written by
Jeff Jassky

Part 2 - Salon Owners using "Forgivable Loans" as Business Grants for Rent, Utilities, Payroll

Covid-19 Salon Guide 10 min read , March 28, 2020
Our Nation’s Capital
Photographer: Louis Velazquez | Source: Unsplash

This is part 2 of a three-part series to help beauty businesses navigate the CARES act and its benefits for the beauty industry including unemployment, individual stimulus checks, the Payroll Protection Program and Economic Injury Disaster Loans.

Note: These programs are very new. Some details seem to change slightly day-to-day as the programs are implemented. I will be keeping this series up-to-date as new information becomes available.


What is the Paycheck Protection Program?

The Payroll Protection Program made available through the Federal CARES act and the Small Business Administration, are acting as a much-needed lifeline for the industry.

The CARES Act provides two significant funding opportunities for small businesses. The Paycheck Protection Program (PPP) and the Economic Disaster Injury Loan (EDIL).

Loans under the Paycheck Protection Program (PPP) are eligible for forgiveness up to the entire amount of the loan. That means that when used properly, these loans can effectively be used almost like business grants. Salon owners may be eligible for loans, up to 2.5x months of payroll, while only having to pay back the loan interest.

How does PPP compare with EIDL?

How does loan forgiveness work?

After receiving your PPP 7a loan, your salon's business expenses for the next eight weeks are added together. These expenses include payroll, utilities, rent, and payments of debt interest. This amount will be forgiven, up to the total amount of the loan.

Approval for the loan and approval for loan forgiveness are two different processes. Recipients are required to provide documentation of expenses to qualify from loan forgiveness. If you use the funds appropriately and provide the proper documentation (detailed below), the principal balance (not including interest) should be forgiven.

Laying off employees or reducing wages by more than 25% during the eight week period results in the forgivable amount being reduced. However, employees laid off before the origination of the loan are not considered and will not incur the penalty. Additionally, rehiring laid-off employees within the 8-week period after accepting the loan will allow additional credits to cover their wages.

The amount forgiven will not be treated as taxable income for business owners.

Who is eligible to apply?

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All businesses with 500 or fewer employees including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors. This should cover any salon owner, chair renter, or independent stylist.

Applicants must also be willing to certify that “current economic uncertainty makes the loan necessary to support your ongoing operations”. Therefore, these loans are intended to be used as lifelines for businesses that may not otherwise survive.

I’m a Chair Renter. Am I eligible?

Yes, you are! Read the next paragraph.

I don’t have any employees. Am I eligible?

Self-employed individuals and independent contractors can apply for PPP.

Each bank will have different "payroll documentation" requirements. You will want to call around to find a lender that will accept whatever documentation you have - whether it's 1099 forms, bank statements, or your federal tax returns.

Keep in mind: most (if not all) lenders won't begin accepting PPP applications for self-employed individuals until April 10th.

Can I use it for just rent and utilities?

In order to qualify for forgiveness, 75% of the funds must be used for payroll expenses and 25% or less of the funds can be used for other approved expenses.

The primary goal of these loans is "protect paychecks".

What expenses are forgivable?

  • Salaries, wages, commissions, or similar employee compensation
  • Rent
  • Utilities
  • Cash tips or equivalent
  • Vacation, parental, family, medical, or sick leave
  • Continued group health care premiums
  • Retirement benefits
  • State or local tax assessed on the compensation of employees
  • Payment of interest on debts
  • Allowance for dismissal or separation (aka severance packages)

What expenses are not forgivable?

  • Mortgage and other debt principal payments
  • Retaining services like marketing, web design, accounting, cleaning, etc.
  • Improvements to your salon (new equipment, products, furniture, etc).
  • Purchases of goods for resale
  • Purchases of consumables like hair products or cleaning products
  • Individual employee compensation of over $100,000 annually, as prorated for the “covered period” (March 1, 2020 to June 30, 2020)
  • Compensation of an employee whose principal place of business is outside the United States
  • Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (the “FFCRA”); or
  • Qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA.

Can my staff still collect unemployment?

The purpose of the Payroll Protection Program is to keep paychecks going. In order for paychecks to keep going your staff needs to be employed. Being employed will disqualify staff members from receiving any federal or state unemployment benefits.

Why would I choose PPP over unemployment?

Both PPP and unemployment benefits are financial tools for your business right now. It's important that you run the numbers to see which program would bring the most benefits.

PPP pros:

  • Access to slightly larger amounts of capital (2.5x payroll)
  • Since you're continuing to pay them while they're not working it can help establish a deeper sense of trust and support between employee and employer.
  • 25% of the funds can be used for rent and utilities.

Unemployment pros:

  • It's less complicated
  • It's a more established program that's well understood
  • Since it's not a loan, there's no risk of having to pay it back.

How much can I borrow?

The amount you may be eligible for is approximately 2.5 times the average monthly payroll expenses for the year 2019, or 2.5 times the average monthly payroll expenses for the period of time from March 1, 2019 to June 30.

For example: If your payroll averaged $20,000/mo from March through June 2019, you may be eligible for a $50,000 loan.

Payroll costs will be capped at $100,000 annualized for each employee.

The interest rate is a fixed 1%.


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How much do I have to pay back?

As long as the money from a PPP 7a loan is used for the approved expenses listed above, during the 8-week period, the principal balance, excluding interest, is eligible for loan forgiveness. 

It's not clear how long the loan forgiveness process will take. You won't have to make a payment until 6 months after getting the loan, so hopefully, that will be enough time to get the loan forgiven in its entirety before making a single payment.

It's also worth noting that this is not the first loan forgiveness program by the Federal Government and that past programs haven't had the best track record. Granted, the previous program was administered by the Department of Education for student loans and not the Small Business Association. Hopefully, the SBA will do a better job of running this loan forgiveness program than the DoE did.

How can I apply?

To apply you will need to complete the PPP loan application and submit the application with the required payroll documentation to an approved lender. If you don't know if your banker is an SBA approved lender simply call and ask.

The SBA provides this search tool to let you find local PPP lenders in your area as well as a list of the top 100 most active accredited lenders.

Lenders who are ready:

Sample Application

The SBA has provided a sample application here. This can be used to preview the information required for an actual application.

For independent contractors (1099) & sole proprietors

Independent contractors and sole proprietors are eligible to apply but will not have their applications processed until April 10 at the earliest according to the SBA.

Can I apply to both PPP and EIDL?

Option 1: You can apply for both, and accept both, as long as you use them for different funds. On your PPP application make sure to select "Payroll Only" when asked for use of funds.

Option 2: If you apply for, qualify for, and accept the EIDL loan, then at a later time you qualify for the PPP loan, you can refinance the EIDL loan with the PPP loan.

Option 3: If you apply for both and are approved for both, you can choose which one works best for your particular situation.

What if my bank isn't ready yet?

Unfortunately, even today, only a small percentage of banks are ready. It's not clear if funds will be granted on a first-come-first-serve basis or not. It may be prudent to try and find a bank that's ready in order to get your application in as early as possible.

How do I get the loan forgiven?

Once you receive a loan and use the money for approved expenses, you will have to provide the following pieces of documentation to the lender to receive forgiveness for the principal balance:

  • Verification of your number of employees, their hours and pay rates for the period of January 1, 2020 to June 30, 2020, including payroll tax filings
  • Documentation of paid rent, utilities or mortgage interest payment amounts
  • Certification from the business owner confirming the accuracy of the documentation
  • Any other documentation your lender may ask for

Risks to consider before accepting a loan

Taking on debt can be a great way to temporarily free up cash flow - but be cautious. The last thing you want to do is take out a loan to pay for a month or two of expenses to find yourself in the same boat after 3 months. A loan is a short-term tool to ensure the long-term viability of your business. Make sure to plan accordingly before taking on debt.A line of credit is often a safer strategy than a loan. This is because you only pay back what you draw from the line. Generally speaking, don't use loans or lines of credit to purchase consumer goods. Retain those resources for larger business expenses.Always talk to your accountant, financial planner, mentors, and experts before deciding to accept a loan.

Where can I ask questions about the loans?

First, you should talk to your CPA and find an accredited lender who is familiar with the Paycheck Protection Program. Salon owners can also join our Salon Growth Strategies Facebook Group where we are discussing the pros, cons, and details of the loan details.

What about regular business grants?

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Business grants serve a valuable purpose. Private organizations may offer business grants to help develop new sectors, grow industries, or develop beneficial technologies. Governments often give money to entrepreneurs to help support economies in certain areas, reduce unemployment, and build strong communities.

Here are some organizations offering small business grants:

In summary

New forgivable loans under the SBA 7(a) Paycheck Protection Program are a wonderful option for salons to get the help they need to come out on the other side of the quarantines. We're yet to see what percentage of applications receive approval and how the process of "loan forgiveness" plays out long-term but we are hoping for the best.

Next: Part 3 covers the Economic Injury Disaster Loans with grant up to $10,000

Previous: Part 1 overviews the CARES Act and how it applies to salons


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