After a week of small business owners and banks working through the kinks of applying for their share of the $349 billion forgivable loan program, sole proprietors and independent contractors now have their chance to get in line.
Part of the massive federal stimulus package, the Paycheck Protection Program (PPP) authorizes up to $349 billion in forgivable loans, and it could be the difference in staying afloat and closing shop.
Sole proprietors and independent contractors are able to borrow 2.5 times their businesses’ average monthly payroll costs — defined as net earnings from self-employment. Loan forgiveness is available if the sole proprietor spends 75 percent of the loan proceeds on payroll costs and 25 percent on things such as mortgage, rent and utilities.
The loan must be spent in the eight weeks following receipt of the loan proceeds.
“Essentially, this loan is for sole proprietors who have employees, plus themselves, because their income is unable to be earned because they’re closed down,” said Brenda Clayton, a local certified public accountant. “A lot of the regulations are still being written and more guidance is expected to be issued.”
But for some sole proprietors, the PPP doesn’t necessarily make good business sense for the business owner, nor the employees.
Preservation Station Owner Jennifer Higdon said her business was having the best quarter of its 8-year existence this until the pandemic hit. Once local school districts announced closures, things flipped upside down for Higdon and her small team of employees.
Higdon said she and her mother, who run the store, were raised to be financially frugal, but the economic loss from COVID-19 and the uncertainty of how long the retail shutdown would last led her to look into small business loans for sole proprietors such as herself.
Higdon thought it was a good idea at first, but she changed her mind after taking a closer look at the logistics. She said if she lets employees go, they could draw more from unemployment than they could get through the loan.
“I have a lot of part-time employees who make $10-$14 dollars an hour and work 20 hours a week. You have to spend 75 percent of the PPP loan to pay your employees and you get a 25 percent bonus for utilities that would only cover our costs for one month,” she said. “[My employees are making three times more from unemployment than from me. I can’t justify doing that to my employees. Some of them are single moms. I don’t feel good about keeping them on payroll.”
However, Clayton said the PPP loan is designed to pay out more to employees than unemployment because sole proprietors can apply for 2.5 times the payroll costs.
“If employees did draw unemployment instead of coming back to work — with the additional $600 [that is being given to everyone drawing unemployment] — it looks to be about 62 percent of your net [employment wages],” she said, using rough estimates. “Unemployment pays anywhere from $200 to $500 a week. If an employer is offering to pay you standard wages, you can’t file for unemployment.”
However, there are limited funds available with PPP loans, and already $180 billion of $349 billion allocated has been dished out. Clayton said she believes another wave of PPP loans will be made available soon, but suggested that no one count on that yet.
Clayton said she doesn’t know any business that won’t be harmed during this economic shutdown, and though there are people who might take advantage of the system, it’s designed to be helpful for everyone involved.
“I think the PPE is [applied for] more because of the opportunity for forgiveness,” she said. “From the forgiveness standpoint, it’s the best loan to get.”
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