Paycheck Protection Program (PPP)
As part of the CARES Act, $349 billion was designated for the Paycheck Protection Program (PPP) which is a hybrid loan/grant program designed to help small businesses continue operations during what is expected to be the worst of the COVID-19 economic slowdown. This program isn’t quite free money; but it can be if your business uses the funds exclusively for the purposes designated.
Update 6/5/2020—Changes to PPP: On June 5, 2020 the Paycheck Protection Program Flexibility Act was signed into law. This new law extends from 8 to 24 weeks the time small businesses have to spend the money. It also enables 40% of the loan (as opposed to the earlier 25%) to be forgiven if spent on operating costs like rent and utilities (as opposed to salaries). It provides a longer time period for the unforgiven piece of the loan to be repaid and provides added flexibility for forgiveness if the small business owner can show that it was unable to return to pre-COVID staffing levels. Additionally, PPP participants can now take advantage of the payroll tax deferrals available to all businesses (prior to this legislation PPP participants were not permitted to take advantage of those deferrals).
Update 4/24/2020—New Funds for PPP: On April 24, 2020 an additional $310 billion was allocated to the Paycheck Protection Program, and applications will again be accepted by participating lending institutions. If you haven’t yet applied, there is still a chance for you to obtain a loan for your business, but act quickly because the new funds are not expected to last for long.
PPP Loan Basics
If your business qualifies for an SBA loan (see above), you’ll qualify for a PPP Loan if you were in business prior to February 15, 2020 and can attest to being harmed by the federally declared Covid-19 disaster between February 15, 2020 and December 31, 2020. And, unlike some SBA loan programs, you do not need to prove that you are unable to obtain loans elsewhere. Additionally, PPP loans all have a 100% guarantee by the SBA, require no collateral or personal guarantees, and do not have fees payable to the SBA. Other notable PPP Loan Features:
- Active Dates: You can apply until August 8, 2020.
NOTE: Apply as soon as you can, demand will be high, and the fund is limited.
- Maximum Loan Amount: $10 Million or 2.5 times your average monthly payroll, whichever is less. (Example: If your average monthly payroll is $50,000 you are eligible for a $125,000 loan)
- Loan Terms: Interest rate of 1%, maturity of 2 years for loans made before 6/5/2020 and 5 years for loans made after 6/5/2020. Payment of principal, interest and fees are deferred until forgiveness is remitted to the lender, but only if the borrower applies for forgiveness with 10 months after the last day of the covered period.
Eligible Expenses for which PPP funds may be forgiven:
- Payroll costs, including salaries and commissions.
- Healthcare costs, including group health insurance premiums and paid sick, medical, or family leave
- Mortgage interest (not including interest pre-payments or principal payments)
- Rent & lease payments
PPP Loan Forgiveness
The main goal of the PPP is to keep small businesses operating and to keep small business employees working. To do that they are offering forgiveness of PPP loans if the funds are used for that purpose. (You can still qualify for and obtain a PPP loan if you use the funds for a non-forgivable expense; you’ll just have to pay it back.)
Requirements for Loan Forgiveness:
- Forgiven loan funds must be used in the 24 weeks following the loan origination date, or December 31, 2020 whichever is sooner.
- All allowable payroll costs (see below for how to calculate this) incurred during the 24-week period will be forgiven if you have not reduced full time staff between February 15, 2020 and December 31, 2020.
NOTE: If you reduced staff prior to applying for the loan, you have until December 31, 2020 to re-hire and still qualify for full loan forgiveness. If you increase staff during the 24-week forgiveness period, you will be forgiven for total payroll costs up to the full loan amount.
ADDITIONAL NOTE: Loan forgiveness will not be impacted if:
- The borrower can document (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020, and (ii) an inability to hire qualified employees for unfilled positions on or before December 31, 2020, or
- The borrower can document an inability to return to the same level of business activity as it was operating at prior to February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
- You may also be forgiven for loan funds used for interest on mortgages, rent, and utilities—however, these costs will only be forgiven up to 40% of the total loan value. (For example, if your PPP loan is $100,000 you could be forgiven for no more than $40,000 in costs incurred for mortgage interest, rent and utilities.)
- If you have reduced staff or reduced salaries for those making under $100,000 per year, you will be eligible for partial loan forgiveness, based on the percentage of staff/payroll reduction.
- If you have received an Economic Injury Disaster Loan (EIDL) Advance (see next section), the amount of that advance is not forgivable. (For Example, if you have a $100,000 PPP loan and received a $10,000 EIDL advance, the maximum forgivable amount for your PPP loan is $90,000.)
- After your 24-week forgiveness period ends, you must apply to your lending bank to have your loan forgiven, and you must provide documentation for how loan funds were utilized and for your pre- and post-loan staffing levels and wage levels.
TIP: The best way to ensure that you get maximum forgiveness for your loan is to use at least 60% of the funds for payroll costs (the more the better), and to keep staffing levels the same or higher than they were before you obtained the loan.
Calculating Average Monthly Payroll
The amount of your PPP loan is calculated as 2.5 x your monthly payroll or $10M, whichever is less. That sounds simple but calculating that all-important monthly payroll amount can be complicated.
For sole proprietors and independent contractors, the basic calculation is:
Your total income from 2019 divided by 12 or $8,333.33, whichever is less.
(This is because any income over $100,000 per year is excluded from the calculation).
For small businesses with employees or contractors, the calculation at its very simplest is:
Average Monthly Payroll = (2019 Payroll Cost) - (Excluded 2019 Payroll Costs)/12
Allowable Payroll Costs Include:
- Salaries, wages, commissions, cash tips, and equivalents
- Payments for benefits (health plan premiums, sick pay, vacation pay, family leave, retirement, etc.)
- Severance pay
- State and local taxes
Excluded Payroll Costs Include:
- Compensation to any individual employee over $100,000 per year
- Payments to independent contractors (Independent contractors can file to receive PPP loans themselves)
- Payroll taxes and income taxes
- Compensation to any individual with a principal residence outside of the US.
- Qualified sick pay covered under any other federal program.
The calculation changes for seasonal businesses and businesses that started in 2020, and there are some additional allowable and excluded costs that apply to a minority of businesses. The US Chamber of Commerce guide provides all of the details along with excellent instructions on how to calculate your average monthly payroll costs.
How to Apply for a PPP Loan
To apply for a PPP loan, simply contact a participating lender and complete its application, which will most likely be online. You’ll need to provide your Average Monthly Payroll calculation amount, along with some supporting documents (which may differ by bank).
All lenders currently approved to offer SBA loans will be able to offer PPP loans if they wish to participate in the program. Additionally, any federally insured depository institution, federally insured credit union, and Farm Credit System institution may opt to participate in the PPP program. Over the next few weeks the Treasury Department and SBA with be working with other regulated lenders to approve them for participation in the PPP program.
If you have an existing SBA loan of any type, your first stop for a PPP loan should be with that lender. Your next stop should be your bank, which will likely be participating.
NOTE: Your best bet for a PPP loan may be a small bank. $30 billion from the new PPP appropriation is designated for the smallest lenders (community financial institutions, small banks, and small credit unions with under $10 billion in assets), and another $30 billion for small lenders with between $10 and $50 billion in assets. So, if you're having trouble applying with your big bank, thinking small and local may help.
The 100 top SBA Lenders through December 31, 2019 are listed here. You can also contact your local SBA Office for assistance in finding a participating lender. Use the SBA map tool and select the type of office you want to contact.
The SBA has released a sample PPP loan application which you can download here. It will give you an idea of the type of information that will be requested, though it may be slightly different for each lender.
PPP Loan Resources