loss for the business, was necessary, with the correct assumption being that any profit was the sole proprietor’s income and any loss represented his or her business expenses.
Not without problems
But despite the ease in apply for these loans, there were still problems. First off, the loans didn’t initially have enough available funds for all that qualified. And, some larger companies that make millions and shouldn’t have qualified as small businesses found loopholes and manage to get funding. (CLICK HERE to read about Ruth’s Chris Steak House, and how, in the end and under pressure from public disdain, the company decided to return the millions that it had originally been loaned via the Payment Protection Program.)
So additional funding was made available. The question remains if everyone who applied for and should have gotten the loans will now actually receive them.
But for the business that have received these loans — what comes next? Sadly, that’s a question that still remains to have an answer.
It’s so unclear that even people who are heading up programs for funds at banks don’t know the answer. According to one bank source, the institution for which he worked was still waiting on “clear guidance” from the treasury department and the Small Business Administration (SBA) regarding any forgiveness process or requirement.
What is still unknown? For starters, answers to fairly simple questions, such as:
- As a sole proprietor with no employees past myself, how should I properly document my own payroll?
- For my taxes, I currently deduct a certain percentage of my utilities as business expenses, since I work at home. Should I use that same percentage when recording how much of the loan I am spending on my utilities?
- How much, as a sole proprietor, can I receive for payroll? Does it have to be the same amount as the 2019 monthly average? What if I was making more a month than that average right before the COVID-19 shutdown hit the economy?
- How will I communicate how the funds were used to the SBA/Treasury Department?
- When it’s time to start to repay the loan, will it be clear how much has been forgiven and how much is still due? How will the bank or SBA/Treasury Department communicate to me what has been forgiven?
- Will I be sent a physical bill monthly regarding repayment of the loan?
And it’s very possible that — despite doing everything right — forgiveness still won’t be on the table for solopreneurs and gig workers.
Pulling the forgiveness rug out from under small businesses
The very thought that forgiveness might be unachievable is hard news to hear when most sole proprietorships were hoping that these loans would be their answer to the COVID-19 downturn. Many small businesses have had serious drops in income — some to the point of having to close their businesses forever. CLICK HERE to learn, for example, about the restaurant owner in Chicago, who after decades of business, is now being forced to close his iconic diner due to the loss of business during COVID-19. His loss could represent just the start of businesses that will fold under the weight of COVID-19’s economic problems.
Well, according to an Evergreen Small Business blog article, losing out on forgiveness — even if you use the funds properly — is a real possibility. You can read more on that by CLICKING HERE and specifically checking out the final sections of the article, subtitled “Gotcha #5” through “Gotcha #8.”
The gist of the problem is that the language of the CARES Act leaves a lot of room for interpretation, including how documentation needs to take place, how much of the loan can be used, and how it should be used, to help secure forgiveness. The lack of clarity at this point will cause businesses to either sit on their much-needed funds or — in the case of businesses that just can’t wait — guess at how to best handle distribution of the funds, with fingers crossed that they’ve guessed right.
The good news
The good news, and there truly is some, is that both of these loans are repayable without worry regarding prepayment penalties and that the interest rate on them is extremely low — just 1 percent on the PPP and 3.75 percent for most businesses (less for non-profits) on the EIDL. The PPP loan, however, must be paid off in just two years. The EIDL, on the other hand, can be stretched across a term which might be as long as 30 years. (Notice that there’s still some ambiguity about the length of that term as well.)
If there’s any advice to be had, it would be to continue to stay in communication with your bank and the SBA. According to our bank source, multiple updates are received daily regarding the various SBA decisions on the PPP loan.
But considering that the PPP is only an eight-week long program, at some point, action will have to be taken and fairly soon. Either you’ll have to plan to immediately pay back the funds (to avoid any interest payments), or use them and simply accept that you’ll have to pay the loan back with interest.
It’s important to remember that, essentially, loans are what these funds were always intended to be, first and foremost. Considering them as such is probably the best thing you can do to plan accordingly. If, in the end, they get forgiven — well, you can then consider yourself and your small business blessed. But it might be more prudent to just assume out of the gate that you’ll have to pay these loans back.
So for now, especially if you critically need to put things into motion, document as best you can. Keep statements. Take screen shots. Use accounting software. Make notes on transactions. Keep physical check stubs if you can, and if it makes sense, use a payroll company to disburse payments. Do whatever you possibly can to create both physical and digital “paper trails” that make it perfectly clear where the money went and how it was used, and keep it all in accordance to the rules that have already been laid out. That way, you can at least give yourself a fighting chance for forgiveness.