May 1, 2020 | Last Updated on: July 20, 2023
As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
Coming into the Treasury’s second round of paycheck protection program (PPP) funding, there are still tons of things that are unclear for small business owners. Questions about eligibility, applications, loan forgiveness, loan terms, and other things are important pieces of the puzzle for small business owners looking to take advantage of this federal aid in response to the coronavirus outbreak. We’ve done our best to compile the most important and frequently asked questions about the federal government’s loan program into a one-stop-shop for small business owners.
The paycheck protection program, or PPP for short, is a new program launched by the federal government with the aim of keeping workers employed and helping small business owners keep their doors open despite an economic decline due to the COVID-19 crisis. The PPP is a cornerstone of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This provision initially allocated $349 billion for small businesses, defined as those businesses with less than 500 employees, to help support payroll expenses and some other bills that business owners can’t deal with due to a decline in revenue.
Business owners who are eligible can receive a loan for up to 2.5x your average monthly payroll costs, calculated as the average from the previous year, to cover up to eight weeks of payroll. You can also apply for an additional 25% of what you would be borrowing for the eight weeks of payroll. Note: As we’ll discuss later in the article, only eight weeks of approved costs are eligible for forgiveness. The remaining funds, should you receive them, will be treated as a loan. The maximum loan amount that borrowers can get is capped at $10 million.
Your average payroll costs are calculated as your average monthly payroll costs in the previous calendar year (in this case, 2019). If you are a newly formed business not formed after February 12th, 2020, you will use the average payroll costs between January 1 and February 29th, 2020. This may differ if you are a seasonal business
When making your calculations, keep in mind that payroll costs are capped at $100,000 on an annualized basis for each employee (this only includes cash compensation, not non-cash benefits like retirement contributions). This limitation is applied to all types of businesses. The standard payroll calculation could include any of the following pieces of information:
If you are a seasonal business, you would adjust the above pieces of information to monthly documentation. For example, salary, wage, tip, commission, bonus, and severance pay information will be found in 941s (quarterly federal tax returns). Information for paid leave can be found in 940s or 944s but could also be found in monthly payroll statements. State and local tax information could be found in state returns or monthly payroll statements. For sole proprietorships, single-member LLCs, and those who are self-employed, you will use the information on your 1040 schedule C and any applicable payroll statements. Independent contractors should use all 1099s received for work and back them up with documentation like paid invoices.
There are a number of payroll costs that aren’t eligible through the PPP. We’ve touched on a few already, but we’ll list them out here for clarity:
According to the Small Business Administration (SBA), the loan terms that apply to PPP funding are the “same for everyone”. So, the terms that we’ll outline below will apply no matter what type of business you run, as long as you are eligible for funding, of course.
PPP loan funding can be used to deal with payroll and, despite the seemingly direct naming of the program, some expenses outside of payroll are also eligible. Funds from a PPP loan can be used to pay for:
Each taxpayer identification number (TIN) is limited to one PPP loan. If you have multiple businesses, you can get multiple loans. However, some SBA lenders may not be able to give multiple loans through one person, even if they are applying for a different business. Check with your lender to be sure. If this is the case, you may need to apply to multiple lenders.
Any business that has 500 or fewer employees (not including independent contractors) is eligible for a PPP loan. This includes non-profits, veterans’ organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors. Other small business concerns that operate in certain industries may have more than 500 employees if they otherwise meet SBA employee-based alternative size standards. The SBA’s affiliation rules that require a business to aggregate all of its parent companies, affiliates, subsidiaries, and other components in determining size requirements mostly still apply, but are waived for the following businesses:
Absolutely! Your application and associated documentation may be a bit different, but you are definitely eligible for PPP funding.
The SBA usually acts as a “lender of last resort”. This means that they require that you have exhausted outside options for financing before they step in and won’t step in to help if you are able to find other sources of financing. But for the PPP, the SBA is waiving this requirement.
Yes, but it’s important to note that you cannot use EIDL funding for the same purposes as a PPP loan. For additional information on the EIDL program as it relates to COVID-19, see our past article detailing the program.
Small businesses and sole proprietorships could submit PPP applications to approved starting on April 3, 2020. Independent contractors and those who are self-employed could submit applications starting April 10, 2020.
The deadline to apply is June 30th, 2020. However, we suggest applying for funding as soon as possible since funds are limited and the program is essentially first-come-first-served.
Applications can be submitted to any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be able to make PPP loans once they are approved and officially enrolled in the program. Check with your business banker to see if your institution is equipped to make these loans. Otherwise, consult the SBA website to find an approved lender.
Per SBA guidance and the letter of the law, lenders are prohibited from charging origination fees for PPP loans.
The standard application asks for a collection of identifying information as well as your requested loan amount. It also asks that you answer a number of questions and certifications of good faith that you meet certain conditions for eligibility and use of the funding. Business owners should review the application carefully to make sure that they understand the questions being asked, the certifications they are making, and that the form has been filled out correctly. Incorrectly filling out the form or making mistakes in answering the questions could result in massive delays in receiving funding.
Besides a completed application form, the application for a PPP loan requires that business owners provide documentation that verifies their calculated monthly payroll costs. There are small differences in the required documentation depending on the type of business that you run. We’ll delineate between these below. Corporations, General Partnerships, Multiple Member LLCs, and Nonprofits (for both seasonal and non-seasonal businesses):
Sole Proprietorships, Independent Contractors, Self-Employed Individuals, and Single-Member LLCs:
Unfortunately, since funds are limited, the answer is no. Lots of business owners in the first round of PPP funding were hung out to dry when the loan program quickly ran out of money. Because this is possible, we suggest that you apply as soon as possible.
PPP loans are forgiven as long as you maintain headcount or rehire your employees by June 30th, 2020, partially maintain wage levels, and use the loan proceeds on approved expenses. Remember, approved expenses include payroll costs, mortgage interest, rent payments, and utility costs over the eight-week period after the loan is made.
If you fail to meet the conditions described above, the amount that is forgiven will be reduced. Additionally, the SBA released guidance that stated: “The amount of principal that may be forgiven is equal to the sum of expenses for payroll, and existing interest payments on mortgages, rent payments, leases, and utility service agreements.” For example, if you reduce wages for employees by more than 25%, the amount forgiven will be reduced by the same amount. If you don’t rehire workers that you had laid off or your business otherwise has reduced in the number of employees, the amount forgiven will be reduced. If you use the funding for things that aren’t approved costs, the amount forgiven will be reduced. Basically, the idea is that the loan will be forgiven if your payroll situation (in terms of wages paid and the number of employees) is the same as it was “pre-COVID”.
To apply for loan forgiveness, you will submit a request to the lender that is servicing your PPP loan. With this request, you will have to include documentation that verifies that you’ve maintained staffing and wage levels and used the money for approved purposes. This will include:
Nope! If the full amount of the principal on your PPP loan is forgiven, the borrower is not responsible for any interest accrued over the eight-week period after receiving the loan.
The terms of the loan not forgiven will be different on a case-by-case basis. However, the maximum pay period is 10 years and interest rates are capped at 4%. The loan will also feature a 100% loan guarantee by the SBA.
