Paycheck protection loans help small businesses survive

By Alfredo Santana

Contributing Writer

HIGHLAND PARK — At the onset of the coronavirus pandemic last April, Antigua Bread’s owners Dennis and Miguel Hernandez shuffled from catering dishes to diners to takeout sales and food deliveries and cushioned the blow to stay in business.

Coupled with a slow-motion rollout loan program from the Small Business Administration geared to avert unemployment and bring financial relief, the restaurateurs were afraid the crisis would hurt their two restaurants.

The first wave of closures forced them to lay off several employees at the Highland Park location.

But a month later, the economic outlook improved after Bank of America approved a Paycheck Protection Program loan for nearly $63,000 to help with payroll for eight weeks to keep 12 employees working. The cash disbursement arrived May 5, when the restaurants needed it the most, Dennis Hernandez said.

“We had to cut 40% of our workforce, and those who stayed worked less hours,” he added. “When we got the loan, it helped us bring everybody back.”

Despite complaints from small business owners and government watchdogs that the PPP loans benefited deep-pocketed corporations with more than 500 workers, the program became popular nationwide with $670 billion streamlined for loans.

Now businesses have started applying for PPP loan forgiveness.

The Paycheck Protection Program, conceived as part of the $2.2 trillion CARES Act, approved on March 27 by Congress and signed by President Donald Trump, features forgiveness clauses if 60% of the money is used to pay employee salaries. The remaining cash can cover leases, utility bills, personal protective equipment purchases, upgrades to infrastructural equipment and others.

The bulk of the loans rest on borrowers who received less than $150,000. In fact, between 50% and 60% of loan recipients received loans smaller than $50,000, said business owner and SBA loan processor Ronald Galati.

However, some corporations received $2 millions or more, prompting federal prosecutors to audit their finances, and request money reimbursements. About $525 billion was distributed to 5.2 million companies from April 3 to Aug. 8, some with little vetting.

The U.S. Treasury Department’s Financial Crimes Enforcement Network reported that 2,415 potential business loans were tracked by banks as being fraudulent or suspicious in September, surpassing totals for any year dating back to 2014.

Initially, the disbursements were deposited on the businesses’ accounts to cover an eight-week period that closed on June 5. Because of its popularity, the SBA and the Treasury Department expanded the coverage period to 24 weeks, with the condition the loans were slated to be used before Dec. 31.

“It could be a loan at 1% interest [to be paid back] from 1 to 5 years. There are short and long forms, and businesses need to figure whether to file for the eight-week, or for the 24-week period,” Galati said.

Each loan is assigned its own coverage period in the contract. The timeframe can encompass payrolls from March 16, the date California Gov. Gavin Newsom declared the coronavirus a statewide pandemic.

To start the process for loan forgiveness, small business owners, independent contractors and self-employed individuals are required to file forms 3508S, 3508EZ or 3508. The applications vary in relation to staff size, and should be submitted anytime before a loan’s maturity date.

The forgiveness packages are filed electronically with the bank or financial institution that issued each loan. The banks process the applications and forward them to the SBA for additional reviews and final approval.

Galati said that forgiveness petitions must not exceed the principal amount, and advised business partners, sole owners and independent contractors to apply before filing 2020 taxes, to avoid overlapping and potential mistakes as documents are rushed.

Otherwise, PPP borrowers would have to request tax filing extensions, and that will increase costs and trigger potential late penalties, Galati warned.

Disbursement dates mark the start of forgiveness periods for every PPP loan recipient, but many business owners began the process after covering the last assigned payroll, or when they spent the remaining funds on items that qualify.

The payroll data should be consistent with tax reports submitted to the IRS for 2019, and matching salaries accounted before Feb. 15, 2020, the pre-COVID injury date required for businesses to be registered and qualify for PPP.

A formula to find the amount of payroll coverage per employee involves dividing the total yearly wages by 52, and multiplying the result by 8 or by 24.

Currently, the limit for any owner and self-employed salary coverage is at 24 weeks from disbursement, and must not exceed 2.5 months worth of 2019 salary with a cap of $20,833 per person.

For employee compensation, the 24-week period allows coverage of up to $46,154.

Another caveat is that no cash should go to pay partners salaries or employees who earn more than $100,000. Hence, the loan becomes ineligible for forgiveness, and the borrowers would be forced to repay it in up to five years with 1% interest.

Money used for rent, to do structural repairs or for utilities “must cover up to 40% of the loan. Not more, or the SBA will not cover the loan,” Galati explained. Expenses for retirement contributions and payroll taxes do not qualify for loan forgiveness.

Furthermore, laid off and rehired employees who refused to continue working due to fears of contracting COVID-19 must be documented so business operators can claim exceptions, Galati said.

Also, the 3508EZ requires that owners do not cut employees’ hourly wages more than 25%, and maintain the same staff and work hours.

When initial application glitches were resolved, PPP became lifelines for businesses fighting to stay alive. Despite huge differences on what items a new federal relief bill should cover, both Democrats and Republicans in Congress agree that any COVID-19 bill should fund a second PPP round.

Applications to get PPP loans ended Aug. 8.

“Generally speaking, businesses are doing better than if they hadn’t received them,” said Laura Stewart, president and CEO of Sound Community Bank to Marketplace.

So far, she said that about 50% of her PPP customers have applied for loan forgiveness and were processed.

Entrepreneurs unable to file for PPP forgiveness, or in need of help with accountancy reports related to their loans, should contact the nonprofit SCORE, said Shannon Jones, a business mentor for East San Gabriel Valley, San Bernardino and Riverside.

“We have Quickbooks workshops available, and programs to help small business owners thrive,” Jones said. “We are of service for the life of a business.”

Meanwhile, Dennis Hernandez maneuvered to revamp food sales to capacity with outdoor dining in November until the Los Angeles County’s Public Health Department prohibited the service, due to concerns the virus spreads faster with unmasked diners drinking and eating amid colder temperatures.

He furloughed four workers again, and witnessed dishes demand dwindle 60%. The Hernandez brothers have not filed for loan forgiveness, but said they plan to do it soon.

The second Antigua Bread restaurant in El Sereno remained closed as of Dec. 11.

Dennis Hernandez predicted that many more shops in the battered restaurant industry would shut down for good if the PPP ceases to exist before most people are vaccinated to prevent COVID-19.

“We went back to square one, as in April,” he said. “Right now the business is really tough. We’d like to use some of that PPP money this season. That’ll be great. I don’t know how a lot of businesses are going to survive. A lot won’t.”