Update Feb. 22, 2021: From Feb. 24 to March 9, only businesses with 20 or fewer employees will be allowed to apply for Paycheck Protection Program loans. This move from the Biden administration is an attempt to provide access to businesses that previously struggled to obtain PPP loans. Additionally, some of the eligibility restrictions on who can apply for a PPP loan have been lifted. Read more here.
Congress has approved $284.5 billion in new Paycheck Protection Program funding. The types of businesses and industries that are eligible for PPP loans have been expanded under the new relief package. Additionally, businesses that can demonstrate at least 25% reduction in gross receipts year over year and meet other requirements may be eligible for a second PPP loan.
Paycheck Protection Program Loans: Everything You Need to Know
The Paycheck Protection Program (also known as PPP) is a program that was unveiled by the Small Business Administration to help supply funding to small businesses, nonprofits, sole proprietors, and business entities affected by the coronavirus pandemic.
This program provides 100% federally guaranteed loans to help businesses with their payroll and other operating expenses. The SBA will forgive the PPP loan proceeds that are used to cover the proceeding eight or 24 weeks of payroll costs, rent, utilities, mortgage interest, and other approved costs.
How to Apply for a Paycheck Protection Program Loan
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 in the PPP program. Funding for these loans will come directly from these lenders, which in turn will be reimbursed by the SBA.
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
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 first-time 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.
In order to qualify for a second PPP loan, businesses must meet the following requirements:
- Have no more than 300 employees
- Have used or plan to use all of their first PPP loan
- Be able to show a 25% reduction in annual gross receipts or in any quarter in 2020 as compared to the equivalent quarter in 2019
- Have not permanently closed
Your business must also have been operational prior to February 15, 2020.
Paycheck Protection Program Loan Rates, Terms, and Uses
Loans disbursed under this program will have the following terms:
- Interest rate of 1%
- Maturity of 5 years
- First payment deferred for 10 months
- No collateral
- No personal guarantees
- No borrower or lender fees payable to SBA
Business owners who take out these loans are eligible for full loan forgiveness, provided they spend at least 60% of the loan on payroll costs and the remaining 40% on other allowable costs.
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
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 leave, wages for which a credit is allowed under the Families First Coronavirus Response Act.
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.
Other allowable uses for PPP loan proceeds are:
- Operating costs, including rent, mortgage insurance payments, utilities, software
- Payments to suppliers
- Property damage caused by protests that is not covered by insurance
- Personal protective equipment
You’ll need to demonstrate how you’ve used your funds to finance payroll and other eligible costs in order to receive PPP loan forgiveness.
The “covered period” for these loans is eight or 24 weeks after receiving the loan funds. Borrowers can chose the covered period length that they prefer.
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 for a first-time PPP loan.
Certain hard-hit businesses are eligible for a second-draw PPP loan of 2.5x average monthly payroll costs, up to $2 million.
The U.S. Chamber of Commerce created a helpful guide on how to calculate payroll costs.