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On March 21, 2020, the United States Senate introduced the CARES Act, an all encompassing emergency assistance and health care bill for individuals, families, and businesses affected by the 2020 coronavirus (COVID-19) pandemic. Within the legislation, the Paycheck Protection Program (“PPP”) authorized up to $669 billion (passed in two rounds of voting) in subsidized loans to small businesses to cover employee payroll (which is forgivable) and other qualified business expenses during the crisis.
However, no program is perfect. The PPP has been subject to issues such as technical glitches, dried up funding, and reported biases toward large companies and away from underrepresented populations. It’s no wonder the program has been described as “troubled,” with many small business owners looking elsewhere for funding alternatives.
Nonetheless, compared to all other small business loan options on the market right now, the PPP is still a great program with extremely beneficial terms for most small businesses that want to take out a loan. It is readily available, easy to apply and most small businesses are eligible. Before you take out a loan from another source, you should definitely look into getting a PPP loan.
We’ve put together this post where James Lee, Hatch's COO and General Counsel responds to some frequently asked questions about the PPP, which we hope helps inform you to make the right choice for your business.
In this post, we cover:
- A series of (8) frequently asked questions about the PPP
- Next steps If you're still interested in getting a PPP loan
Q1: Isn’t the PPP only meant for bigger businesses to pay employees?
No, based on the terms of the PPP loans, the funds can be used by businesses for a variety of costs. Only if you want the loan forgiven, do you need to spend at least 75% of it on paying employees.
Even if your loan is not forgiven, the terms are still extremely favorable. It’s important to ask yourself: where else can you borrow money for 1% APR for a 2-year term, no payment due in the first 6-months, and with no collateral or personal guarantee required?
Q2: What is my personal risk if my business defaults on the PPP loan?
Ultimately, it depends on whether your business is incorporated. If your business is a corporation or an LLC, then there should be no personal risk to you if the business fails and defaults on the PPP loan, since there are no personal guarantees required. If your business is not a corporation or LLC, then you are personally taking out the PPP loan and the lender can pursue you for a default. However, due to the program’s high demand and (still unclear guidance from the federal government on loan servicing), it is still unknown if and how lenders will try to collect.
In addition, your personal credit score should not be adversely affected by a PPP loan default if your business is a corporation or LLC. However, your personal credit will be affected if your business is not a proper legal entity. This is a prime example of why it is important to convert your business to a corporation or LLC.
Q3: I have a small business with no employees, is this for me?
Absolutely! There are over 30-million small businesses in the U.S., 80% of whom don’t have employees. As long as you were in business prior to February 15, 2020, and had income or payroll, you are eligible for a PPP loan.
For example, if you had no employees and paid yourself $50,000 last year, then you could qualify for a ~$10,000 PPP loan. If you had employees or paid yourself more, then your eligible loan amount will be higher. Use this handy calculator to find out how much you’re potentially eligible for.
Q4: I don’t like to take on debt, isn’t debt bad for businesses?
Ideally, your business can survive without any financial help, and debt is considered as a strategic tool for growth. However, with the uncertainty of the economy after businesses reopen, it’s important to consider all options for building a financial cushion to keep your business afloat.
Interest rates and fees should be carefully considered for any loan product, but a 1% APR loan is practically “free” in the lending space. For example, on a $10,000 PPP loan, you’d pay about $150 of interest at the end of 2-years, which means if you end up not needing the loan, you’ll be out $150.
Consider the following: Best case scenario, taking the loan could save your business during these uncertain times. Worst case, if you take the loan and can’t save the business, you’ll have minimized your personal risk (as long as your business is a corporation or LLC) and your business will default on the loan.
Q5: I’ve been rejected for loans before, can I really qualify for the PPP?
Yes! There is no underwriting criteria to be eligible for this program. How long the application process takes will depend on if you’ve worked with the lender in the past. Our recommendation is to apply through your current bank to minimize this processing time.
As long as your business was open before February 15, 2020 and had income/payroll costs, you can get a PPP loan. The federal government is able to offer a deal like this because they are trying to support small businesses and are willing to lose money on this program.
Q6: Don’t I have to spend the PPP money on employees?
No, you only have to spend money on employees if you want the loan forgiven. The PPP information sheet states that the PPP funds should be used for wages, mortgage, rent and utilities but does not require it unless you are looking to have the loan forgiven. However, if you spend the money on things not related to your business, then you are committing fraud. It is important that you keep receipts or other evidence of what you spend the loan proceeds on in the unlikely chance that you get audited,
If you’re interested in seeing how much of your loan could be forgiven, and the terms of forgiveness, check out this PPP loan forgiveness calculator by our friends at Coast. However, if you are looking to have the loan forgiven, it is a complicated process and you must follow the instructions carefully and keep very good records.
Q7: What is Hatch’s interest in the PPP?
Hatch does not offer the PPP loan and gets no referral or other fees. However, we understand that a program this large can be confusing without the help of a team of experts. We started Hatch to help small business owners navigate complex topics like this, and get you a leg up on building your business. Our team considers PPP loans a great deal for small businesses that are interested in taking out a loan, with minimal personal risk for corporations or LLCs. If your business is not a corporation or LLC, then you need to decide whether the low APR is worth the personal risk if you default on the loan.
Q8: How do I apply for a PPP loan?
You can apply for a PPP loan through any existing SBA 7(a) lender or through any federally insured bank or credit union. Click here to learn more about your different options. While much of the spotlight has been on application woes and problems with loan forgiveness, many of the program’s processes have been fixed, and there are now minimal delays in processing and still billions of dollars of funding available.
At Hatch, we offer small business owners something that no other lending company does: a fresh start and the benefit of the doubt. We extend a line of credit (up to $5,000) to business owners who are just starting out, without requiring a previous business history or a great credit score. Click here to learn more about applying for your Hatch Card today!