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All businesses, from self-employed freelancers to Fortune 500 corporations, spend money. You might have to pay rent, buy inventory, pay employees, buy a desk lamp, or purchase heavy machinery—or even a new building. These expenses lower your company’s overall profit margin, so it’s critical to pay close attention to how you’re spending money.

Not all expenses are considered the same in the small business world. Some expenses, like rent and wages, are regular and recurring. Generally, these everyday purchases are considered operating expenses. Others, like the purchase of a vehicle or property, happen once and then last your business a long time. These are known as capital expenses.

The terminology can be misleading—if you drive it every day, isn’t a new car an operating expense? Probably not. Knowing the nuances of operating expenses and capital expenses is important for every small business owner.

Furthermore, differentiating between the 2 categories becomes paramount when preparing financial statements and filing your business taxes.

Operating Expenses

The list of operating expenses is vast and ever-expanding—office supplies, equipment leases, travel, some types of taxes, utilities, and insurance are all considered operating expenses because you spend the money in order to conduct regular business. Wages are operating expenses, although they might be calculated into your COGS depending on your business.

Capital Expenses

Property, equipment, and vehicles are common capital expenses. Expanding or adding value to an existing asset, like through a building expansion, could also be a CAPEX.

Instead of recording capital expenditure on your profit and loss statement, you list CAPEX as assets on your balance sheet.

Importantly, many capital expenses—like vehicles—depreciate in value over the usable lifespan of the asset. This depreciation over a fixed period of time, usually monthly, is recorded as an expense on your profit and loss statement. Overall depreciation is recorded on your balance sheet and subtracted from the value of the asset.

While many CAPEX are tangible entities, like buildings, some intangible purchases can be considered CAPEX, particularly patents.

Why Are OPEX and CAPEX Categorized Differently?

Sometimes you can choose how you want to categorize an expense. If you buy a car outright, for example, it’s a CAPEX, but a lease for a vehicle is an OPEX.

OPEX vs. CAPEX on Financial Statements

“While OPEX are line items in the expense category on a cash flow statement, CAPEX are typically found under the heading ‘Investment in property, plant, or equipment,’” e-commerce company Shopify explains. “CAPEX usually require a sizable financial investment and, for that reason, often need the approval of the company’s board of directors or shareholders.”

Categorizing your various expenses on the proper profit and loss statements and balance sheets is essential for understanding the overall financial health of your company—and will better position you to receive funding.

OPEX vs. CAPEX During Tax Time

“Through depreciation you recover the cost of the asset over its useful life,” says Manny Davis of AllBusiness. “The IRS has strict requirements as to how many years an asset must be depreciated over. Since these assets cannot be expensed 100% in the tax year they are purchased, it will lead to a higher taxable income amount for the company in the given year and therefore higher taxes.”

The IRS allows some CAPEX to be expensed in total and at once through Section 179. Because of specific situations like this, you should consult with a tax professional about your business taxes—even if you don’t regularly hire an accountant. Utilizing bookkeeping software like Lendio's software also helps.

When we start using words like “unprecedented” to describe everyday life, I turn to my old stand-by for comfort: baked goods.

Baked goods don’t care if you had to wait in line for 45 minutes in freezing cold weather to get into the grocery store. Baked goods don’t care if you wear 2 masks on your afternoon walk in between a million Zoom calls. Baked goods are always there.

With bakeries and high-end restaurants closed in response to the pandemic, pastry chefs have started operating microbakeries out of their tiny apartment kitchens, baking sourdough, croissants, cookies, and more—using their creativity to bring people the exact kind of comfort food we all need right now.

Making dessert the main attraction.

The idea of microbakeries—food businesses started out of your home kitchen—isn’t new. What’s different now is that these microbakeries aren’t amateurs who happen to have a great recipe for chocolate chip cookies or strawberry jam. Out-of-work pastry chefs and alumni of some of America’s finest restaurants and bakeries helm the newest microbakeries.

All this is made possible by so-called “cottage food laws,” state licensing exceptions that allow home bakers to sell certain foods like jams, jellies, and baked goods without needing to undergo the rigorous permitting and health inspection process required in a restaurant setting.

“What we’ve seen in the last year is, obviously there’s a demand for dessert,” pastry chef Kelly Miao—a Dominique Ansel and Bar Boulud alum—told the New York Times. She started Kemi Dessert Bar from her Queens apartment, making home deliveries of verrines, tarts, and custard buns. “I’m not sure why restaurants don’t highlight it more, because there’s so much to offer. Desserts can be extraordinary, but [restaurants] don’t give them the chance to shine.”

For many chefs, it’s about recreating what people miss the most from pre-pandemic life. “Well, why do we do it?” Shuna Lydon, who owns Seabird Bakery out of her apartment in Brooklyn, asked the New York Times. She serves up baked goods, French toast, cinnamon rolls, and more brunch staples. “Because brunch is a thing that is very high up there on people’s list of things they miss the most.”

With start-up costs relatively low—what self-respecting pastry chef doesn’t have an oven or stand mixer in their home?—there’s a window of opportunity that many bakers feel gives them more creativity and ownership over what they make. 

What you need to start your own microbakery.

Space will be the biggest factor in what and how much you choose to sell. “Space really determines our menu. We have to be really creative not only in terms of the items but also the logistics. We have a regular fridge; you can’t fit 20 kilos of dough in that,” Miro Uskokovic, who runs Extra Helpings out of his Queens apartment with his wife (and fellow pastry chef) Shilpa, told Food and Wine. “Every corner of our home is turning into kitchen storage. We turned our second bedroom into a large pantry, where we keep several metro racks with ingredients and molds.”

You may also need to level up your equipment, as consumer-grade mixers, fridges, and work tables may not cut it. “My home mixer can make a batch of 50 cookies at a time, and on average I’m selling 600 to 1000 cookies per week,” LA-based Kirstyn Shaw of the Very Best Cookie microbakery told Food and Wine. Shaw rents space at a ghost kitchen once a week just to keep up with demand. 

A rigorous cleaning protocol—and ways to communicate that with customers—is next. Depending on what state you reside in, you may face stricter regulations on what you can and cannot sell. But taking precautions—like wearing a mask and gloves while handling baked goods and maintaining a regular cleaning schedule—matters.

Finally, even if you have the best cakes or pies in the world, it won’t matter if no one finds out. The most successful microbakeries attribute their growth to social media channels like Instagram. Online-only Kora, a Filipino doughnut shop started by Eleven Madison Park alum Kimberly Camara, already has a waitlist of 800 customers. She adds an order form to her Instagram bio every Monday at 3:00pm for the donut flavor of the week—and they usually sell out within a minute. 

A strong social media presence gives bakers the freedom to avoid third-party delivery services, which cut into already thin profit margins. It also helps with scheduling pickups or deliveries or expanding to nationwide shipping—you’ll need to decide how to get your baked goods to the masses. 

Will microbakeries last?

When bakeries and restaurants open again, will microbakeries last? That depends. Some chefs plan on turning their efforts into sit-down pastry shops, tasting rooms, or brick-and-mortar neighborhood bakeries. “Many people dream of having a business of their own,” Uskokovic told Food and Wine. “We are taking things one step at a time with the hopes that it will turn into something bigger—something permanent.”

Others hope that the model is here to stay. 

“It’s really cool and interesting to have a whole class of restaurants, basically, where the barrier to entry is much lower than we’re used to,” Marissa Sanders, who delivers savory pastries through Wrightwood & Sawyer out of her Brooklyn apartment, told the New York Times. “I hope it’s something we can hang onto. There’s a real sense of hustle, which is very encouraging and creative as people flourish in this terrible, uncontrollable situation.”

Trade credit, sometimes called trade finance or supplier financing, is an extremely common form of exchange between businesses. Famously, Walmart relies heavily on trade credit. But it isn’t only large corporations that utilize this form of agreement between suppliers and buyers—trade credits are extremely common for small businesses, as well.

In fact, according to the World Trade Organization (WTO), an astounding 80% to 90% of all global trade relies on trade finance.

Therefore, trade credits will likely be involved in some way regarding your small business, and you should understand how this system works.

What is trade credit?

A trade credit is a business-to-business exchange where one business provides goods on credit to another, i.e. no cash is paid up front. In turn, the recipient of the goods promises to pay for the goods on a predetermined time frame.

Trade credits operate on the same basic idea as running up a tab at a bar or grocery store over time, which was common in years gone by. Importantly, though, a trade credit is a very formalized agreement between businesses, not a business and a customer.

In essence, trade credits are like financing with 0% interest—the buyer’s assets increase without the initial expenditure of capital. Depending on the size of your operation and your suppliers, a trade credit agreement might look a lot like a financing application from a bank, but they are often more informal. Typically, trade credit repayments take the form of invoices.

Trade credit definition.

A trade credit is the loan of goods or services from a supplier business to a buyer business. The buyer agrees to pay for the goods or services at a later date.

Trade credits in the international supply chain.

Trade credits are essential for businesses across the globe. Even if your business doesn’t have trade credit agreements, some organizations in your supply chain most likely do.

“International supply chain arrangements have globalized trade finance along with production,” the WTO notes. “Sophisticated supply-chain financing operations—including for small- and medium-size companies—have become crucial to trade.”

What is a trade credit example?

Trade credits have been hyped as one of the secrets to the success of Walmart, which continues to vie with Amazon for the title of world’s biggest retailer. Many of the products available on the shelves of your local Walmart store are procured without money up front.

“Walmart is no different from other large retailers,” points out financing expert Marco Terry. “Most large retailers are known for paying invoices in 30 to 90 days. Large companies operate this way during the course of their normal business.”

Walmart, which would have no problem getting financing in any form, must see a lot of intrinsic value in trade credits—the corporation uses up to 4 times more in trade credits than any short-term external financing.  

What are the advantages and disadvantages of trade credit?

Walmart probably sees a lot of benefit in trade credits because trade credits heavily advantage the buyer. This favorable condition exists because trade credits basically function as an interest-free loan. Walmart (or any other retailer chain) can start selling products before it has to pay for them.

Small businesses can take advantage of this, too. If you can work out a trade agreement with a supplier, you can begin making sales before spending money on inventory.

A disadvantage of trade credit is the risk involved—even though you don’t have to pay upfront, your business will still have to pay the supplier at some point. If you don’t have the money when the invoice is due, your company could face a dangerous cash crunch. If you don’t pay, you risk ruining your supplier relationship; not paying off trade credits can also damage your business’ credit score.

If you are on the supplier side of a trade credit, an advantage is that trade credits encourage repeat business. Trade credits allow you to do business with companies that might not have the up-front capital to buy from you before making sales.

If you offer trade credit, you basically become a lender, which involves inherent risks. This is why the supplier is at less of an advantage in a trade credit agreement than a buyer.

Make an educated assessment of the situation before offering trade credits. For example, is it worth waiting 30 days for payment if it means your product is placed on the shelves of a popular retailer? 

What are the types of trade credit?

The different types of trade credits are defined by invoice periods. On your invoice, it will typically say “net,” followed by the number of days when payment is due after the invoice date. The most common trade credit type is “net 30,” meaning repayment is due 30 days after the invoice date.

Trade agreements also occur with 45-day, 60-day, 90-day, and even 120-day payment periods. You should typically expect to repay in 30 to 45 days, though.  

What is bank credit and trade credit?

Bank credit and trade credit are different ways to understand financing available to your business. Bank credit is the total amount of money a business or individual can borrow from a bank. Bank credit includes credit cards, mortgages, and business lines of credit.

The value of trade credit, on the other hand, is connected to the value of goods or services being offered from a supplier to a buyer. Additionally, trade credit is available from suppliers instead of a bank.

Seller credit

A seller credit, or owner financing, is related to the sale of a business. The seller of a business can opt to sell all or some of a business like a trade credit—the new owner of the business can get started immediately and then repay the credit back over time. For the seller, it can allow you to get an overall better price for your business, but you assume the risk of the buyer defaulting. Seller credits are also common in home sales and function similarly to seller credits in the sale of a business. 

When opening a business, you have a lot of choices to make—including the structure of your business or the business entity. One of the most common types of businesses is known as an LLC, or limited liability company. In addition to being one of the easiest entities to form and maintain, it also offers legal and financial protection to its owners. 

Keep reading to understand LLCs and why they are so popular. 

What Does an LLC Mean?

However, an LLC limits the liability to just the business assets. These assets include company profits, equipment, and inventory but do not extend to any personal assets outside the business.

An LLC is often used by business owners to protect themselves personally when they go into business. 

How Can You Start an LLC?

What Does an LLC Cost?

Along with a startup fee, you will need to pay an annual fee to maintain the designation. These fees also vary widely depending on where you live. In Missouri, there is no annual fee, though business owners still need to submit annual reports. In Maryland, business owners need to pay $300 annually.

Look up your filing fees before you decide to become an LLC so you can budget for the costs. 

What Is an Annual Report?

These annual reports are typically due around the anniversary date of formation. You can often find annual report templates online. 

When Should You Form an LLC?

You don’t have to file your paperwork in January to form your LLC. Some states offer a “delayed effective date” up to 90 days out. This means you can work through your paperwork in October or November for an LLC launch date of January 1. 

One of the key traits of an LLC is the separation between professional and personal accounts. If you plan to start a company, make sure you have a foundation of good bookkeeping to easily report your income and expenses. Use an app like Lendio's software, which offers free tools for small business owners. This can make establishing a business easier.

What makes a lending marketplace different from applying through a bank or a single lender? Excellent question. There’s a lot to love about lending marketplaces and the way they’re changing the borrowing experience. Here are 5 things every business owner should know about a business lending marketplace. 

1. You Can Compare Options

You would never book a flight by visiting one airline’s website and saying, “I guess this must be the going rate to Orlando.” Comparing options is a vital part of the process and ensures that you can find a flight that matches the price you want to pay and your scheduling needs. 

A lending marketplace works the same way… but for business loans. The idea that you should have to pick a single lender and roll the dice on the terms you qualify for is, quite frankly, a little outdated. And it doesn’t usually work in the borrower’s favor. With a lending marketplace, you can compare multiple loan offers to ensure you’re choosing the right loan option for your needs. Through a lending marketplace, you can compare the interest rates, loan terms, loan size, and speed of capital of different offers to ensure you feel confident when you apply for a specific loan. 

2. It Gives You Flexibility

When you have multiple financing options, it can open up new ways to attack a specific problem. If you’re looking for financing to cover a large inventory order, for example, you may want a short term loan that gives you the capital fast so you can quickly repay the loan and move onto the next opportunity. Or you may find that opening a line of credit will allow you to make repeated inventory purchases. 

Being able to compare financing opportunities gives you the flexibility to tackle your business challenges in different ways so you can find the strategic path with the highest payoff. 

3. It Saves You Time and Effort

With a loan marketplace, you apply via a single application to compare multiple offers. That’s a heck of a lot better than the typical 25-hour bank application that only gives you a shot at… one loan option. 

What’s more, loan marketplaces typically prioritize your time and make that application short and sweet. We can only speak for ourselves here, but we’ve edited the process down to a single 15-minute application that can unlock offers from 75+ lenders. If you average that out, it means you spend about 12 seconds/lender on the application.

4. You Can Rely on Expert Guidance

When you apply through Lendio, we pair you with a team of experts to guide your application through the process. These experts can answer your questions, help you understand the pros and cons of different loan types, and be there to guide you through each step— from putting your documents together to submitting them for underwriting.

5. You Can Find Funding That Matches the Speed You Need

For some business owners, their first question is, “How fast can I get a loan?” For others, it’s, “How big of a loan can I get?” The beauty of a lending marketplace is that you can choose the option that best fits what matters to you. Need financing in 24 hours? Yup, there’s an option for that. Don’t mind waiting if it means you can secure a lower interest rate? We have an option for you, too. 

A lending marketplace puts you in the driver's seat for your financing experience. Ready for an experience that’s tailored just to you? Apply now. 

Not sure how to choose the right lending marketplace? Check out our tips.

White glove service refers to high-quality care and a concentrated focus on the needs of your shoppers. The phrase “white-glove service” conjures images of Downton Abbey, scenes from Titanic, and visuals from other movies where butlers and house staff don pristine white gloves to ensure a meal or experience is exceptional. 

In the modern era, white-glove service means going above what your customers expect. It means genuinely putting them at the highest priority to meet their needs. You don’t need a large budget or substantial customer service team to offer this service—you just have to know what your customers want.  

Track (and improve) your response times.

One of the most tangible ways to provide white-glove service is to respond to customers quickly. The sooner you can address their needs, the better their experience will likely be. According to a SuperOffice survey of 1,000 companies, it takes an average of 12 hours to respond to a customer email. 

However, when 3,200 customers were asked how quickly they expect a response from brands, 88% said within 1 hour, and 30% expect a response within 15 minutes or less. Asking a customer to wait 12 hours is 11 hours too long and means you will start off your conversation with a poor experience.

Try to update your customer service policies to respond to customers quickly. This process could mean sending a confirmation email that you received a query so your customers don’t think their messages are stuck in the ether. It could mean investing in a 3rd-party customer care service so you can help customers faster. 

Your business doesn’t necessarily need to be on-call with 24/7 service, but you can set a goal for 2023 to significantly improve your call and email response times. 

Avoid canned responses.

A common mistake that brands make when setting up their customer service programs is the creation of canned responses for various situations. These pre-written scripts are meant to make training new team members easier while creating a unified tone and response front across the company. Executives never have to worry that customer care team members will say something inappropriate as long as they keep up with the script. 

However, these canned responses can infuriate customers who feel like they are speaking with a robot. Placations, canned apologies, and strict customer service processes can frustrate customers before their problem ever gets addressed, leaving them with shorter tempers and a bad experience with the company. Plus, canned responses can wear out your representatives, who can start to mumble through the same phrases each day. 

Instead, develop a customer care process focused on listening and active problem-solving. Train your team members on tone and branding, rather than asking them to read directly from a script. This will make their conversations more engaging, and they’ll create personal connections with customers, driving better results. 

This doesn’t mean you shouldn’t have some responses written down for new team members or for when your staff needs help, but try to avoid forcing your employees to always “stick to the script.” 

Balance automated prompts with human conversation.

Along with canned responses, talking with automated systems and chipper chatbots can also leave your customers frustrated and feeling neglected. Automated prompts are meant to make the customer service process easier. They sort customer problems into different categories and help teams identify certain customers. However, endlessly listening to menus and pressing different buttons can grow weary, as each answer prompts a new question and fresh menu. 

“Sometimes it’s super frustrating because you enter in a bunch of information in there, only to have to repeat it again,” Janelle Matthews, senior vice president of Solution Strategy at Genesys, tells Marketplace. “It drives me crazy. So painful and it doesn’t have to happen.”

The customer already told the system what is wrong—they don’t want to go over the issue again with a customer service person. Plus, many people will click through a menu without thinking or just say “representative” until they can speak to a real person about the issue.  

This automated process gets more complex with certain industries, including insurance firms or credit card providers. Oftentimes, customer teams will have to confirm the digitally-entered information for security purposes or will lose the information due to a computer glitch and will have to ask for it again. 

In the same way that not all canned responses are bad, there is a time and place for automated prompts in customer service. However, they need to be used in moderation, and the answers need to provide value to your customer care team.  

Look into tools to easily pull up customer order history.

When a customer needs help with an order, they don’t want to spend several minutes explaining to your team what the problem is and hunting down confirmation numbers. This process is frustrating to them and can create confusion with your team members. Instead, look into tools and apps that can highlight the customer problem before they even speak to your customer service representatives.

According to the 2017 Global State of Customer Service Survey by Microsoft, 66% of Americans expect a brand representative to know their contact information and product or service information and history. This number is slightly lower than the global average of 72% of respondents, including 77% of consumers ages 18–34. 

How can having this information help you offer white-glove service? There are several ways.

• If you get disconnected from the customer, you can call them back instead of sending them through your service system again.
• Your representatives can quickly report on the status of an order and make adjustments as needed.
• You can use their previous buying history to recommend products or offer discounts on items your customers might find valuable.

Multiple customer service apps on the market can pull up buyer history based on their email address, name, or phone number. Look into these tools if calls to your customer care team are increasing. 

Listen to customer service complaints.

If you want to improve your customer service experience, then start with your customers. Learn what they consider a weakness in your company and take steps to improve it. For example, if your customers aren’t happy with your slow response times, identify ways you can address problems faster. If your phone system is too robotic, look for ways to make it more personable. These changes will make your improvements more effective as you directly address your customer needs and deliver a white-glove service that will separate you from your competition.

UPDATE: The PPP loan application period ended May 31, 2021. Apply for the Employee Retention Credit today through Lendio.

Over the past year, the SBA has rolled out a series of updates and adjustments to better serve the self-employed who need/want a Paycheck Protection Program (PPP) loan. Here’s everything you need to know: 

How Can You Apply for PPP If You’re Self-Employed?

You can apply for PPP via any lender participating in PPP whether or not they are your primary bank. Online applications make it easy and accessible, in addition to limiting exposure with an in-person application. To apply for a PPP loan online, you’ll need to calculate your payroll costs and gather the required documentation to complete the application successfully. 

For full instructions for how to apply online, consult our Step-by-Step Guide to Applying for a PPP loan. 

Who Can Qualify for a Self-Employed PPP Loan?

To qualify for a PPP loan, self-employed individuals must meet the following criteria: 

• You were in operation as of February 15, 2020
• You are an independent contractor, sole proprietor, or other qualifying business classification with self-employment income
• In 2020, you filed a Schedule C or Form 1040
• Your primary place of residence is the United States
• You meet other program requirements 

How Much Money Can You Get?

You can qualify for 2.5 times your monthly payroll costs— based on either your net profit or gross income during the calculation period. 

In March 2021, the SBA released new guidance allowing the self-employed to choose whether they want to calculate their PPP loans based on net profit or gross income. Previously, calculations were limited to net profit, which limited the funds you could access if you’re in the habit of maximizing tax deductions. 

If you have additional employees on your payroll, their payroll can be used to calculate payroll numbers. You cannot include 1099 workers in your payroll calculations, as they are entitled to apply for their own PPP loans. 

How Can You Calculate Payroll Expenses If You’re Self-Employed?

There are 2 different methods for calculating your PPP loan depending on whether you employ other people. 

How to Calculate a PPP Loan If You’re Self-Employed and Have No Employees

• Retrieve your Schedule C from either 2019 or 2020. If you’re using 2020 to calculate your payroll costs and have not yet filed your 2020 return, you can fill out your 2020 Schedule C and calculate the value.
• Choose the number you’ll use to calculate payroll. This will either be gross income (found on line 7 of the Schedule C) or net profit (found on line 31 of the Schedule C). If the amount is greater than $100,000/year, reduce to $100,000/year. If neither number is greater than $0, you do not qualify for a PPP loan. 
• Take that number and divide by 12 to calculate your monthly payroll costs. 
• Multiply the monthly total by 2.5.

How to Calculate a PPP Loan if You’re Self-Employed and Have Additional Employees

• Choose whether you will use net profit (line 31) or gross income (line 7) on your Schedule C from 2019 or 2020—depending on which period you’re using to calculate payroll. 
  • You will then subtract the following from your net profit or gross income total. Add employee payroll from: line 14—employee benefit programs, line 19—pension and profit-sharing plans, and line 26—wage (less employee credits).
  • The maximum total for this step is $100,000/year. If greater than $100,000/year, reduce to $100,000. If the number is less than $0, set the amount to $0. 
• Calculate your gross wages and tips paid to employees who live principally in the US (line 5c, column 1). If the total for any employee is in excess of $100,000/year, reduce to $100,000. Add this number to the total from the previous step. If you have employees who live primarily outside of the US, subtract their wages.
• Add employer contributions from 2019 or 2020 to employee group insurance (line 14), retirement (line 19), and state/local taxes on employee compensation. 
• Divide the total amount by 12. 
• Multiply that number by 2.5.

If You Have an EIDL That Will Be Financed By the Loan

Whether or not you have employees, you must take an additional step of adding the outstanding amount of any Economic Injury Disaster Loan (EIDL) awarded between January 31, 2020, and April 3, 2020, which must be refinanced into your PPP loan, although if you only received an EIDL advance, you will not need to refinance the advance amount into your PPP loan. 

What Documents Do You Need to Apply for PPP If You’re Self-Employed?

To complete your PPP application, you will need the following documentation. We recommend gathering this information prior to starting the application. 

• • Copy of government-issued ID for all owners with 20%+ share in the business
  • Proof that you were in business as of February 15, 2020:
    • If you have W2 employees: IRS Form 941 from Q1 2020 or a third-party processing report from February 2020. 
    • If you do not have W2 employees: February 2020 bank statement or a customer invoice from February 2020
  • Tax documentation: 
    • Form 1040 with a Schedule C, or:
    • 1099

• If you have employees, you’ll need to provide proof of payroll costs. Choose one:

• • W2s and W3 for your employees
  • IRS Form 944
  • IRS Form 941 (all 4 quarters)
  • 3rd-Party Payroll Processing Report

Can You Use a PPP Loan to Pay Yourself?

Yes, you can use your PPP loan for payroll-related expenses, including paying yourself. To qualify for loan forgiveness, individual payroll amounts cannot exceed the calculation limits, meaning you can pay yourself a maximum of $8,333/month ($100,000/year) to be eligible for forgiveness. 

What Can You Use PPP For?

The allowed uses for PPP loans have been expanded. Due to high demands for the loan, it’s expected that you will still need to spend 60% of loan funds on payroll-related expenses, but you can now use the other 40% on a variety of uses. 

Payroll Costs

• Compensation in the form of salaries, wages, commissions or similar compensation up to $100,000
• Payment of cash tips or equivalent
• Payment for vacation, parental, family, medical, or sick leave
• Allowance for dismissal or separation
• Payment of retirement benefits
• Group vision, dental, disability, or life insurance
• Payment of state or local taxes assessed on the compensation of employees

Other PPP Uses for the Self-Employed

• Healthcare costs related to the continuation of group healthcare benefits during periods of sick, medical, or family leave, as well as insurance premiums
• Mortgage interest payments (but not prepayment or payment of the mortgage principal)
• Rent
• Utilities
• Interest on any other debt obligations incurred before February 15, 2020
• Refinancing an SBA EIDL received between January 31, 2020, and April 3, 2020
• Covered expenditures such as business software or cloud computing services that facilitate: business operations; product or service delivery; the processing, payment or tracking or payroll expenses, human resources, sales, and billing functions; accounting or tracking of supplies, inventory, records, or expenses
• Covered property damage costs
• Covered supplier costs
• Covered worker protection expenditures

What Documents Do the Self-Employed Need to Apply for a PPP Loan?

• 1040 Schedule C for 2019
• Your birth date
• A color copy of your Driver’s License (front and back)
• 1099-MISC, if you have them
• A voided check for your business bank account
• If you have 941 Quarterly Tax Filings (2019, 2020 Q1) or 944 Annual Tax Filings (2019), they should be submitted

You can visit our step-by-step guide on completing the PPP application for full instructions. 

Can You Get a PPP Second Draw?

Self-employed individuals can apply for a Second Draw on their PPP loan if you’ve experienced a revenue reduction of 25%+ due to the pandemic and you meet the other Second Draw qualifications. Learn more about how to qualify and apply for a PPP Second Draw. 

How Much Can a Self-Employed Individual Claim for Payroll Expenses?

The maximum amount for a PPP loan is 2.5 times your average monthly payroll costs. Income listed on a Schedule C in your personal tax return is the only payroll that can be used to calculate your PPP loan amount. If you’ve hired 1099 workers, they cannot be included in your PPP loan calculation and may apply for their own PPP loans. 

Do You Need to Take the Full Amount You Qualify For?

No, you may apply for a PPP loan that is smaller than the maximum you qualify for (2.5 times your monthly payroll costs). 

How Can You Get Your PPP Loan Forgiven?

The SBA has simplified loan forgiveness applications for PPP loans less than $50,000. This provision was specifically designed to support independent contractors and the self-employed. Loans that meet this threshold will not have to meet the employee retention requirements of larger loans, 

If your First Draw loan is $50,000 or less, you can not apply for forgiveness using the simplified Form 3508S. 

The SBA has not yet indicated whether or not this guidance will apply to PPP Second Draw loans. 

What If Your PPP Loan Is Not Forgiven?

If your loan forgiveness application is denied, you will be required to repay the loan. PPP comes with a 1% interest rate and a maximum loan term of 5 years. 

Is Loan Forgiveness Automatic?

No, you must apply for loan forgiveness through your lender. 

As you look to secure funding for your business, you may come across the concept of a lien. A lien gives creditors the legal right to claim your property if you fail to pay them back for a loan or purchase. Liens are most commonly found in mortgages, where lenders can take your house if you fail to meet your monthly payments. 

A lien isn’t necessarily a bad thing, but it can impact your credit and financing opportunities. Let’s dig deeper into a lien’s definition and what it means for your business.  

Is a lien bad?

A lien isn’t necessarily a bad thing to have. Many people take out voluntary liens when they accept mortgages or business loans. If you keep making payments related to this lien—proving to your lender that they will get their money back—then a lien isn’t something you need to worry about. 

However, there are instances when a lien can be bad. An outstanding lien can mean that you hold unpaid debts to various creditors or vendors. When this condition applies to a property, it could relate to your mortgage lender or the local government that collects property taxes. If you fail to pay these obligations, then your creditors have the right to seize your property or take legal action against you.  

What happens when you have a lien against you?

If you have an unpaid lien against you—or if you stop making payments on it—then the lienholder can step in and reclaim their assets. The person who issues the lien is known as a lienholder. For example, your bank might be your lienholder when issuing your mortgage.  

In theory, the bank or financial service provider can seize your business if you have outstanding liens. They can evict you and sell your property at auction. This action allows your lender to reclaim some of their lost funds, even if they sell your property below market value. 

However, not every lien against you can lead to foreclosure or seizure. Lenders often do whatever they can to get business owners to meet their financial goals. They will also take business owners to court in hopes of recouping the lost funds in cash rather than spending time selling off assets. Navigating the seizure of assets and the resale process is time-consuming for lienholders and can severely damage the credit of loan recipients.  

How do you get a lien removed?

You have a few options if you need a lien removed from a property or asset. First, you can pay off the debt. This option is the best if you took out a loan and created the lien. You might also need your lienholder to submit a release-of-lien form if you paid the lien holder before the lien was placed. This document needs to be notarized and will protect your accounts from going to collections. 

Most entrepreneurs have liens related to their business assets. If you make regular payments against your debt, you can grow your credit and keep your lienholders happy. The best way to avoid bad liens is to keep up with your repayment schedule as best as you can.