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Paycheck Protection Program (PPP) – Guide for Small Business Owners

The most widely publicized feature of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a massive stimulus bill passed amid the worsening economic fallout of the COVID-19 pandemic, was a provision for one-time stimulus payments ranging up to $1,200 per head to most American adults.

Coupled with expanded unemployment insurance and one-time payments of $500 per dependent child to eligible parents and guardians, it can undoubtedly help Americans facing pandemic-induced financial insecurity.

But if it works as intended, in the long run, one lower-profile feature of the CARES Act could prove more consequential for the millions of Americans who remain employed and the entrepreneurs supervising their work: the Paycheck Protection Program (PPP).

Through the PPP, the CARES Act authorizes the Small Business Administration (SBA) to disburse up to $659 billion in low-interest loans to small businesses, self-employed individuals and solopreneurs, and qualifying nonprofit organizations. Each PPP loan covers up to $10 million in business payroll costs during the eight weeks following its origination. Any proceeds put toward payroll and certain other qualifying expenses are forgivable at the borrower’s request. That means loans used entirely for qualifying expenses don’t need to be repaid at all — assuming the borrower’s forgiveness request is granted and the borrower lives up to the program’s terms.

PPP opened for small-business applications on April 3, 2020. Self-employed individuals and nonprofits can apply beginning on April 10, 2020.

Because demand for PPP loans is extraordinarily high and available funds are limited, you should apply as soon as you’re eligible. But before you do, review the program’s eligibility and application requirements, loan terms and repayment procedures, and how to request forgiveness.

Eligibility & Application Requirements

Millions of small-business owners, self-employed individuals and solopreneurs, and nonprofit organizations are eligible to apply for PPP loans. And the application process itself is more straightforward and less bureaucratic than a typical SBA loan application, which is good news for cash-strapped borrowers hoping to expedite their applications.

Who’s Eligible for a PPP Loan?

Any qualifying entity with fewer than 500 employees is eligible to apply for a PPP loan. That includes:

  • Formally incorporated for-profit businesses
  • Nonprofit organizations
  • Tribal businesses
  • Self-employed individuals, including those working as independent contractors and freelancers

The PPP waives the 500-employee limit for certain types of businesses. The SBA Contracting Guide has more information about business size calculations and relevant exceptions.

The PPP waives ordinary restrictions on SBA loan applications, making it much easier for businesses and self-employed individuals to apply. Most important, the program waives the credit elsewhere requirement, which compels SBA loan applicants to look for other sources of credit before applying for SBA funding. Essentially, any eligible business can use the PPP as a first resort to help cover payroll.

Getting a PPP Loan

Sole proprietorships and small businesses, including nonprofits, can apply for PPP loans beginning on April 3, 2020. Self-employed individuals and independent contractors can apply beginning on April 10, 2020.

For both groups, the application period continues until June 30, 2020, or until the SBA depletes available funds. The SBA hasn’t provided an estimate as to which is more likely to occur first, but given the anticipated high demand for loans, applying early could increase your chances of approval. Eligible individuals and entities must have been in business on Feb. 15, 2020.

How to Apply

To apply for a PPP loan, complete and submit a completed application with all required supporting documentation to an approved lender. Use the SBA’s zip code search feature to find a list of approved lenders near you. You can also use Fundera.com to start your application. Fundera gives you access to multiple SBA lenders so you know your application will be processed as soon as possible. Plus, they have additional relief options available, if needed.

On the loan application itself, you must support your funding request with valid payroll documentation — most likely a report from your payroll provider showing a detailed breakdown of your payroll expenses, including payroll taxes. You must also provide your tax identification number (your employer identification number or Social Security number), which your lender may use to verify the payroll information submitted with your application is identical to the payroll tax information you submitted to the IRS.

You must also certify in good faith that your business meets several conditions of the PPP:

  • The economic uncertainty around COVID-19 impacts your business.
  • You’ll use the proceeds for approved purposes.
  • You have not and will not receive another PPP loan.
  • You’ll provide all documentation required by the lender before the loan is disbursed.

Calculating Your Funding Request

You can apply for 100% of your expected payroll expense for the eight weeks following your loan’s funding plus an additional 25% of that amount to cover other expenses. This calculation depends on your business’s age and seasonality:

  • If your business has been open since the start of 2019 or before, use your average monthly payroll expenses for 2019 to estimate your payroll obligations for the eight weeks covered by the PPP loan.
  • If your business is seasonal, use your average monthly payroll expense during the second quarter of 2019.
  • If your business opened after Jan. 1, 2019, use your average monthly payroll expense during the first two months of 2020 (from Jan. 1 to Feb. 29).

In all cases, multiply your average monthly payroll expense by 2.5 to calculate the maximum funding amount.

Key PPP Loan Features

PPP loans have very low interest rates and short repayment terms. However, for many borrowers who devote the entirety of their loans’ proceeds to payroll costs, these features won’t ever come into play thanks to the program’s generous criteria for loan forgiveness. As long as you use it as indicated, getting a PPP loan forgiven is even easier than getting one in the first place.

PPP loan terms are identical for all program borrowers, regardless of loan size, employee count, entity type, or any other factor.

What You Can Use Your Funds For

You can use PPP loans to cover four types of expenses:

  • Payroll
  • Mortgage interest
  • Rent
  • Utilities

You can use loan proceeds to cover expenses other than payroll only if you incurred those expenses under contracts (such as commercial leases or real estate purchase agreements) in force before Feb. 15, 2020.

The SBA defines payroll expenses to include:

  • Compensation (salaries, wages, tips, and commissions) up to $100,000 per employee on an annualized basis
  • Employee benefits, including paid leave and vacation time, group health insurance payments, severance pay, and retirement benefits
  • State and local taxes on compensation
  • Income from self-employment or independent contracting, if applicable, up to $100,000 annualized per employee

Interest & Collateral

The interest rate on all PPP loans is a flat 1.0%. All loans are unsecured, meaning borrowers aren’t required to put up collateral as a condition of funding. Nor is a personal guarantee required from business owners or organization heads. However, the SBA advises that using loan proceeds for any fraudulent purpose — basically, affirming that you’ll use the funds for payroll or other qualifying business expenses and then failing to do so — is a violation of federal law that exposes the borrower to criminal prosecution.

Expenses Eligible for Forgiveness

All four types of eligible expenses — payroll, mortgage interest, rent, and utilities — are eligible for forgiveness.

However, because the primary purpose of the PPP is to subsidize employers’ payroll costs, it is unlikely loans will be fully forgiven when the borrower uses more than 25% of the proceeds to cover other expenses.

For example, an employer using 50% of a hypothetical PPP loan’s proceeds for rent and utilities and 50% for payroll would most likely be obligated to repay 25% of the loan’s principal. The entire amount used for payroll would be forgiven, but only half the amount used for rent and utilities would be.

Forgiveness Requirements

You must meet specific additional requirements to maintain eligibility for full forgiveness. Your forgivable amount is likely to be reduced if you do any of the following:

  • Decrease your full-time employee headcount before applying for forgiveness
  • Decrease compensation (salaries and wages) by more than 25% for any employee earning less than $100,000 annualized in 2019
  • Fail to rehire terminated employees or restore full-time salaries to prior levels by June 30, 2020, if you made any cuts to staff or compensation between Feb. 15, 2020, and April 26, 2020

PPP Loan Repayment Schedule

All PPP loan balances not eligible for forgiveness are due in full two years after origination.

All borrowers can elect to defer payments entirely during the first six months of the loan term, during which interest continues to accrue.

Deferring payments does not affect the repayment term — you must repay all unforgiven balances within two years. However, borrowers can prepay — make payments ahead of the official repayment schedule — and can pay off loans in full without penalty at any time during the two-year repayment window.

How to Get Your PPP Loan Forgiven

You can request PPP loan forgiveness at any time during the loan term, though for practical purposes, it makes more sense to do so before repayments begin. You must include documentation supporting your claim to use the funds for approved purposes, including:

  • Documentation verifying full-time status and compensation rates for each full-time employee on your payroll
  • Mortgage documents
  • Lease agreements with evidence of rent paid
  • Any applicable utility bills

The SBA requires your lender to determine whether to forgive your PPP loan within 60 days of receiving your application for forgiveness.

Final Word

The Paycheck Protection Program is a short-term fix for the sharp, sudden economic contraction caused by the COVID-19 pandemic. Demand for the first tranche of PPP funds was enormous, and no one knows for sure how long the program’s reauthorization (made official on April 24, 2020) will last. Eligible borrowers would do well to apply as soon as they’re able.

Think of it this way. If your application proves successful, the hour you spend gathering the necessary documentation, completing your application, and submitting it to the lender of your choice could be the most profitable hour you spend at work this entire year.

Are you planning to apply for a loan through the Paycheck Protection Program?

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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