Mike Reed, CPA, FRSA Controller and General Manager
Note - I hope that what follows is old news to any contractor taking the time to read this article. It is intended to let you know a few of the things we learned at FRSA in the process of applying for and receiving a loan.
FRSA recently applied for and was granted a Small Business Administration (SBA) Payroll Protection Program (PPP) loan. The 2020 FRSA Convention and Expo had not yet been cancelled, but the prospects of holding the event looked dim at the time we applied. We felt we had a need for the funds because the income produced by the Convention and Expo on an annual basis makes up a large portion of FRSA’s budgeted revenue. Warning lights started flashing about the possibility of having to refund sponsor and expo payments already made.
We learned that although not all banks are approved SBA lenders, many small banks are. The best place to apply for a loan is with a smaller bank that will be more likely to give your application individual attention. FRSA applied for its loan at two banks. While a large national bank that we have been doing business with for many years has yet to consider our application, but a small regional bank that we had to open an account with just to qualify to apply did. Guess which one will be getting more of FRSA’s business in the future.
We found that it helps to respond quickly when the bank requests any documentation to process the loan application. When money is released for the PPP, it is a first-come, first-served protocol that rules. If all your paperwork is in order so the bank can upload documentation when funds are released, you have a much better chance of receiving a loan.
For contractors that rely heavily on independent contractors (1099 “employees”) there is not much good news in the PPP rules. “Employee” compensation paid to independent contractors cannot be included in calculating the requested amount for a loan, nor will payments made to independent contractors be allowed as a covered item in the use of loan proceeds.
Maybe the most important thing we have learned through the PPP process is that there are items that still need clarification from the SBA. One of those items was recently clarified. The SBA has determined that a “safe harbor” exists for all PPP loans with an original principal amount of less than $2 million. The clarification further states that borrower will have been deemed to have made the required certification concerning the necessity of the loan request in good faith. This is good news because it relieves almost all borrowers from having to certify that they could not get funds elsewhere through conventional borrowing or other sources of business capital.
Another late clarification from the SBA is that the amount received from a PPP loan is not taxable income, but neither are the expenses paid with loan proceeds tax deductible expenses. For everyone using the loan amounts for PPP stipulated reasons, this makes the loan a wash for tax purposes.
Of course, there are complexities that arise the more complicated a business structure is. For that reason alone the best person to consult with from the beginning of the loan application to the final payback and loan release is the SBA person at your bank, who should know about breaking PPP news before anyone else.
With the possibility of additional funds being released through the SBA in the near future, it is still a good time to make sure you have all required documents in order and that you have already made contact with the bank you plan to work with to let them know you would like to apply during the next round of government payments. Hopefully, that will already be in progress as you read this.
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