The Paycheck Protection Program (PPP), a federal financial relief program that provides forgivable loans to small businesses to help them retain workers following the COVID-19 pandemic, has received additional funding and is up and running again. Small-business owners seeking coronavirus relief would do well to be aware of it, and the potential help that it can offer them in maintaining staffing levels and meeting current payroll obligations.
Payroll Protection Program Basics
If you were unable to apply for a PPP loan previously, now’s the time to consider putting an application in as soon as possible. After initially allocating nearly $350 billion under the CARES Act for low-interest loans designed to provide small businesses with coronavirus relief, which was quickly depleted, the House and Senate have approved an additional $310 billion in PPP funding. These added sums supplement previous Paycheck Protection Program disbursements, which ran out in less than 2 weeks, and may provide much-needed relief to small businesses looking to offset fallout from the virus and related concerns.
Thanks to this additional funding, as well updates to the PPP application process, many more small businesses may enjoy a better shot at securing a loan this time around. Beyond introducing additional sums for SBA disaster relief loans, hospitals, and testing, Congress’ new financial relief package includes $250 billion to help refill the PPP program, and $60 billion that’s been set aside specifically for smaller lenders such as credit unions and community banks. It also introduces additional limitations on larger and public businesses that have looked to seek PPP loans. For example, while up to $10 million in Paycheck Protection Program loans can be secured in total per small business, the Internal Revenue Service says that it will audit loan requests in excess of $2 million.
Here’s what you need to know about the program to get started.
Small-Business COVID-19 Relief: How PPP Works
To qualify for small-business coronavirus relief, your business must have 500 or fewer employees. However, select small businesses in the hotel and food services industries that are franchises according to SBA guidelines may qualify if they have over 500 employees as well.
Nonprofits qualify, as do independent contractors and freelancers (including those who run small LLCs such as sole proprietorships), so they may also apply for PPP loans.
Businesses may apply for a maximum of one loan. A tax ID number and select documentation (which typically includes various payroll and tax forms, but varies by individual lender) are required for applications.
The maximum PPP loan size that you qualify for can be determined by multiplying your average monthly payroll from 2019 (or January 1 – February 29, 2020 if you’re a new firm that was not in business prior to June 30, 2019) by 2.5 times.
For purposes of computing PPP amounts, individual employee salaries are capped at $100,000, and you must subtract any sums paid above that amount. By way of example, if an employee made $150,000 last year, only $100,000 may be included when calculating PPP loan amounts. In addition, no matter how much employees made during the time period, only those who principally reside within the United States of America qualify for purposes of calculating payroll costs.
When calculating payroll costs, you should consider:
- Salary, wages, commissions, and tips (which are capped at $100,000 per each employee per year)
- Costs of benefits including parental, family, vacation, medical and sick leave
- Allowances for separation or dismissal of employees
- Payments for retirement or health care benefits
- State and local taxes on compensation
If you employ sole proprietors and independent contractors such as freelancers, be advised that these individuals are not eligible to be included in payroll calculations since they have the option to apply for their own PPP loan.
PPP Loans: Do You Have To Pay Them Back?
Payroll Protection Program loans are designed to help you pay employees and cover common business expenses such as utilities and rent. All loans come with a 1% fixed interest rate attached, and require you to put no property or cash down to secure. Each is due within 2 years, and payments are deferred for 6 months, during which time interest will accrue. Note that no prepayment penalties or fees apply to sums borrowed.
But more importantly, because they’re designed to provide small businesses with COVID-19 relief and keep workers employed while coronavirus continues to impact the economy, upon application, PPP loans will be completely forgiven if used for eligible expenses. In other words, if used for the purposes that they’re intended and you meet all requirements, you don’t have to pay these sums back,
SBA PPP Details
To qualify to have your loan forgiven in full, you must meet certain financial requirements. Specifically, you must keep workers on your payroll for at least an 8-week period after your loan has been granted. In addition, you must also use a minimum of 75% of PPP funds for payroll expenses within this 8-week period, and no more than 25% for rent, mortgage interest, and utility payments.
Should staff counts be reduced though, or salaries for employees earning under $100,000 trimmed by more than 25%, you must repay the loan. In the event that you need to address any concerns here, a deadline of June 30, 2020 exists to restore employees to the full-time employment and salary levels that were amended between February 15 – April 26.
To receive forgiveness, businesses will also need to keep documentation verifying their use of the funds, as well as employees and pay rates, and submit a request for forgiveness to the lender that provided their loan.
How Can I Apply For A PPP Loan?
Dozens of banks and online fintech (financial technology) lenders have lined up to offer thousands of small businesses PPP loans, with more information to be found at their individual websites. But as quickly as initial PPP balances ran out, experts advise applying as fast as you can to receive one, as demand for Payroll Protection Program loans is extremely high, and lenders are capped on the amount of loans they can process.
Any bank or lender that you enjoy a current relationship with makes a good place to start. But do be aware that it often takes time to process loan applications (although they can frequently take as little as 15 – 20 minutes to submit to a lender), and that many lenders may not currently be accepting additional queries at this time. To maximize your chances of securing a PPP loan, you should apply as soon as possible.