Using and Tracking Your PPP Loan (To Help With Loan Forgiveness)
If you were approved for the Paycheck Protection Program Loan--congrats! Making it through the process is no small feat, so cheers to you, you rockstar business owner.
But now that you’ve been approved, what should you do? First things first, celebrate yourself and breathe a small sigh of relief. The Covid19 Crisis hasn’t been easy on any of us and having the chance to keep your business afloat with what could eventually be free money is something to pause and appreciate.
Then, it’s time to get to work! Make sure you know what expenses will be forgiven and that you know the timeline you have to spend the money. Payroll, mortgage interest, business rent, and utilities are forgivable expenses within the first eight weeks after you receive the loan. You may want to mark your calendar because what this means is that you cannot sit on this money until some far away day in the future and expect it to be forgiven. It is an emergency fund that is meant to provide relief to your business in the short term.
1. Percentage Breakdowns for PPP Loan
Not only is it crucial that you track the timeline of your loan and expenditures, but it is also important that you know the percentage breakdown for the loan to be eligible for forgiveness. At least 75% of your loan funds must be used on payroll. The remaining 25% can be used for the other expenses listed above such as rent, interest, utilities, and other business debts.
2. Keeping Track of Your PPP Loan Expenses
The best way to ensure that you’re properly spending the money and that you will be eligible for loan forgiveness is to document your expenses. As a business owner, this may seem like a no-brainer, you might be a champion at documenting your business expenses--but just keep in mind that you want to be even more diligent than usual in this area.
Once you’ve been approved, I recommend sitting down and running your numbers. What do you project to spend in Payroll over the next 2 months? Calculate the total. Is this total at least 75% of your loan? Can you increase your employee’s hours during the forgiveness eligibility period?
Then consider the remaining 25% of the loan. How much will your rent and utilities be during the loan period?
3. Should You Set Up a Separate Bank Account for Your PPP Loan?
It is not necessary, however, you may find that doing so helps you better track expenses associated with the loan funds. If you do, be sure that your payroll is coming from this account as well.
4. Monitor Your PPP Loan Timeline
Earlier I suggested that you mark your calendar, I also suggest that you have a check-in with yourself and/or your accountant during the loan forgiveness period to make sure you are on track. You may want to check in at 30 days, as a halfway mark, or you may want to check-in every 2-3 weeks.
Whatever timeline you set for yourself, be sure that you are following your spending plan. You may need to make adjustments if you find that your numbers are too high or too low in certain areas.
5. Is PPP Loan Forgiveness Automatic?
In a perfect world...but alas, the world is not perfect. Near the end of your loan forgiveness period, you will want to make sure you have:
Spent 75% of the loan on payroll
Maintained your monthly average payroll
Paid each employee at least 75% of their average wage
With these things in mind, you should be on track to be forgiven. However, remember that while the SBA oversees the program, your lender may have a different set of guidelines that you must adhere to for forgiveness. Check in with them throughout the process, and make sure you fully understand their rules and guidelines for forgiveness.
Remember, this program arose in the midst of a pandemic so there are kinks and bugs that are still being worked out. We may find ourselves dealing with yet another hurdle when it comes time for mass loan forgiveness. While the government continues to issue guidance, you should be diligent and aim to have your ducks in a row.
For help managing your business finances, check out our services page. Desnoyers CPA, is an accounting firm that offers a wide range of services for business owners. Check out our monthly blog and join our mailing list to get more information for small business owners seeking experienced financial advice.