Business Insider Publication
Written by Julie Peck, published 4/27/2020
On Monday, Congress released a fresh $320 billion in stimulus funds to boost the Paycheck Protection Program (PPP) that ran dry on April 16 — but many small business owners are still confused about the application process.
Experts are skeptical this money will last very long, so it's unclear whether new applications will even be considered, but it's never a bad idea to be prepared.
And small business owners who are already in line could be contacted by their lenders this week to submit additional documentation in support of their application. With every bank adopting its own procedures, the guidance has been less than clear for most applicants.
"Simply too many businesses are being asked to provide documents that are not needed and there is inconsistency in the marketplace right now," said Erik Asgeirsson, president and CEO of CPA.com, the business and technology arm of the American Institute of CPAs (AICPA).
Asgeirsson spearheaded the AICPA's small business funding coalition organized during the legislative process that led to the CARES Act, and has coordinated a coalition of payroll companies in the interest of establishing agreement on the documentation necessary to submit to lenders for the PPP. "What we are trying to do is build consistency in the overall approach," he explained.
Business Insider spoke with a variety of experts to get the details on the documentation typically needed for the PPP and other coronavirus aid-related applications, and how business owners can efficiently assemble these documents.
The process favors the prepared
"If you have your paperwork ready, you might be approved this time," Nick Kolbenschlag, cofounder and managing partner of financial services firm Crown Wealth Group in Charlotte, North Carolina, told Business Insider. "If they come to you and you're missing something, you go to the back of the line again, and maybe someone else gets into underwriting while you're getting your missing document or documents together."
Dr. Thomas Ruchti, assistant professor of accounting at Carnegie Mellon University's Tepper School of Business, added that you should be utilizing some kind of enterprise resource software that's coordinating your inventories, payroll, and benefits and be ready to pull those reports at the right time. "The bottleneck isn't on your end when you have everything prepared and ready," he added.
The AICPA recently released a set of recommendations on the documents it suggests borrowers should have prepared for submission when applying for a PPP loan. Kolbenschlag separated the documentation needed into five categories.
The first step PPP applicants will need to complete is the SBA's Borrower Application Form. This is a one-page form with an additional page of certifications and two pages of related instructions. Kolbenschlag cautioned attention to detail on this form.
"There were many, many versions of it, so applicants have to be sure they use the most recent version of it," he told Business Insider. "There should not be any more changes at this point, so the way to ensure this is the most recent form is to check for the control number ending in 0407 in the top right corner."
Corporate entity documents
Next, lenders will require documentation to establish a company's founding date and principals. For an S-corp or a C-corp, this includes articles of incorporation and company bylaws, whereas for an LLC, it would be articles of organization and an operating agreement.
"According to the rules of the law, you had to be in operation before February 15, so that's what the articles will establish," Kolbenschlag said. "Additionally, the reason the bank wants to see the company bylaws or the operating agreement is that someone is going to have to sign the promissory note (when the loan is made), and those documents will govern who has to do that."
Business operating records
Kolbenschlag said in his experience helping dozens of his firm's clients apply for the PPP loan that some lenders have asked for a profit-and-loss statement — which he believes is the case for two reasons.
"First, I believe they're doing this because they want to have an understanding of your payroll, your operating costs, etc.," Kolbenschlag told Business Insider. "Ultimately, it will be helpful in getting the loan forgiven. Secondly, god forbid something would happen with the SBA and they don't buy these loans back, these banks want to see if you have the ability to pay it back so that they don't end up with it on their books," Kolbenschlag speculated. "Thinking like a bank, if I had to guess, that's what I imagine is happening."
In terms of other operating records, Ruchti highlighted the importance of being scrupulous with record-keeping with regard to dates on expenses, something that will be important both when submitting paperwork for the PPP (and other loans) as well as when turning in the documentation for forgiveness on the loan further down the road.
"Lenders will look at, 'Did you actually pay that person in February, or was that some other time?'" Ruchti said. "For some small businesses, this kind of precise record-keeping can be an issue, but it's very important in this process."
Kolbenschlag observed that anecdotally, the smaller banks his clients work with have asked for more information than the larger banks. Ruchti said this may be due to what he referred to as the SBA's history of "under-documentation."
"Small lenders probably have a lot to worry about there," he told Business Insider. "Depending on what they're doing, they could get wiped out if the SBA comes back and tells them this was a bad loan, that was a bad loan — if they start moving the goalposts."
Since, according to the SBA, the PPP loan is based on two months' payroll costs plus 25% of this cost, payroll documentation is at the heart of the application. Here are the forms to prepare:
2019 Form W-3, Transmittal of Wage and Tax Statements: A summary of all the W-2s that were produced for the year in one document.
2019 Form 941, Employer's Quarterly Federal Tax Return (one for each quarter): A quarterly payroll report from each of the four quarters of 2019. "This is what they're pulling the wages from," Kolbenschlag said. "Your lender is looking at this to make sure it matches up with your W-3." With respect to these forms and the W-3, the AICPA recommendations suggest that you may be able to substitute reports that substantiate employment tax returns filed, if necessary.
A 2019 payroll summary report: "This is something that the business owner will pull from their QuickBooks, or their payroll company will pull for them," Kolbenschlag said.
That same payroll summary report for February 15, or the closest pay date to it: "This is where your lender will derive your headcount, which is based on the number of full-time equivalency employees you had on February 15," Kolbenschlag told Business Insider. "It shows everything — wages, FICA, state unemployment insurance, company healthcare contributions, retirement contributions, etc. It proves who was over $100,000, and you can adjust your amount down from there."
For seasonal businesses, the AICPA recommendations advise that payroll numbers used should be the average monthly payroll beginning February 15, 2019 or March 1, 2019 through June 30, 2019.
Like a number of other cloud accounting and payroll platforms, Intuit QuickBooks has released in-line PPP reports to help their customers pull together and package their electronic reports quickly and easily.
"We put a massive team to work on this as soon as we saw the program on the horizon," said Luke Voiles, vice president and business leader of QuickBooks Capital, regarding the PPP application addition. "From a technical perspective, we started looking at our existing package to get it built and get it out as quickly as possible. Now, our customers can create a report in QuickBooks and take that report wherever they want, or complete their application in under 10 minutes."
Payroll companies like ADP have also worked hard on the technology side to help ease the burden of document production for small business owners.
"The primary thing we've done is to prepare a report of payroll costs — there's a pretty specific calculation that employers would have to do, including all these costs around payroll: healthcare, retirement contributions, workman's comp … All of those are included in our reports," Pete Isberg, ADP vice president of government affairs, told Business Insider. "I think we've produced more than 250,000 of those reports in the past couple of weeks."
Isberg said ADP has also been working behind the scenes to ensure that lenders understand that the payroll reports produced by fintechs are legitimate resources that banks can depend on, which he said was the source of some nervousness among lenders early on in the PPP process.
"Banks have not been getting a lot of guidance from [the] Treasury and the SBA, and were asking for a lot of extra documentation, which tended to slow things down and gum up the works," Isberg said. "We've been working with the AICPA to produce messaging letting lenders know that payroll company reports are a comprehensive and reliable source of data."
At this point, what else is requested is up to your lender. Being ready with backup on the components of your payroll is a smart strategy, though.
"Some companies are asking for documentation on the healthcare premiums paid by the company directly from that company's insurance carrier and retirement contributions paid by the company from the plan manager, for example," Kolbenschlag said.
Dr. Ruchti agreed that retrieving data on items such as paid leave and company healthcare and retirement contributions before they're requested is a potential time-saver for small business owners.
"This could add up to a lot of information to search if you don't have all of it filed through your payroll company," he said.
Forewarned is forearmed
"Pulling together this information is also very important for forgiveness, as well as for business decisions like whether you close down or not and for how long," Ruchti told Business Insider. "Having more accounting information now is incredibly important not only in the PPP process but as you make these decisions. Everyone's having to take stock, and the more data you have, the better."
Kolbenschlag, meanwhile, has seen this strategy of preparedness pay off for a majority of his clients.
"You don't want to be missing anything — this way, you'll get a quick process," he said. "At least 60% of our clients who applied have been approved, and another 20% are in the process where I believe they have their SBA loan number and are just waiting on final approval. We've gotten good feedback from not just our clients, but also from the banks — it makes their jobs that much easier."
Erik Asgeirsson said the banks are striving toward honoring what he said the industry terms a "thin file," which helps everyone.
"Some of the lenders are just now getting their arms around the fact that they're asking for documents that are not needed because this is not a standard loan," he said. "You really only need to ask for just what's asked for in the specifications of this loan. Getting the documentation process down to a thin, accurate file will really help to alleviate the anxiety and the delays on the business owner's end for a lot of people."