In response to the fraud and confusion that accompanied the first rollout of the Paycheck Protection Program (PPP), the latest round is supposed to include more scrutiny before applicants even receive a loan number. That process could push small businesses that lack close ties to a lender closer to the front of the line, but even so, Benjamin Johnston of Kapitus, a nonbank lender headquartered in New York City, opines that the available funding still could be exhausted quickly because of the need. His company has provided over $3 billion of capital to more than 50,000 businesses since it was founded in 2006, and Kapitus claims to be one of the largest lenders to the construction sector, with more than 1,000 general and specialty trade contractors as clients.
PRO BUILDER: What is the same and different with the latest round of assistance compared with the previous round of the PPP and Economic Injury Disaster Loans available from the CARES [Coronavirus Aid, Relief, and Economic Security] Act?
Ben Johnston: This is a great opportunity for small businesses hurt by COVID-19 to obtain much needed capital to pay bills, pay employees, and invest in getting back to business. Much, if not all, of the loan is likely to be forgiven just by paying your bills and making payroll, so I see it as a win-win that allows you to invest in your business and get your people and suppliers paid while likely having much of the loan forgiven.
Basic terms of the second-round PPP loan include:
• Five-year loan carrying a 1% interest rate, no payment for the first 10 months after issuance
• Must have been in business on or before Feb. 15, 2020, before COVID-19 shut down the U.S.
• Must have fewer than 300 employees
• Eligible businesses must have experienced a 25% reduction in revenue in one quarter of 2020, first, second, third, or fourth, over the comparable 2019 quarter
• The maximum loan amount is calculated as 2.5 times the average monthly payroll of the company during either 2020 or 2019—the borrower chooses. Payroll is capped at an annual rate of $100,000 per employee when calculating average monthly payroll. Requirements for forgiveness are similar to the first round.
Forgivable expenses include payroll, rent, mortgage interest, and utilities. In addition, this round has expanded forgivable expenses to include general operating expenses, property damage expenses, supplier costs and worker protection expenses.
Sixty percent of eligible forgiveness must come from payroll expenses. The loan forgiveness period in which forgivable expenses may be accrued is between 8 and 24 weeks (at borrower’s choosing). If the borrower’s loan is less than $150,000, they will be eligible for a simplified one-page loan forgiveness process.
PB: If a business owner doesn’t have a relationship with an SBA (Small Business Administration) lender, what should they do?
BJ: While many banks offer SBA loans, many nonbank small-business lenders, like Kapitus, work closely with their clients to help them secure SBA funding. Given the comparatively low cost of the government-guaranteed SBA program, we work to help each customer understand whether they could qualify and if the SBA’s loan sizes and underwriting timeline meet their needs. Small-business owners should check with their local bank to see if that bank provides SBA financing and what the application process and approval timelines are. If the bank doesn’t provide SBA financing, or if you want a second origination option, you should also check with nonbank providers.
PB: What should a home builder/remodeling contractor do to enhance their relationship (or have a conversation) with their banker(s) so the lender is willing to work with them?
BJ: It’s important to be transparent, whether you’re dealing with a banker or nonbank business lender. If you are having success and need additional capital for growth, banks will want to pull personal and business credit, review financial statements, tax returns, and WIP [work-in-progress] reports. They may want to review a business plan and will likely work to secure collateral against the loan. You can generally expect an extended underwriting period of several weeks before a decision on your loan is made.
While sometimes more expensive, nonbank small-business lenders generally require less information during the underwriting process and most do not require collateral. Reviews of personal and business credit and the last three to 12 months of bank statements are common underwriting requests. Larger loans, often over $150,000, may require financial statements and tax returns, but decisions can generally be made within hours and money can be received within one to two days.
PB: Some builders and remodelers are small businesses that were pushed to the back of the line by lenders who prioritized assistance applications from larger clients. What can these small guys do if they’re not a big customer for the bank/lender?
BJ: Given the challenges securing PPP in the first round offered last May, builders and remodelers are understandably concerned about finding a strong partner to help them secure the next round of PPP financing. I would encourage all small businesses to contact their primary banking relationship and ask them if they are participating in this round of PPP. I would also explore non-bank small-business lenders, such like Kapitus, which is actively assisting small businesses in obtaining PPP loans.
Fortunately, this round of PPP has placed several restrictions that will hopefully limit the ability of larger businesses to participate. The new round limits the total amount a business may receive to $2 million, down from $10 million in the first round. It also excludes public companies from participating and reduces the maximum number of employees most businesses may have to 300. Still, given that the funds available for this round total just a little over half of the amount given out during last spring and summer, availability may be quickly exhausted.
PB: What do applicants/borrowers need to know in order to avoid an unexpected tax or loan payment hit? (In other words, what should they be prepared to document; what expenses are eligible/ineligible to be covered by the assistance funding?)
BJ: The terms for forgiveness have been expanded considerably for this round of the PPP, so hopefully most qualified businesses will be able to achieve considerable forgiveness. Business expenses paid with PPP funds are tax deductible, and businesses should be prepared to support these expenses with documentation when preparing to apply for forgiveness.