Schools shuttered for the rest of the academic year. Governors instituting stay-at-home orders. A record-setting surge of people filing for unemployment. And, of course, small-business owners forced close down their restaurants, shops and beauty salons.
These are all results of the COVID-19 pandemic.
There is, though, a bit of COVID-19-related financial relief for those small-business owners in the form of the Paycheck Protection Program, better known as the PPP. This loan program, part of the federal government’s massive CARES act, is designed to help businesses stay open and keep their workers employed.
Business owners who qualify for a loan through this program won’t have to pay some or all of the money they borrow if they follow certain rules on how they spend their loan proceeds. It could be a help to small-business owners who are struggling to generate income during the pandemic.
That “following the rules” part, though, is important: PPP loans can be complicated, and it might prove challenging for small-business owners to adhere to some of the program’s rules. There aren’t even guarantees that the program won’t run out of money again.
Here, then, is a guide to how PPP loans work, what businesses they might benefit, and the challenges business owners will have to overcome when applying for this financial relief.
Small Business COVID-19 Relief
The federal government in late March passed its Coronavirus Aid, Relief and Economic Security Act — better known as CARES – to help businesses and individuals struggling in the wake of the COVID-19 pandemic. As part of this package, the government allocated $349 billion for small-business loans made through the Small Business Administration to help business owners pay their workers and cover certain other expenses.
The problem? The program proved so popular that it ran out of money on April 16. Congress voted to refund the program, with the second round of PPP funding beginning April 27. This round provided an additional $310 billion for new loans to small businesses.
How fast will PPP funds run out?
The PPP remains popular. The Trump administration announced that as of May 3, 2.2 million small-business loans worth $175 billion had been made during the second round of the program.
Treasury Secretary Steve Mnuchin and Small Business Administration Administrator Jovita Carranza said in a statement that the average size of a loan made through the program’s second round was $79,000.
The question, though, is how long these funds will last. The first round of the PPP ran out of money quickly, and the numbers suggest that the second round of funding will, too.
Government officials have said that they’re willing to consider refunding the program again to help business owners keep people employed. But small-business owners who need this financial assistance today should apply for their loans quickly if they don’t want to wait through whatever delays occur in a possible third round of funding.
How soon can I apply for loans through the PPP?
Business owners can apply for PPP loans now. They can do this by working with any existing SBA 7(a) lender, which includes federally insured banks and credit unions. Business owners can also work with other lenders who have been approved by the Small Business Administration to make PPP loans.
What businesses are eligible for PPP loans?
Any small business with 500 or fewer employees may be eligible for a PPP loan. But even businesses that employ more than that number might qualify for one of these loans, if they meet the SBA’s industry-based or alternative size standard.
According to the alternative size standard, a business qualifies for a PPP loan if as of March 27 it had a maximum tangible net worth of $15 million or less and had an average net income after federal income taxes of no more than $5 million for the most recent 2 fiscal years.
There is also the industry-based size standard, which states that companies with more than 500 employees might qualify as a small business if they employ fewer workers than the average company in their industry.
These standards can be confusing, so it makes sense to work with your bank, credit union or other lender to determine if your company qualifies for a PPP loan.
The terms for a PPP loan are the same for every business: an interest rate of just 1%, a 2-year term and no payments for 6 months. There are also no fees for borrowers or lenders, and business owners are not required to put up collateral or personal guarantees for their loan.
How does PPP loan forgiveness work?
PPP loans are attractive because some or all of the loan will be forgiven by the SBA depending on how business owners use the funds.
The SBA will forgive all of the loan proceeds that businesses use to cover their first 8 weeks of payroll costs, rent, utilities and mortgage interest. The clock on that 8 weeks starts ticking as soon as business owners receive their PPP funding.
The key, though, is that business owners must use the money as the SBA intended. The purpose of the loan is to keep people employed, so the SBA wants owners to spend most of their loan money on paying workers.
According to the program, at least 75% of the amount of the PPP loan that is forgiven must have been used for payroll. Businesses will have less of their PPP loan forgiven if they reduce the number of full-time employees on staff or if they decrease the wages or salaries of their workers.
Businesses, then, must be certain that they can use most of their loan money on retaining or rehiring workers. This can get complicated: Say you run a restaurant and you had to let most of your employees go after your state suspended in-house dining. You apply for a PPP loan and get it. You can now hire those workers back.
But what if these workers filed for unemployment and are now earning an extra $600 a week from the federal government, which boosted unemployment benefits to help people who lost their jobs because of COVID-19? They might be making more money on unemployment than they would be working for your business. Even if you offer them their old jobs back, they might not want it.
If you can’t hire enough workers back, you might struggle to spend enough of your loan on payroll. You might then have a smaller portion of your PPP loan forgiven. To earn forgiveness on a PPP loan, you must either keep your payroll at its current level or rehire those employees you laid off because of the pandemic by June 30.
When do I have to start repaying the loan?
You’ll have to start repaying your loan – or at least the portion of it that isn’t forgivable – either 6 or 12 months after you receive it. If you spend your the whole amount on payroll, mortgage interest, rent and utilities, your entire loan might be forgiven.
How much can businesses borrow through the PPL program?
How much you can borrow depends on your individual business. According to the SBA, a business can borrow up to two-and-a-half times its average monthly payroll costs. You can’t borrow more than $10 million, no matter how much you pay each month for payroll.
If your business’ average monthly payroll costs are $200,000, you can qualify for a PPP loan of up to $500,000.
Can I apply for more than one PPP loan?
Businesses can only apply for one PPP loan. However, if you run multiple businesses, you can apply for PPP loans for each one.
If your business can’t qualify for a PPP loan, you might benefit from other assistance. Check out our list of free resources for businesses during the coronavirus outbreak.
And finally, take this time to sharpen your business plan. A strong business plan can help you prepare for the unexpected in the future.
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