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The Paycheck Protection Program was designed to provide relief to eligible organizations affected by the coronavirus pandemic. Ask your banker these questions before completing the loan application process.

COVID Financial Management

5 Questions to Ask Before Applying for a Paycheck Protection Program Loan

  • Ginny Veit
  • 4/7/2020

Key insights

  • The Paycheck Protection Program was created to help organizations keep their workforce employed during the coronavirus pandemic.
  • Some lenders have been interpreting the loan application requirements differently than others.
  • Review the loan application details to help expedite the process and increase the likelihood that your loan will be approved.

At CLA, we are closely monitoring the CARES Act and the Paycheck Protection Program (PPP). Since the CARES Act passed on March 27, guidance has come out quickly and is changing daily. This has created significant confusion and varying interpretation by lenders.

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Ask your banker these five important questions before applying for a PPP loan. Understanding these points can help you complete the application process efficiently and help you support the maximum allowable loan for your organization.

1. Is the bank applying the SBA alternative size standards?

It has been widely reported and generally understood that all organizations or affiliated organizations with fewer than 500 employees or that meet the Small Business Administration (SBA) size standards are eligible for the PPP. However, some banks are disallowing applications from entities that meet the PPP size standards when the applicant has revenues in excess of the thresholds set forth in the SBA size standards. If your revenues fall below the revenue threshold for your NAICS industry code, you can move to our next question.

However, if you are over the threshold but meet the SBA size standards, you are still eligible for the PPP. If your bank indicates you are not eligible due to the revenue size standards, find another bank that is correctly interpreting the eligibility requirements and will permit your application. If you would like to confirm you qualify, check out the SBA size standards.

2. How is the bank interpreting the $100,000-per-employee compensation limit?

The PPP allows eligible borrowers to borrow 2.5 months of average monthly payroll costs, but limits the payroll cost per employee to the annual equivalent of $100,000. Based on guidance from U.S. Department of the Treasury, the $100,000 annualized cap only applies to salaries, wages, commissions, or tips. Currently, banks are applying the $100,000 cap in a variety of ways; however, they are generally taking one of three positions:

  1. The $100,000 limit is applied to aggregate compensation (salary and wages, healthcare, and retirement) for all employees, regardless of salary level.
  2. The limit is applied only to individuals with salary or wages over $100,000, and healthcare and retirement benefits for those individuals above the cap are also excluded.
  3. The limit is applied only to individuals with salary or wages over $100,000, but healthcare and retirement benefits for those individuals are not being excluded.

Review the tables below to see results under these three different scenarios

  John Smith Mary Jones Company Total
Annual salaries and wages (includes PTO) $95,000 $150,000 $245,000
Employer health benefits 10,000 15,000 25,000
Employer retirement benefits 5,000 7,500 12,500
Total "payroll costs" 110,000 172,500 282,500
Amount Eligible for Loan Sizing    
Scenario 1
Limit applied on all payroll costs
$100,000 $100,000 $200,00
Scenario 2
Limit only on those over $100,000 in salaries and wages, excluding benefits
110,000 100,000 210,000
Scenario 3
Limit on those over $100,000 in salaries and wages, allowing benefits
110,000 122,500 232,500

Based on the U.S. Department of the Treasury guidance, we believe that scenario 3 is the correct way to interpret the $100,000 annualized cap. Determine how your bank intends to apply the $100,000 limitation so you don’t receive a reduced loan size as a result of an improper interpretation.

3. If the organization has affiliated entities, does the bank require applications from each affiliate or from the affiliates as a single borrower?

For entities with affiliates, most banks are accepting applications at the individual entity level, subject to an overall limitation of $10 million for all affiliates. However, other banks are having one of the affiliates apply on behalf of the group.

Determine the approach your bank will take, in order to gather the required loan application information. If you apply separately, take care not to exceed the $10 million limit for the affiliated organizations as a whole.

4. Is the bank allowing you to include owners’ self-employment income in the organization’s loan sizing?

General partners and some LLC members (depending on structure) receive self-employment in the form of guaranteed payments and distributive income share. (This does not apply to S corporation shareholders.) Those amounts should be eligible for inclusion in the average monthly payroll used to size the PPP loan.

However, banks are taking different approaches with respect to partners and members who don’t receive W-2 wages. Some allow the partnership to include guaranteed payments only. Some also allow the distributive income share, since those amounts are subject to self-employment tax. Others are excluding these amounts from the organization and advising the owners to apply for the loans individually outside of the organization. Any amounts for partners and members who don’t receive W-2s are limited to a maximum of $100,000. Check with your banker to determine if they are allowing owner compensation to be included for loan sizing purposes.

5. Is the bank permitting organizations with non-U.S. ownership to apply for the loans?

SBA guidance provides that foreign-owned companies with U.S. employees can apply for the PPP loans, provided they otherwise meet the eligibility requirements. There was some previous guidance to the contrary, so some banks are not permitting foreign-owned organizations with U.S. employees to apply for PPP loans. If your entity is foreign-owned, confirm that your banker will accept the application.

While it’s unlikely you can change how the bank interprets these topics, you don’t have to accept a lower-sized loan or have your application denied. Ask these questions upfront, to ensure you are working with a bank that will support your application and help you maximize your loan size within the PPP guidelines.

How we can help

We’re here to help you through this complex, rapidly changing environment. Whether you’re considering the Economic Injury Disaster Loan program, the PPP, grants, or other financing, CLA is ready to help you navigate the process. We will work with you to understand your situation, strategize on immediate needs, and help you to pull together the information necessary for you to submit your financing application.

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