Update on the Paycheck Protection Program
Note: The Paycheck Protection Program closed to new applicants on August 8, 2020. This page will be updated if and when the federal government passes legislation to restart the program or create additional small business financial relief.
Paycheck Protection Program Loans: Everything You Need to Know
The Paycheck Protection Program (also known as PPP) is a program that was recently unveiled by the Small Business Administration to help supply funding to small businesses, nonprofits, sole proprietors, and business entities affected by the novel coronavirus.
This program provides 100% federally guaranteed loans to help businesses with their payroll and other operating expenses. All business loan payments are deferred for 10 months, and the SBA will forgive the loan proceeds that are used to cover the proceeding 24 weeks of payroll costs, rent, utilities, and mortgage interest. (Note that these terms have been updated to reflect the PPP Flexibility Act.)
How to Apply for a Paycheck Protection Program Loan
The Paycheck Protection Program officially opened to small business owners and lenders on April 3. The program also became available to sole proprietors and independent contractors on April 10.
According to the terms of the program, small business owners can apply through existing SBA 7(a) lenders or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Funding for these loans will come directly from these lenders, which in turn will be reimbursed by the SBA.
In reality, at this stage, many lenders are either only accepting applications from existing business customers, or are prioritizing their customers above the applications of other applicants. If your chosen lender has either already closed their application process to you or not started accepting applications at all, you’ll want to find an alternative, whether it’s a community lender accepting applications or by applying through Fundera.
Each lender may have a different application process, though most will ask for similar information. The SBA has provided a copy of its official Paycheck Protection Program application form, which will likely be a part of many lenders’ application processes.
Per that application form, business owners will need to provide:
- Average monthly payroll costs (you can calculate your average monthly payroll yourself)
- Basic business information (including business name, address, and tax ID number)
- Answers to questions regarding ownership background, previous and/or current federal loans, and citizenship status
- A good faith certification regarding how they’ve been impacted by the coronavirus pandemic
In addition, most business owners will need to show their business was in operation on February 15, 2020, and provide monthly payroll stages for all of 2019, or their last 12 months of business. Seasonal business owners can qualify if they prove they were operational for an eight-week period between February 15, 2019 and June 30, 2019.
When applying, business owners should prepare to upload or otherwise share the following documents with their lender:
- Business bank statement
- Copy of drivers license
- Proof of payroll (IRS Form 941)
- Voided business check
Who Qualifies for a Paycheck Protection Program Loan?
In order to qualify for a PPP loan, you must be a small business (including nonprofits, veterans organizations, Tribal concerns, sole proprietorships, self-employed individuals, and independent contractors) with 500 or fewer employees, or no greater than the number of employees set by the SBA as the size standard for certain industries.
Your business must have been operational by February 15, 2020. The “covered period” for these loans will run from February 15 to December 31, 2020, which means expenses made during this time frame can potentially be forgiven. (Note that the covered period was previously from February 15 to June 30, 2020, prior to the passage of the PPP Flexibility Act.)
Paycheck Protection Program Loan Rates and Terms
Loans disbursed under this program will have the following terms:
- Interest rate of 1%
- Maturity of 5 years (Note that prior to the PPP Flexibility Act, this was 2 years)
- First payment deferred for 10 months (Note that prior to the PPP Flexibility Act, this was six months)
- No collateral
- No personal guarantees
- No borrower or lender fees payable to SBA
Keep in mind: Business owners who take out these are eligible for loan forgiveness for the amount they spent on payroll costs, rent on a leasing agreement, payments on utilities, and additional wages to tipped employees.
That means your loan for these costs will essentially be converted into a grant.
You’ll need to demonstrate how you’ve used your funds to finance payroll and other eligible costs in order to receive loan forgiveness.
What do payroll costs mean? The following compensation is considered eligible payroll costs under this program:
- Salary, wage, commissions, or similar compensations
- Payment of cash tips or equivalent
- Payment for sick, vacation, parental, family, or medical leave
- Dismissal or separation allowance
- Payments for group health care benefits, including insurance premiums
- Payments for retirement benefits
- Payments of state or local tax on employee compensation
Sole proprietors, independent contractors, and self-employed workers will also be able to take out a PPP loan for compensation or income that is not more than $100,000 in one year, as prorated for the covered period.
As for what payroll costs are not included: Compensation of an individual employee in excess of $100,000 annual salary; payroll taxes, railroad retirement taxes, and income taxes; compensating an employee that lives outside the U.S.; qualified sick leave or family leaves wages for which a credit is allowed under the Families First Coronavirus Response Act.
How Much Can I Borrow Through the Paycheck Protection Program?
The goal of this loan is to help businesses pay for their payroll and other overhead costs. Therefore, loan amounts can be up to 2.5x the business owner’s average monthly payroll costs, not exceeding $10 million.
In order for your loan to be forgiven by the SBA, you must maintain your payroll, or rehire the employees you laid off during the beginning weeks of the pandemic by December 31, 2020.
The amount of loan forgiveness will be lowered if you reduce workforce, or reduce wages paid to those employees by an amount greater than 25%.
The U.S. Chamber of Commerce created a helpful guide on how to calculate payroll costs and how loan forgiveness can be reduced.
Details of Paycheck Protection Program Loans
The Paycheck Protection Program was created and funded by legislation known as the CARES Act, which was signed into law on March 27 as part of phase three of the federal government’s response to the coronavirus pandemic.
The outbreak of the coronavirus across the U.S. has crippled millions of small businesses, forcing them to work under restrictions, with limited staff, and with virtually no foot traffic. These businesses are facing indefinite limitations and perhaps permanent closure if they are unable to make payroll, pay their rent, and meet other financial obligations.
Through the CARES Act, the SBA received $349 billion in funding that it used to finance loans made by thousands of SBA lenders across the country to those small businesses.
The SBA has long been known to small business owners as the best place to find low-cost financing on favorable terms. Even by those standards, PPP loans are exceptionally friendly to small business owners—due to the fact that this pandemic has leveled small businesses across the board, through no fault of their own.