Application advice for SBA loans

Hosted by Neil Amato

Questions about the U.S. Small Business Administration’s Paycheck Protection Program (PPP) loans aimed at helping small businesses hurt by the coronavirus pandemic are numerous. Glen Frost, CPA, J.D., and Matthew Kraeuter, J.D., partners in the firm Frost and Associates LLC, share information on eligibility, the amount of money available, interest rates, and more. Note: This episode was recorded on Friday, April 3, 2020.

What you’ll learn from this episode:

  • Details on what qualifies as an eligible small business.
  • The limits of CPA firms’ role in advising clients about the loans. For ethical considerations and other resources for CPAs, visit the Private Companies Practice Section’s SBA Paycheck Protection Program resources page.
  • Why the PPP loan documentation might be different than the documentation required by a lender.
  • More information on the loans’ fees, interest rates, and potential forgiveness.
  • The tax considerations of the loans.

Play the episode below or read the edited transcript:

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page.

To comment on this podcast or to suggest an idea for another podcast, contact Neil Amato, a JofA senior editor, at


Neil Amato: I’d like to welcome Glen Frost and Matt Kraeuter to the podcast. They are partners in the firm of Frost & Associates in the Washington, D.C., area. Glen, Matt, thank you for being on the podcast.

Glen Frost: Thank you for having us.

Matt Kraeuter: Glad to be here.

Amato: First we’ll make clear to listeners we’re recording on Friday, April 3. Plenty is changing on this topic and will continue to change with that. I guess we’ll start with Matt. Matt, can you provide a quick overview on the availability of loans for small businesses as a result of recent legislation?

Kraeuter: Certainly. The one that’s received the most news is the Paycheck Protection Program, which was just made available today, April 3, which was part of the CARES Act that was passed as the $2 trillion bailout. But in addition to that, there were already some loans available, one in particular through the Economic Injury Disaster Loan Program, which is an older SBA program that provided economic assistance for businesses located in disaster areas.

The recent legislation and recent actions by the president, one, declared the entire country a disaster area, so therefore everybody is located within that geographic region. Secondly, and more importantly, the recent legislation added a $10,000 grant to that program. So if you were to apply to the SBA under the EIDL, or Economic Injury Disaster Loan Program, you can get a $10,000 advance that is forgiven, so you do not have to pay that back, even if you are subsequently denied the loan, you don’t have to pay the $10,000 back. So that’s a big program for some businesses and does make some sense. Glen will be shedding some light on the different programs and what types of businesses should look at these programs.

Lastly, each state, I don’t know if it’s every state, but most states have created their own programs made available to businesses, a lot of them in the forms of grants in that $10,000 range and some of them in the form of low interest rate loans they can pay back over time, generally with a period of zero interest for six months or a year.

So there are a variety of programs; the PPP or the Paycheck Protection Program is the one that’s gotten the most news and we’ll be talking about here today.

Amato: Sure, and obviously you made it very clear because you mentioned the state programs last, but the first ones you mentioned are federal programs that are options available through the CARES Act.

Kraeuter: That’s correct. The PPP was created in the CARES Act. The EIDL loan already existed in prior legislation, and it just expanded applicability to different situations and like I said also included that grant provision. Mechanically they’re a little bit different. The EIDL program is funded directly from the SBA, so it’s actually money flowing out of the SBA directly to business, whereas the Paycheck Protection Program is bank money that’s being loaned to people that’s guaranteed by the SBA. So the money flows a little bit differently, and legally and mechanically they’re a little bit different, but they were both part of this CARES Act that expanded the availability of these programs.

Amato: What qualifies as a small business for these programs?

Kraeuter: Generally it’s 500 employees or less is the standard. There’s some variation to that, depending on a company’s business segment or their NAICS [North American Industry Classification System] code and what business they’re in. A good example would be boatbuilding has a 1,000-employee limit, but generally it’s 500 employees. There’s some technical affiliation rules that apply to these programs, whether, you know, if you have one umbrella company and a bunch of subsidiary entities, the affiliation rules require you to add all of them up so that you can’t have, you know, six companies with 100 employees and individually apply. The affiliation rules are going to lump them into one business entity for the purposes of these programs.

Amato: And for CPA firms that are themselves small businesses or for those advising small business clients, what’s the time period for apply for these loans? We’ll go with Glen on that one.

Frost: So the time period for applying for the loans has started today, April 3, for loans for businesses with employees. The time period for Schedule C individuals opens April 10. The deadline for application currently is set to June 30 of this year. All of the PPP applications have to be in by June 30; however, the government may run out of money well before that deadline.

Amato: Yeah, so I guess your advice is it’s not truly first-come, first-served, but you should probably get it in sooner rather later, because the money could run out.

Frost: Absolutely.

Amato: And I’ll ask based just on news reports or what you’re hearing, has there been a flood? I don’t want to call it a "flood" if it’s not truly a flood, but it seems like there’s a lot of people applying very early on right at the opening day.

Frost: Sure. So everybody wants to apply now, but the banks are extremely hesitant. SBA has not put out all of the required due diligence at this point.

Amato: So obviously these things are changing quickly, but as far as we know right now, what are the terms, the rates, or deferment periods for these Paycheck Protection Program loans?

Frost: Sure. So the PPP loans are a 1% interest rate. There’s a six-month deferral period, and they have to be repaid within two years. However, a large portion of these loans may be forgiven based on a calculation of net payroll that we’ll cover later on.

Amato: For the PPP loans, what sort of documentation is needed to apply? Is there anything in place to prevent fraud on these loans?

Frost: Sure. So every bank is going to require a particular level of due diligence. What the SBA and the government have said is that they’re trying to make it as easy as possible for banks to comply. But I think typical banking practices to ensure that loans are accurate — and because the banks are actually underwriting these loans, they’re going to want to do particular diligence to ensure that the loans they write are good.

Amato: Do you have more thoughts on that, Matt?

Kraeuter: So the SBA has its general guideline, but the banks aren’t required to give these loans. So it’s really unclear and it’s really a bank-specific requirement and that’s just their own internal criteria, it has nothing to do with the SBA criteria.

So I think it’s just an important thing to remember that the SBA came out with this application, which is great, but it’s still the bank that’s writing the promissory note, and the contract is going to be between the bank and the borrower. So that relationship, while it’s dictated and has to operate within the confines of the CARES Act, it’s still is up to that bank to make the determination on what that relationship looks like. So I think that in terms of the documentation needed to apply, it varies widely from bank to bank, and that’s kind of the tricky part right now.

Amato: So obviously, one of the pieces of advice as we’re moving forward is you’ll have to check with your lender to see what documentation is needed to apply.

Kraeuter: And another great piece of advice to pile on top of that is what we’ve really found is that because from a business perspective these loans aren’t really going to be moneymakers for the banks. Generally banks are not taking these applications for people that are not currently clients. So banks are hesitant to even entertain the idea of giving out a PPP loan to a business that doesn’t currently have a relationship with the bank.

So it’s really an interesting situation because it’s the reverse of banks trying to jockey for business, they’re almost trying to not take the business. So you do really have to work your banking relationship as part of these programs and, you know, leverage that relationship.

It’s a little odd and it’s just because the economics of it are so strange. Initially, the interest rate that the bank was allowed to charge was a half of a percent, and I think that the government got a tremendous amount of pushback from the banks on that rate and then they raised it to 1%, which still is not a huge incentive for banks to put this money out on the street at a 1% rate. There is an origination fee and there’s some other fees associated with that, but what we’re learning is that there’s a lot of front-end work to process these applications and there’s also a lot of back-end work when the businesses come in and they’re going to ask for forgiveness.

I think that Glen is going to provide a little bit more detail about the forgiveness portion of the loan, and that’s what makes this PPP program so attractive to businesses that you can borrow the money and then have the loan forgiven. But there’s a lot of work that the bank has to do and for the origination fees and the 1% interest rate, it’s not a particularly great business decision for them to make these loans. So really, they’re restricting the loans to the current client base and not really looking to broaden their client base through the PPP program.

Amato: Is there an application fee for these loans?

Frost: There’s no application fee by the small business; however, there is a bank fee that is paid directly from the federal government.

Amato: And does that depend on the loan amount?

Frost: Sure, there’s different tiers based on the size of the loan. The first tier is under $350,000, the rate is 5%; under $2 million the rate is 3%; and above $2 million up to the $10 million threshold, the rate is 1%.

Amato: Can CPA firms fill out an application on behalf of clients or just advise?

Frost: It may be better for firms to provide advice to clients and help them with the somewhat complex calculations that need to be performed. The SBA resources page on has more insight on this, including a statement that signing the loan application as a client’s authorized representative will impair independence, since doing this is a management responsibility.

Amato: I realize this is a wide-ranging question and can be a podcast on its own, but what are the tax benefits or consequences of these programs?

Frost: Sure. When they issue the loan and then a portion of it is eventually forgiven, there is no cancellation-of-indebtedness income to the small business. It’s effectively tax-free forgiveness.

Amato: Obviously early, obviously things are changing, but what are you hearing from those who have already gone down the path of applying for these loans?

Frost: Yeah, at this point many people have submitted applications to the banks, but my understanding is the banks are having a lot of trouble actually submitting the applications to the SBA and they’re holding those applications and they’re waiting for SBA guidance in order to submit them.

Amato: What advice in closing would you give for someone who is considering applying for the loans?

Kraeuter: I think there’s a variety of considerations that you need to make. The first thing I’d mention is there’s a lot of programs out there, right? The federal government came out with $2 trillion to inject into the economy, and they are trying to do it in a variety of different ways. So it really is worthwhile to spend a little bit of time, whether it be with your accounting professional or a lawyer or some other adviser looking at these different programs.

There doesn’t appear to be a lot of problems with applying to multiple programs. A good example would be under that Economic Injury and Disaster Loan Program, the $10,000 grant, if you were to apply for that and get the $10,000 and then subsequently apply for the PPP program, you would on the forgiveness portion of your loan, would be reduced by the amount of that $10,000 grant, so you can’t get both, but it’s not going to hurt you one way or the other, so there is a tradeoff there.

Something that I think is really important to consider with any of these programs is, and specifically with the PPP program, is that you are incurring new indebtedness with a lending institution. So you will have a promissory note with a bank for a certain amount of money to pay back over time and on its own may not cause any problems, but you have to consider your current indebtedness and your current other obligations that you have.

A good example would be that if you have another commercial line of credit that is collateralized to a piece of real property and it has a cross-default provision so that it says that if you default on any other loans, you will also default on these loans, and if you have personal obligations on that loan now you’ve exposed yourself to personal liability on these loans. Those are just some of the considerations you want to give when you’re taking on new indebtedness.

Another good example would be if you have certain restrictive covenants with respect to your debt-to-income ratio on current indebtedness, and that’s going to change now that you’ve taken on new indebtedness. Is that in any way going to create a violation of some of those restrictive covenants in your current debt instrument?

So those are some of the questions you want to consider when you’re taking on these loans. You know, there are other programs out there that are a little — they’re not quite as beneficial and they’re for larger businesses, and they’re an alternative to the PPP program. There’s a tax-incentive program where you’re able to take back some of the payroll tax and essentially give yourself an interest-free loan for a period of time. So there’s other considerations to give. You don’t necessarily want to charge into this PPP loan and not consider all of these other things.

The other thing you really want to consider on the PPP loan side is that you want to make sure that you can meet the forgiveness provisions. You don’t want to take on this debt with the assumption that you’re going to have it all forgiven and then come out the back end and still owe that money.

A good example of that would be that in the PPP program you have to use 75% of the loan amount for payroll expenses. And so if you don’t meet that then you don’t have that amount forgiven. So you want to make sure that you’re considering both how you qualify for the loan and then also that you’re going to meet the forgiveness provision, because in the CARES Act it says you can use it for payroll, utilities, and rent expense, but you still have to have 75% of that loan amount used for payroll expense.

So a good example would be the restaurants in town that are closed and only doing delivery and carryout. They may have a fairly large rent expense still, but their payroll may be quite small because they don’t have a wait staff and other things. So they take out this loan based on — the loan amount is based on your prior year payroll so that’s your fully staffed payroll so you get a nice big loan amount, but your current payroll expense isn’t very high because you’ve laid off a lot of your wait staff, and then you’re going to end up taking on this debt obligation and not have it forgiven and still have to pay it back, which may still be a good thing, because it’s going to be a very low interest rate loan and it’s going to give you cash upfront, so it might still make a lot of sense.

There’s a big rush to submit these loans today, as matter of fact, and it’s something you just want to consider before you go charging into taking on new debt.

Amato: Guys, thank you so much. There’s clearly a lot going on, a lot changing, but I think some excellent advice shared today. Appreciate you guys coming on.

Frost: Thank you for having us.