What do minority business owners need to know about the Paycheck Protection Program? PPP expert Hannah Smolinski shares how to apply and maximize PPP funds.
In this bonus /Founders Focus episode, PPP expert Hannah Smolinski explains how minority business owners can apply and maximize PPP funds by the March 31, 2021 deadline.
According to The New York Times, only 12% of Black and Latinx business owners got the PPP assistance they asked for. With the new $284 billion round of PPP funding, we want to offer clarity around the PPP process so there are less barriers to receiving a loan.
Hannah Smolinski breaks down:
Additional Resources:
This episode was recorded on Thursday, February 18, 2021.
Have feedback? Connect with Scott Case on LinkedIn
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Scott Case 0:00
Again, I'm Scott Case, I am the co founder and CEO of Upside. And I'll just give a little bit of a background. This is a special session of Founders Focus, which is a program we started almost exactly a year ago or 11 months ago, at the start of the pandemic. And the goal was to create a safe place for founders to come together and talk to each other and for us to be able to bring experts in to pick up topics. At the beginning, it was about just getting through those first few months of the pandemic. And we've expanded, we've done about 50 different sessions, where we talked to co hosts about all kinds of different things. I've done hundreds of one on ones with other founders, about the ups and downs of their entrepreneurial journeys. And we use these sessions to act as a mechanism to both teach people things and bring expertise to the table.
Scott Case 0:54
One of the recurring themes that has come up throughout the Founders Focus first season and has come up a few times so far this year is that inequity across the entrepreneurial ecosystem, and it's no secret that black and brown founders face unique challenges that others don't. And, in particular, sometimes the barriers might be the same, they're just a lot higher, and the pandemic has been no exception. A significantly greater number of businesses run by women and people of color have gone out of business as a result.
Scott Case 1:29
And today's goal of this Founders Focus session is to talk about one tool to help small business owners make it through the rest of this pandemic. We're going to talk about the Paycheck Protection Program. It was initially created in the spring of 2020 as a tool to do what it says -- to protect the paychecks of small businesses. And there was an enormous amount of confusion during the entire program. And a lot of black and brown business owners bounced off the system. By the way, all kinds of businesses bounced off that system. And so what we've done today is we've brought together some expertise to work through how everybody can take advantage of this program. And we're targeting in on working with black and brown business owners, because there's still confusion about whether this is a tool that's appropriate for every business. And I think most people will be surprised at how valuable this can be once you understand some of the mechanisms.
Scott Case 2:31
So I want to start with using the chat feature. I've got two questions for you. So if you would please post in the chat, one, just introduce yourself, maybe a little bit about your business. And then question number one is did you get a PPP loan the first time around? So that would have happened between April 3 and about, I think, August 10 or so. And it would have been applying through a bank or a lender with the SBA. So did you get a first round PPP loan? And then second, are you already planning to apply for a second PPP loan or a first loan during this new program? So just introduce yourself. What's the name of your business? Or what kind of business you're in? Did you apply for a loan the last time and get one? And then are you planning to apply this time around?
Scott Case 3:23
The second round of the PPP stimulus has some very important changes that make it much more approachable for women business owners, as well as for people of color. And while there's still some nuances to it, it's really important to understand that this has been redesigned to be much more approachable.
Scott Case 3:46
And then finally, I'll just tell you a little bit about our story. So Upside Business Travel is our core business. And we participated in both the first PPP loan as well as the second one. And we had a huge advantage, financial expertise on our team, we had excellent relationships with not just one bank, but multiple bank relationships. And it didn't hurt that the CEO of upside business travel is a middle aged white guy, this guy. And even with all that, we still experienced all kinds of challenging messiness in it. And it was a complex process from beginning to end, a lot of stuff has gotten easier, but we decided to try to do our own part. And so we created something called Upside Financial and Upside Financial is a service that's aimed at leveling the playing field for PPP, so business owners can both get the relief that they need and then also we primarily help with the forgiveness process that comes along with it. And we'll talk a little bit more about that.
Scott Case 4:49
So that kind of gives you a lay of the land about how we got here. And now I'm going to introduce my co host for today and the actual person who knows everything there is to know about PPP, or at least significantly more than I do. So I'm joined today by Hannah Smolinski. She's the founder of Clara CFO Group. And she's a PPP expert. She joined our team at Upside Financial as a senior advisor, so she's been helping us wade through all these new rules and help us inform our product, but also help us get the word out about these. And Hannah has been working with Upside Financial for the last several months. And she is nothing short of awesome. Just setting the bar high for you, Hannah. But I know you can exceed it. So with that, why don't you introduce yourself, Hannah, before we dive into some core questions?
Hannah Smolinski 5:40
Sure. Thanks for the introduction. I'm really happy to be here. I'm happy to see all the chats, so keep them coming. Because we're going to be using some of that to inform like where we go with some of the q&a and where we go with some of the conversations. So make sure you put that in there. We love it.
Hannah Smolinski 5:56
So like Scott said, I own my own small business, Clara CFO group. And what I do is I help small business owners use their financial information to make better decisions and to grow their businesses. So last year, I was helping clients figure out PPP. And what I realized was that was how many people were not going to know about PPP, because it was essentially a first come first serve program, which automatically, like Scott mentioned with Upside. He knew about the program with the organization that you know, has the financial team. So when I realized that people weren't going to know about it, I started putting my stuff up on YouTube and tried to educate as many people as I could about PPP, and kind of became a PPP expert from talking about it a whole lot this past year. So I'm excited to be here today. And just looking forward to the conversation.
Scott Case 6:54
Again, thank you, you've done a fantastic service for so many people. And it's how we found you because we were looking for partners that could help explain this in a way that was both approachable and accurate and easy to understand.
Scott Case 7:10
So let's actually dive in. The first question I have for you is, why is this second round of funding, this second PPP round, beneficial for black and brown business owners and what makes it a little different than the first time around?
Hannah Smolinski 7:27
So I think the biggest thing about this second round is that it gives people another opportunity. So people who potentially didn't know about it the first time around and are now maybe learning about PPP or now realizing that they're eligible where they didn't think they were eligible, they now have a chance to come and get this money.
Hannah Smolinski 7:47
So the whole thing with PPP is that it's trying to help small business owners who were existing before COVID, essentially maintain status quo and help them float along during these challenging times. So use the money, mostly for payroll, which can include paying owners. So that was one of the big things that everybody was really confused about, they said, Hey, I don't have payroll, this does not apply to me. But that's not the case. I already saw somebody on the chat that said that they're an independent contractor and don't have any employees. So like, this is still a program that they can potentially use. So maybe they didn't know about it the first time around. Now with a second round, they can still go and apply for this money. That's one of the really exciting things that is good for those people that maybe just kind of got left out to dry, or they tried a couple times and they couldn't get through. And so now we've got more people, more banks available and more information out there so we can do it, get the money and do it right.
Scott Case 8:52
I want to put a fine point on that piece, which is, I can be a sole proprietor, I'm the only person who works in my business and I, assuming I meet some basic criteria, I can apply for a loan to pay for me, to subsidize my work. Do I have to have a bank account? Do I have to have any kind of employees at all or other expenses? Or if it's just me paying myself, is that sufficient?
Hannah Smolinski 9:25
Yeah. You don't have to have a pre-existing banking relationship. Now some banks might say we're going to help our people first, and that was really what was happening a lot with the first round of PPP. Banks were serving their own clients first. However, now we've got lots of banks doing this. Many are saying Come on, come on in, like we'll take you, you don't have to have an account here. You might open one in the process, but you don't necessarily have to have been a pre existing customer or client. And then now we have lots of online lenders as well, like PayPal is one of the biggest online lenders for PPP, which is not something you think of when you think of PayPal? So, yes, you absolutely can get this money as a sole proprietor and use it to pay yourself. I'd say the caveat of that is, you do have to be making a profit in your business or in the past, you have to have been profitable, let's say 2019 or 2020, and show that. And then you can essentially use that information to apply for a PPP loan.
Scott Case 10:35
We're gonna come back to some of the debt documentation that you need in a moment. So what were the big barriers in the first time around that had 90% of women and minority businesses bounce, that didn't didn't get loans? What were some of the big things and what's changed?
Hannah Smolinski 10:57
Yeah, I mean, I think some of that was potentially, you know, when all these systems were set up at the very beginning, it was set up really, really quickly. And so we were all like, just kind of scrambling for money, everybody was trying to figure out exactly where to go and what to do, and some banks were giving bad information. Like I said, a lot of banks were turning people away if you didn't have an existing relationship, it was almost like they had too much to do already, so they weren't going to take on additional clients. And a lot of times, it's minority and women business owners who don't have those pre existing relationships that we're talking about. So when they went to try to go and talk to different banks, they were rejected. Banks were like, No, we're not helping you, no we're not helping you, no we're not helping you. But now we have additional organizations that can take these loans and there are specific call outs of the total amount of funding that are specifically for women and minority owned businesses and also for employers that have less than 10 employees. So with both of those things, we've got specific allotments that can't be taken by the large businesses that have all the financial help.
Scott Case 12:15
So I'm going to ask another question. For those of you who are participating live, just post how many, if you have employees, how many employees you have, and that'll give us a litmus for where the conversation should go. So I just want to put a fine point, everything that you heard in the past around PPP, it's worth sort of forgetting it all and starting from scratch and saying, All right, let me go relearn this.
Scott Case 12:41
Why should a business owner kind of trust the PPP system, that it's not gonna, like, screw them up somehow down the line, right, like, I get this loan, and now I'm on the hook for it. Talk a little bit about how it's set up, and maybe this forgiveness piece is an important piece, what is that part? And, you know, it feels like one of those things, that's too good to be true, and there must be a catch. So let's just lay the catch out and maybe you can explain a little bit about that.
Hannah Smolinski 13:09
Yeah, I would say that was one of the biggest things that people were concerned about at the very beginning, it was like wait, free money, no way, this is too good to be true, the government's handing out 1000s and 1000s of dollars, hundreds of 1000s in a lot of cases up to millions of free money, that's not possible, no way. But that's actually the case, this is actually happening. I've helped clients through the forgiveness process, Upside has been helping people through the forgiveness process, we're seeing their loans being paid off, we know it's actually happening. The big catch with forgiveness is knowing what you can spend your money on. And if you know what you can spend your money on, then you can decide whether or not you want this loan and then you can say, I know I can spend it on these things. And if you spend it correctly, which they are now giving ample time for us to spend this money correctly, then we can apply for forgiveness, and they've actually made it a lot easier for the majority of people getting these loans to go through the forgiveness application process.
Scott Case 14:20
So if I've applied for the loan and I use the money correctly, for payroll, etc, I should be able to apply for forgiveness and not have to pay any of the loan off?
Hannah Smolinski 14:33
Correct.
Scott Case 14:34
Okay. So if somebody wants to apply, what's the best strategy to go through an application process today?
Hannah Smolinski 14:47
Yeah, I mean, maybe we can talk a little bit first just for sole proprietors since it sounds like there's some people here right now that are sole proprietors and are looking to get this money. Let's give them some really practical, you know, what do you need to know. The loans are based off of what's called average payroll costs. So they say you can have two and a half months of your average payroll costs, and you can get that amount as a loan. But what's an average payroll cost? That's the big thing, right? So for a sole proprietor, this is where it gets weird, because you say, Hey, I don't have payroll. But if you take your 2019 Schedule C, which is what you file with the IRS, that's your proof of your net income and your net loss. If you take that number and you look at the net profit, which is line 31. If that number is positive, then you can get a PPP loan. So what you do is you take that number, you make it an average monthly amount, divide it by 12, and then you multiply it times 2.5. So just a little bit of math, take that line 31 divided by 12, multiply it times 2.5, that's your loan amount.
Hannah Smolinski 15:59
And for sole proprietors, the great thing for them if they don't have any employees or anything like that, is they use that exact same documentation to then go and apply for forgiveness. So you can get 100% forgiveness for sole proprietors, without really having to do much of anything. It's just kind of finding the bank to begin with, making sure your tax documentation is in order and then submitting it. So that's one of the magical pieces of the PPP that I think was missed the first time around by a lot of people. I convinced my hairdresser recently to go and get a PPP loan because she didn't know that she qualified and people had told her that she doesn't qualify, but then she got some money.
Scott Case 16:47
Most hairdressers and other types of independent, they're all independent contractors, even though they might go to a salon, they rent their chair, etc. So let me just give a concrete example and you're gonna tell me whether I get it right or not.
Hannah Smolinski 17:04
Are we doing math? Do I need my calculator?
Scott Case 17:07
I'm gonna try to do it in my head, but you'll correct me with your calculator. Okay, so if I made $36,000 in 2019, so that means I made $3,000 a month. And so the loan that I would be eligible for would be $7,500?
Hannah Smolinski 17:26
Correct. Good job.
Scott Case 17:27
Woohoo. So just as a very specific thing, that's the way to look at it. And we had a question about, is the form from personal business taxes, is that where you would pick up the number?
Hannah Smolinski 17:42
Yeah, so probably what Kay is talking about is on the 1040, which is your personal tax return, if you have a small business, you're filing a Schedule C. So this is if you're a sole proprietor or if you're an LLC but taxed as a sole proprietor, you're going to have a Schedule C, so you're going to go and find that schedule C, and you're going to find line 31. And then we can talk about for other tax entity types, because that's kind of how they base it off of. So if it's a sole proprietor, you would do it that way. But if it's any other type of entity, you would be going and looking at payroll reports. Partnerships are also treated a little bit differently, that gets into a little more detail than I think we want to go to, but I do have a YouTube video on it. So if you want to go and look at that, if you're a partnership, we've got resources.
Scott Case 18:31
Got it. So, there's people that are looking for new lenders, I think we've posted something in the chat about a great guide to those banks that are accepting loan applications right now. So if people have questions about that, that's the place to go. And, we'll talk a little bit more about some resources that we've pulled together.
Scott Case 18:55
Most of the people are likely looking for loans that are less than $150,000. The typical company, even with 20 employees, when you do the math on that two and a half times the payroll. So what's special about that $150,000 mark, it feels like somebody just pulled it out of thin air. So what has the application process done that makes companies who are applying for loans less than $150,000 get certain advantages?
Hannah Smolinski 19:29
So there's a couple of advantages. So if you're applying for a second round loan, if this is like when you're getting it, you're getting your second round loan, because we didn't even mention that you can get two PPP loans. And so if you already got one, you can get a second one, we did kind of like allude to it but I want to make sure that's clear. But if you are trying to go and get your loan, you can use less documentation when you go to actually apply for it. But then when you go to apply for forgiveness under $150,000, you have a simplified forgiveness form and you don't actually have to provide the documentation for forgiveness to the banks -- however, you have to keep it, which is like one of those things, they say, you don't have to give it to us, but make sure you hold on to it for four years. So I always just recommend people make sure you have all the documentation, save it in a nice file, make sure you do the calculations correctly, which there's guidance on how to do that. But then the forgiveness aspect, I literally filled it out for a client today and it took five minutes. And it was a very easy process from like filling out a form. But I did make sure we go and pull all the documentation to make sure that we've got it all covered. Because if you were to get audited, you do need to prove that out and you don't want to be scrambling for payroll reports three or four years down the road.
Scott Case 20:57
So let's put a fine point on that. It's important to have the documentation and to track it, even if you are not submitting it to your bank. And even if you're above $150,000 and you do submit the documentation to your bank, you also have to maintain that because you're going to need it when you get forgiveness and then there's still a chance that you could be audited at some future date. So being organized about how much you apply for, in addition to keeping track of the information you use to apply, it's just good practice.
Scott Case 21:35
I want to ask a little bit about, from a process standpoint, is there anything different if you received a PPP loan in the first round and you're applying for a PPP loan in the second round? Is there anything different that you need to be aware of as a business getting a second loan?
Hannah Smolinski 22:01
Yeah, when the second round of funding opened up, they did some things to try to limit the funds and funnel the funds towards the most hardest hit businesses. So they even called it the Economic Aid Act. And it's kind of for the hardest hit businesses, it's like in the name of the act. So what they did is they said, if you got a PPP loan the first time, great, but if you want a second round of money, you need to tell us that you've had a revenue decline. And the revenue decline is comparing one quarter of 2019 to one quarter of 2020, and it has to be at least a 25% decline. So if you had $100,000 in any one quarter of 2019 as your revenue, and then you had $74,000 of that same quarter in 2020, you would be eligible for a second round of PPP loan, even if the rest of your quarters are like great and you had no other problem, you don't have to show an annual loss. But you do have to prove at least one quarter was worse than the year before by that 25% mark.
Scott Case 23:14
And what if you are applying for a loan for the first time, so this is the first loan, are there any differences or things or benefits that you get as a first time applicant?
Hannah Smolinski 23:29
Yeah, so even though this is the second round of funding, it just means more money has been put into the coffers for PPP. But if it's your first time getting a PPP loan, as a business owner, you do not have to prove a revenue decline. So it's almost like you were applying back in April of last year when the original rules were put out. So that's really good to know, because there's people trying to go get these loans right now and they're worried because they don't have that revenue decline, but they never got a PPP loan to begin with. So then in that case, you're applying as a first draw loan. That's what you do when you go to apply for it, you say I'm getting a first draw loan rather than a second draw, because that second draw would be where you have to show your loss.
Scott Case 24:14
And so showing that loss is something you need to provide documentation to even for a loan that's under $150,000?
Hannah Smolinski 24:23
So you will have to provide the documentation. If it's under $150,000, you will not have to give it to the bank right away, but they will ask for it at least by the time you go and apply for forgiveness.
Scott Case 24:36
Got it. So one of the questions we had was if you haven't had a loss of more than 25%, could you be denied? It sounds like you could actually get the loan, but then when you go to get forgiveness, you might not get it forgiven. So be careful that you can demonstrate that reduction, otherwise you could find yourself owing that money, because you didn't 'use it' quote unquote use it appropriately based on your application.
Hannah Smolinski 25:08
Or technically it should never have been given to you. That's kind of the bigger thing. It's like if you didn't actually have a revenue decline of 25%, and remember, second draw loan we're talking about here only, then it's like, you really shouldn't have gotten it. So that's why I don't know why they decided to make this little rule because you have to do that calculation to determine whether or not you're eligible for that second draw line, I think they might have just done that to give people more time to pull together their financial information. Because I think there's a lot of people that know, like, Oh, I might have had 40 appointments a month normally, and now I only have 10 a month, and you might feel and know as a business owner that you do have a loss, you just might not have all your financial information pulled together just yet.
Scott Case 25:57
That's right. So we have a question about if your company is made up entirely of independent contractors, so maybe you pay yourself something, but then you've hired a software developer and a designer, and you're paying them as independent contractors. Do you as a business owner, do you apply for them or do you encourage them to apply for their own PPP loans so that they can cover their costs? How does that dynamic work?
Hannah Smolinski 26:31
Yeah, so you would leave them out of your payroll calculation. You don't include independent contractors, because they can go out and get their own PPP loan. But you could still include your own owners compensation if you're applying for yourself. So you might have a profit that you show from your business on your Schedule C, even after paying all your independent contractors, and then you can use that number to determine your loan.
Scott Case 27:01
So I want to ask a question about the quarterly number. Typically, when you file your taxes, it's an annual basis. So a quarter is defined as, usually for most sole proprietorships, a calendar quarter, right? Most of them don't have a fiscal. So that would mean that you would need to look back at your receipts for January, February, March or April, May, June or July, August, September or October, November, December, and one of those three month periods you need to show how to 25% or more loss relative to the same month in 2019. Did I get that right?
Hannah Smolinski 27:41
Yeah, yeah, that's yes. And it is on a calendar quarter. We can't adjust it and say, Can I do February, March, and April? It has to be like a true calendar quarter.
Scott Case 27:55
Okay, I can see why that can be confusing.
Hannah Smolinski 28:00
We can mention if you have a loss for the whole year, if it's 2019 and 2020, 2020 was more than a 25% decline, you can use that number too. You can use the whole annual. Because that is easier for some people who only keep annual reports.
Scott Case 28:20
That's great. So hopefully that answers the question that we got. If you have questions and you’re live, please do post them in the chat and we'll pick them up. I do have some follow up questions, just driven by my own curiosity about these things.
Scott Case 28:36
So if you think about the documentation piece, if you are focused on loans under $150,000, it sounds like the basic thing that you need is to go back to your taxes from 2019. If you're an independent contractor, pull your Schedule C, look at line 31, do the math, that's how much you can borrow and then make sure that you've either got an annual loss or a quarter loss below 25, you've lost more than 25%. Is that it? Like if you meet that then you're good?
Hannah Smolinski 29:10
Yes. Because that would've assumed that you were in business before COVID, that's one thing that has tripped people up. You have to be in business. But if you're comparing 2019 to 2020, that means that you were in business. So you did that, you did your due diligence on deciding, seeing your net profit, and then you made sure you were eligible because you had that revenue decline. You're good to go. You do have to have less than 300 employees, but I think most people on this call are less than 300.
Scott Case 29:44
That's right. Okay. So let's talk about deadlines. When do I need to apply?
Hannah Smolinski 29:52
Yeah, so this money is still first come first serve. So we have I think close to $150 billion I think still left, I'm not exactly sure the number because they periodically report on this. But there is still money. And the program is open through March 31. The first time we got money, it went really fast, and so they added more money to it. And then when that program closed, there was still money left in the pot. So we don't want that to happen this time, we actually want the people who need the loans to get the loans so that they can get this thing forgiven. So March 31 of 2021, you would have to apply before then.
Scott Case 30:36
Got it. And then let's say, it's Thursday, I go to my bank, I apply for the loan. And let's assume I've got all my ducks in a row, it's under $150,000. What typically happens next, right, I go on the online portal for the loan, I fill out everything I'm supposed to fill out, what's the basic sequence of events and then when does the money hit my bank account?
Hannah Smolinski 31:06
Yeah, I've seen this happen as quick as seven days. And then I've seen it drag out a little bit further. So what happens is once you fill out and you're going to go directly to a bank or a lender or an online lender or a community development financial institution, and you're going to apply for the money, and then when they get it, they're going to review it. And hopefully, you've given them the right information, because they should be asking you for the right information. And they'll review it, they might have some follow up questions, they might need some additional documentation. So make sure you are watching out for those emails or the communication from the bank. They will review it and once they approve it, they'll stamp it for approval and send it to the SBA. And then the SBA has time to review it and then they give the approval to the bank, the bank issues you the money and it just shows up into your account. They'll give you usually like some type of E-signature of the promissory note, that's the paperwork to accept the loan. Once you sign that promissory note, it's like a day or two, it's usually not very long from signing the promissory note to actually getting the money into your account. So depending on what your backlog is of your bank, this could be as little as a week, and then as much as probably three weeks.
Scott Case 32:34
Okay. And you talked a lot about online and getting emails, are there banks that you can go to physically if they have an open branch and fill out the application like on paper or is it all online?
Hannah Smolinski 32:49
Most banks I've seen are sending people to an online portal. People have been asking if they can fill out their application and just send it directly to the SBA and go around the banks, but that's not how the program is working. We do have to go through the banks. You can talk to your bank and walk in, but most people are being pushed to online.
Scott Case 33:11
Got it. And do I have to tell the bank ahead of time that I'm applying? So let's say I have a bank account there and do I have to give somebody a heads up? Like Hey, I'm about to apply for this loan? Or can I just go straight through the portal at the bank and fill it out?
Hannah Smolinski 33:30
I've seen this happen. Every bank is a little bit different, so they have like different processes internally. I've seen some that say, hey, let me know and I'll send you a link to then apply. It's not just like open to anybody. So if you don't see it on your bank's website and you have a relationship with your bank, go ahead and email them, call them, do whatever you need to do to go and say, How do I get my PPP loan? I don't think you have to give them necessarily a heads up. But it might just be good to say, Well, where do I need to go?
Scott Case 34:06
Got it. Okay. And we have another question here. If you're going for a second draw PPP, so you got money the first time around, you're getting a second draw. Could you get the same amount? Could you get more in the second draw? Do you have to get less? Is there any relationship to the amount of money from this first one to the second one?
Hannah Smolinski 34:29
So I'm seeing this like all over the place of people getting different amounts. Even if somebody has used technically the same time period to apply. With a second draw, you can use 2019 or 2020 to apply, whichever one is better for you. So that's kind of nice, because you might have had higher payroll costs in 2020 than you did in 2019, and then you can use that more advantageous number. There's no kind of stopping you from, hey you already got 20,000, now you can only get 10,000, there's nothing like that. Even if you use 2019 Schedule C to apply, and then you use 2019 Schedule C to apply again for the second round, that's still okay. And so, in a perfect world, we would have applied with the right numbers the first time around, and we'd get the exact same number the second time around. However, most people didn't have enough information to get the right amount the first time. And so now I'm seeing people get the right costs and understand everything they can include the second time, so I'm actually seeing loan numbers being higher in the second round.
Scott Case 35:40
So I need to calculate it really independently, I should look at what I need in the second round, apply by the rules and apply. I know that this is on the other end of the spectrum, but just in terms of the rules, they did have a lower total cap this time. So if you are a larger business or you had a lot more employees, you can't apply for more than $2 million. Is that correct?
Hannah Smolinski 36:09
Yeah, that's correct. So that's kind of helping keep the smaller business owner, the one that probably needs more help trying to focus those dollars a little bit more.
Scott Case 36:21
So are there any restrictions on the timeline as a business owner to use the funds? So we know that they're supposed to be used primarily for payroll, and I'm gonna come back to what else might they be used for. But if they're primarily used for payroll, do I have to have to use them all within, you know, if I get the money in my bank, do I have to use them all in two and a half months or do I have a longer period of time to use the funds that I got, even if I'm using them for payroll?
Hannah Smolinski 36:58
Yeah, we actually have the option now that SBA added this option, that they said, you can use the funds anywhere between eight weeks and 24 weeks. So you start using the money right away. You get the money in your account, you start using it right away, and the time you're using your money is called your quote, unquote, covered period. So your covered period can either be as short as eight weeks. So after eight weeks, you can apply for forgiveness, if you've spent all the money. But then maximum, it can be 24 weeks, which is almost six months. So if we only got two and a half months of payroll costs, but we have 24 weeks to use it, the likelihood that most people are going to use 100% of this money on payroll costs is really high. So that's totally fine in the eyes of the SBA, they're happy for you to use all of it on payroll.
Scott Case 37:50
And what does SBA stand for?
Hannah Smolinski 37:53
Small Business Administration, and they're like the ones that are approving the loans at the very end. And they're the ones that had the final say on the forgiveness, because once they review the forgiveness application at the very end, they're the ones that fund the bank and wipe your loan clean. So they're the ones who really care about issuing guidance.
Scott Case 38:18
But you don't interact with the SBA directly? It's really the bank that's going through it.
Hannah Smolinski 38:24
Yes.
Scott Case 38:24
So you talked a little bit about this, but these are loans until they're not loans.
Hannah Smolinski 38:35
Right.
Scott Case 38:36
So at the point that you take out this loan, you as a business owner are on the hook to use the money properly and apply for forgiveness at the right time, in which case, you can get all or part, usually all of it or sometimes part of it forgiven. But if you don't use it or you don't use it for the right things, you have to pay it back. What are the terms if for some reason, you borrowed the money, and maybe you had to shut the company down and now you've got this loan hanging out there for part of it? What happens in that case?
Hannah Smolinski 39:14
Yeah, so it's still a favorable business loan, even if it were not forgiven. The terms of the loan is five years repayment at a 1% interest rate. So I mean, you can't get a 1% interest rate anywhere. But that is if it were not forgiven, or if a portion of your loan is not forgiven, it converts to that timeline, the five years at 1%. And, like you said, if a business closed, they weren't able to use it, they'd be on the hook for whatever could not be forgiven. It's important to note, if you're not intending to use this money in the right way, if you want to use it for something If you want to buy a Lamborghini, like, don't do it, because that's not what the money is intended for. And you have to make certifications that you're trying to use this money in the right way when you sign up and get these loans, so we don't want anybody going to prison for using the money incorrectly. We have a good story about that. But yeah, use the money for the intended purposes. But if something happens, and there is that risk, there's always business risk that we don't know what the future holds, right. So that's the opposite side of it, it is good to know what you're signing your name to, at the end of the day when you signed that promissory note.
Scott Case 40:39
I think that point about signing the note, again, if you apply correctly which is pretty straightforward and you use the money for payroll, you shouldn’t have any problem getting forgiven down the line. There are other things you can use it for. I want to ask some questions around, you talked about a hair stylist, if I’m getting paid from my client $50 for a haircut and I do 100 of those, so I think that math adds up to $5,000, and I have to rent the chair and maybe I have a commute that I have to pay for to get there and these other expenses that are there, can I use a portion of that loan to pay those expenses in addition to paying myself?
Hannah Smolinski 41:33
Yeah, so at least 60% of the PPP loans have to be used for payroll and payroll costs, so lump all the payroll-related stuff into payroll costs. But you have to reach that 60%. But let’s say maybe you didn’t need to take the money home as owner compensation, but you did need the money to pay that rent, you can use the money for rent. There are seven categories that you can use this money for that are considered non-payroll costs, and they can make up up to 40% of that total. So that ratio can change based on what your business needs, but rent is one of the big ones. Utility is one of the other ones. Mortgage interest, less people have that, but that’s something you can do. Property damage costs from riots that happened if it’s not covered by insurance. Software expenses in the business, a lot of us have software expenses now that can now be included. As well as personal protective equipment for your employees, like for example, if you’re having to buy masks and buy extra cleaning supplies to make sure you’re cleaning after every person coming in, those types of things can be included and be paid for with a PPP.
Scott Case 42:49
Awesome. Well, we’re a little after time. We’ve answered a lot of great questions. Really appreciate you being here, Hannah. Is there anything else that you would want to share from a parting wisdom from a PPP guru?
Hannah Smolinski 43:10
I really think this program can be super helpful for people, so it’s worth looking into. And don’t leave money on the table that essentially could be free for you. It’s worth a little investigation to see if you qualify. It’s worth the investigation to research what you should be spending your money on. It’s worth getting help if you need help along the way because for the amount you’re paying to get help you could be getting tons of free money back, so don’t try to go at this alone, don’t try to throw your hands up without doing some due diligence because it’s one of the best investments of time that you could do. Like spend a couple hours of time learning about it and you could be getting $1,000s of dollars of free money into your business. That’s what I’d say. Don’t leave free money on the table.
Scott Case 44:08
That’s great, and as we talked about, we created Upside Financial as a resource. We do primarily focus on helping with forgiveness, but we also have some lenders that we’re working with, so if you need additional help, please check out upsidefinancial.com and we could be a resource to at least guide you. But as Hannah said, don’t leave money on the table that could be driving your business forward.
Scott Case 44:35
Thanks for tuning in to this episode of Founders Focus. What did you think? You got any feedback for us? Got a topic that you'd like us to discuss, or maybe a future co host? We'd love to hear from you. Just hit me up on LinkedIn at T Scott Case. And join us at foundersfocus.com to stay up to date with the latest episodes. And join us live every week at our Founders Focus sessions. Hope to see you there.