Hey guys! Welcome back to Products Worth Talking About — the show about disruptive physical products and the people who built them.
Today, we’ve got an incredibly informative episode all about two essential loans that will assist your business. The COVID-19 pandemic has forced countless businesses to temporarily close for safety purposes. This has pushed small business owners into the difficult position of needing additional funds to make up for lost revenue. Emergency federal loans are a great way for you to sustain your small business. Fortunately, we had the privilege of speaking with Mike O’Donnell from the Colorado Lending Source about federal loans for this episode!
In today’s episode, we’re discussing the U.S. Small Business Administration, the Economic Injury Disaster Loan, the Paycheck Protection Program, the importance of staying positive, and some ideas on how you can help your community during this crisis. If you’re a small business owner, entrepreneur, or contractor, you’re not going to want to miss the essential information from today’s episode. Let’s dive in.
The COVID-19 pandemic has forced the economy to shut down. Countless businesses are unable to offer their services and products to their customers. Regardless of whether your business is suffering during this time, it’s crucial that you’re aware of the available economic relief loans.
Mike O’Donnell has a great deal of experience dealing with U.S. Small Business Administration (SBA) loans. His company Colorado Lending Source is working diligently to inform people about SBA loans during this unprecedented time:
“Last year, we touched about $93 million worth of SBA activity in the state, which makes us the biggest SBA lender in Colorado. And so we’ve done this for a while. And we’ve … been trying … [to] make sure people understand how the SBA programs that are now available are accessible … and how [the programs] can actually help a business really get through and survive this particular period we’re in.” – Mike O’Donnell
One of the major loans that Mike is informing the public about is the Economic Injury Disaster Loan (EIDL). Small business owners, sole proprietors, and independent contractors can all apply for this loan.
So how does funding for the EIDL work?
“FEMA [the Federal Emergency Management Agency] has the ability to make loans to both businesses and individuals that are impacted by [disasters]. SBA is a conduit through which you attach these FEMA funds. So this is an SBA Disaster Loan, but it’s really FEMA money. … Every time they create a Disaster Loan program, it takes a little while to set them up.” – Mike O’Donnell
The Federal Emergency Management Agency funds SBA Economic Injury Disaster Loans. Disaster Loans take a while to process — Mike speculates that it will take around two months for businesses and individuals to receive funds from the EIDL. Loans can be up to $2 million, but you’re not guaranteed the amount you apply for, so you might only receive partial funding. Loans below $200,000 are set at a fixed interest rate of 3.75% for businesses and 2.75% for nonprofits.
Mike observed that Disaster Loan programs are often inconsistent, so you shouldn’t rely too heavily on potential funds from the EIDL:
“The Disaster Loan program has never been a very … efficient … program because it pops up and goes away [repeatedly]. … And because it’s not consistent, you can’t create … the protocols to do things on a consistent basis. … So I wouldn’t put all your eggs in that basket. … I think everyone should apply for it because, again, the intent of the program is [that] funds are set aside to help people who are impacted by [disasters]. … But again, don’t apply today and expect to receive the money tomorrow.” – Mike O’Donnell
Even though you shouldn’t plan too heavily around receiving an EIDL, you should still apply for it if you or your business needs financial assistance.
In addition to the Economic Injury Disaster Loans, your business can apply for a Paycheck Protection Program (PPP) loan. Mike observed that these loans are incredibly appealing because they offer loan forgiveness:
“The Paycheck Protection [Program] is something that’s really unique. We’ve never seen anything like that before. It was created specifically by the CARES Act [The Coronavirus Aid, Relief, and Economic Security Act]. … If you’re an existing business, … you look at what your average [monthly] payroll was over a defined period. … You multiply that by 2.5, and that determines how much you can borrow. … Then [when you spend the funds] over the next eight weeks, [the loan will] be forgiven. So essentially, the loan is great from that perspective.” – Mike O’Donnell
The CARES Act, signed on March 27th, 2020, allocated $349 billion to the Paycheck Protection Program. Unlike the EIDL, you’ll actually receive the total funds that you request. You calculate the amount of funding you’re eligible for by averaging your monthly payroll and multiplying it by 2.5. At least 75% of what you spend with the PPP loan has to be payroll, but the other 25% can go towards non-payroll-related expenses. When you spend the PPP loan within eight weeks (two months of payroll), your loan will be forgiven. The CARES Act designed PPP loans to help employees:
“[There’s] no principal interest payments for the first six months. So say you applied for a loan from a bank, and you got a loan today. You’ve got eight weeks to spend the funds on bringing people back, hiring people, [and] giving them bonuses, … [or] whatever you need to do to help them survive the next couple of months. And then you can claim forgiveness on that loan from the bank. … It could be a 100% of what you borrowed, anything that’s leftover [after eight weeks] then continues on at [a] 1% [interest rate].” – Mike O’Donnell
In order to receive funds from a PPP loan, you need to have a relationship with a bank that has access to the SBA program. The maximum amount that a business can borrow is 10 million dollars, so you could potentially have millions of dollars forgiven if your payroll multiplied by 2.5 is that expensive.
The one exception is that you need to roll back employees that earn over $100,000 a year. For example, if an employee makes a salary of $120,000, then you’ll need to roll back their average monthly payroll to reflect only $100,000 a year.
Another important thing to note about PPP loans is that you’re not including contract workers in your calculated loan amount:
“1099 [workers] aren’t technically employees, but they’re business people. And so you can’t include the 1099 [workers] anymore in the calculation of the payroll.” – Mike O’Donnell
Contractors need to apply for PPP loans separately, even if all of their income comes from a single company.
So how do contractors calculate their payroll for the Paycheck Protection Program?
“The payroll for [a contractor] is essentially their income for the year. … 1099s are a good indication, but some people work and don’t get a 1099. … So basically, if you’ve done your books for 2019, it would be your gross income that would be your payroll. Then you divide that by 12 to come up with your average payroll.” – Mike O’Donnell
If you’re working as a contractor, you multiply your average monthly gross income by 2.5 to find your PPP loan amount.
Whether you’re a business owner or a contractor, it’s crucial that you apply for a PPP loan. Now is a volatile time for the economy and small businesses, so you should access these available funds to provide finances to your employees and yourself!
Although we’re facing a difficult time with COVID-19, we must stay positive and focus on helping our employees and our communities. Mike observed that many small business owners are using their PPP loans to positively impact their employees beyond minimum payroll:
“Some of the questions I get on the Paycheck Protection Program … [include] people asking, ‘Well, if I bring everyone back, I mean, can I pay them more to make up for what I wasn’t able to pay them last month? And can I give them bonuses [and] increase their salary?’ … And all of those are really positive things.” – Mike O’Donnell
Countless small business owners and entrepreneurs are doing their best to help those around them during COVID-19. Mike also received questions from business owners about using employees to help out in the community:
“If you don’t have people coming into your store, … perhaps they go to the school and volunteer to help pack lunches for the kids that aren’t getting those lunches now, or you have them volunteer at the red cross. … There [are] lots of ways that people can really help contribute to the community.” – Mike O’Donnell
If you save money on payroll by receiving PPP loan money, you can use your excess funds to help your community or contribute to a COVID-19 emergency fund. You can also take the time to volunteer and encourage your employees to help the community as well!
Mike pointed out that during times of uncertainty, entrepreneurs and small business owners should do everything they can to help their employees:
“It’s all about planning for the future, [and] not being obsessed with all of the negativity around the present. … What I love about entrepreneurs and the small business community is that they’re fighters … and they … really do their best to try and keep people. And we have tools we’ve never had before, like this forgivable Paycheck Protection loan, which people should maximize and take advantage of because you’ll never see anything like this again.” – Mike O’Donnell
The Paycheck Protection Program is a great way to help your business and your employees as we continue traversing this crisis.
We’re so thankful to Mike O’Donnell for coming onto the show and giving invaluable EIDL and PPP information. You can watch the whole episode on YouTube to learn even more from Mike. Additionally, his company, Colorado Lending Source, features excellent small business resources for navigating COVID-19 that you can check out here.
If you’re an up-and-coming entrepreneur that wants to start a product-based business, check out our informative Business Plan Course! You’ll learn everything you need to know about pitching to investors and building your dream company.
We hope that you found this post informative! If you learned something new about EIDL and PPP loans, we would love to hear from you. Take a screenshot of the episode and share your greatest takeaways with us on Instagram, @productsworthtalkingabout. Also, if you enjoy our show, make sure to subscribe on YouTube so that we can deliver new content to you directly! Let us know what products and brands you want us to feature on the show!
Thanks for reading! Until next time —
RT and Tyler