A PPP (Paycheck Protection Program) loan is designed to provide a direct stimulus to small businesses to keep their workers in the workforce during the Covid-19 pandemic. PPP loans will be available again in 2021 and 2022 through a new round of funding. While these loans can be fully forgiven, they are not appropriate for all small businesses.
The SBA’s existing 7(a) loan program (the agency’s primary program) has always been a vital financial tool for small businesses, and it will remain so in 2021. These loans have all the necessary requirements, loan amounts and approved goals to be the best financing option in a variety of circumstances. Before you apply for an SBA PPP loan in 2021 or 2022, it’s important to keep a few things in mind. Below, we’ll look at how you can apply for this loan and what to keep in mind.
The Wage Protection Program is for businesses with fewer than 500 employees for first draw PPP loans. For second draw PPP loans, you cannot have more than 300 employees. Your business must still be open and operating and must at least be operational by February 15, 2020. The following steps must be taken in order to apply for a P3 loan:
Access your application
Confirm or add company information
Add new requirements
Confirm business ownership
Confirm additional information
Verify additional instructions from your lender
Approval of your PPP loan application varies by lender. Generally, it takes about two weeks for the lender to disburse the funds. Sometimes additional information is required, which delays the process. Another factor that can delay the process is if a new round is introduced it will take lenders longer to process all applications.
7(a) loan program or PPP?
When it comes to spending, SBA 7(a) loans offer much more flexibility. PPP loans are more limited, and total forgiveness is subject to stricter restrictions. If you want to receive full forgiveness of your loan, you must spend at least 60% of your loan on payroll expenses; any less will limit your eligible forgiveness proportionately.
An SBA 7(a) loan is a better option if you want to expand your business or finance working capital needs. A PPP loan is a better option if you need money to pay your staff or cover rent. You also need to think about when you will use your loan. With an SBA 7(a) loan, you can spend the funds on your own schedule. You must use all of your money within the covered 8- or 24-week period to qualify for debt forgiveness with a PPP loan; any money spent outside of this period will not qualify for debt forgiveness.
Qualification for an SBA 7(a) Loan
If you are interested in receiving assistance from the Small Business Administration, you must meet the following criteria:
Be a for-profit business based in the United States.
As a small business, you must meet the SBA size criteria (varies by industry).
You do not have similar credit elsewhere
Not work in an ineligible industry, which includes certain passive businesses.
Not have caused the state to lose money on federal debt in the past (for example, unpaid student loans or tax debt).
Meet the character standards for all business owners with 20% or more ownership, which includes a prohibition on business ownership by individuals with specific criminal histories.
A U.S. citizen or legal permanent resident must own at least 51% of the ownership.
Before applying for an SBA 7(a) loan, it is important to keep in mind that PPP loans can be fully forgiven if the loan is used. (If used for payroll) Outside of the PPP loan program, however, 7(a) loans are not cancellable. SBA’s loan fee guidelines help protect small business borrowers from paying excessive fees. Some are allowed, some are not. However, small business owners will find that closing costs and fees on these loans are generally lower than on other commercial loans.
If your business has been affected by the coronavirus, you should start looking for low-cost financing through the Wage Protection Program and the Disaster Economic Damage Loan Program. If your business was spared the adverse effects of the pandemic, an SBA 7(a) loan is a great way to cover working capital or expand your business at rates that other lenders, such as online lenders, cannot match. Ultimately, it’s the impact of the pandemic on your business, as well as your specific situation, that will determine the best financing package for you.