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.
Why Was PPP Funding Increased?
When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was originally passed by the federal government to support American citizens and small businesses during the COVID-19 pandemic, one of the most popular programs was the Paycheck Protection Program (PPP), which is being run by the United States Treasury Department. Under this relief package, small businesses have been able to apply for loans through the United States Small Business Administration (SBA), which come with a low 1% interest rate and the possibility of full loan forgiveness if the business satisfies a number of requirements.
However, because these PPP loans were so popular, funding for them quickly ran out. For example, Wells Fargo, which originally allocated $10 billion toward the program, stopped accepting applications for the loan just a few days after the program began. By April 16, the program had completely run out of funds.
Though Republicans and Democrats were initially at odds over how much additional funding to provide, as well as what terms to place on the new funding, last week Congress was finally able to come to an agreement, and both the Senate and the House of Representatives passed the Paycheck Protection Program (PPP) Increase Act of 2020. The bill was then rushed to the White House where President Trump signed it shortly thereafter.
What are the Terms and Details of the New PPP Funding?
Under the new bill, appropriations for PPP loans have been raised from the original cap of $350 billion to $670 billion, over a 90% increase. With this new funding, businesses that had applied for PPP loans prior to the bill being passed, but which have yet to be approved, should now be able to get funding. If you have not yet applied for a PPP loan, time is of the essence and you should apply as soon as possible. The new funds are expected to run out even faster than the original funding allocation. We will discuss the application process a little later in the article, and cover some commonly asked questions.
Has Funding for Economic Injury Disaster Loans (EIDL) Been Increased?
The Economic Injury Disaster Loan program is a separate SBA program outside of the PPP program. While the EIDL program has not yet run out of the funding provided originally by the CARES Act, it is only a matter of time until they do. As such, the act just passed by Congress also provided an additional $50 billion for the program. In addition to this $50 billion, Congress also approved a $10 billion increase in the EIDL grants being offered, which are free $10,000 grants being given to businesses who apply for EIDL loans before they receive their actual loan funding. Businesses who end up being denied for the EIDL loan can still get the EIDL grant, which does not have to be repaid regardless of whether the business is approved or denied for the loan.
It is important to remember that these loans do not come with loan terms as favorable as their PPP counterparts, as they are not forgivable and have a significantly higher interest rate. However, this does not mean they cannot benefit your business, and they have already been supplied to thousands of businesses across the nation. Additionally, businesses are eligible to apply for and receive both EIDL PPP loans, however, the funds cannot be used for the same business expenses. For example, if you are using the PPP loan to meet payroll, which is what it is intended for, then you cannot use money received from an EIDL loan for payroll as well.
However, unlike PPP loans, EIDL loans offer long-term financing options of up to 30 years, with an interest rate of 3.75%. Businesses can also qualify for up to $10 million in funds from EIDL loans and payments can be deferred for up to a year. EIDL loans over $25,000 will require collateral of some form, and loans of over $200,000 will require a personal guarantee.
As a quick note, remember that when you apply for an EIDL loan you must opt-in to the $10,000 grant program. Failure to do so will result in your business being ineligible to receive the $10,000 in grant money, a mistake you definitely do not want to make.
How Do You Apply for a PPP Loan Before It Is Too Late?
Given the popularity of the PPP loan program, if you have not already applied, there is no way to guarantee that their will be enough funding left for your business. However, the faster you move, the better the chance that you will be able to take advantage of the program. In this next section, we will briefly go over PPP eligibility as well as the loan application process.
According to the United States Treasury, small businesses across the United States that have less than 500 employees total are eligible to receive funding through the PPP program. This includes businesses of all kinds, whether you are in construction, e-commerce, health care, real estate, etc. Furthermore, the program is also available for veteran organizations, independent contractors, and non-profits.
Under What Circumstances are Loans Forgiven?
In order to be eligible to have your PPP loan forgiven, your business must satisfy a series of requirements:
- At least 75% of the PPP loan funds forgiven must be used on payroll expenses.
- Only funds used for payroll costs, interest payments on mortgages, rent, and utilities will be forgiven. All other forms of expenses do not qualify.
- Businesses must keep all of their employees on the payroll for at least 8 weeks, and they cannot decrease their wages or salary during that time.
What if Part Of or All Of My Loan Is Not Forgiven?
In the circumstance that part of the funds or all of the funds provided by a PPP loan are not forgiven by the United States government, your business will be liable for repaying them. This unforgiven loan amount will carry a 1.0% interest rate, and are due to be paid back in full within two years. That said, the first six months of payments can be deferred if necessary. The amount can also be refinanced into an EIDL loan if your business does not yet have one.
These terms are extremely favorable, so even if your business does not have the full amount of the loan forgiven, the loan could still be a great opportunity to help your company survive until the reopening of the economy, particularly if you are located in a state, such as New York, that is currently under stay at home orders.
Remember, the government and/or your lender will not forgive your funds on their own accord. You must apply for the funds to be forgiven. At this point in time, the process for applying for loan forgiveness is still a little unclear. However, if you are approved for a loan, your lender will provide you with a point of contact who should be able to assist you with your loan, so they will be an important resource throughout the life of the loan.
PPP loans can also be prepaid, or paid in full before their due date, without any penalty.
How Can You Apply for a PPP Loan?
Small business owners can apply for PPP loans through SBA certified lenders. Right now, you can find lenders via the SBA’s PPP lender finder.
What Should I Avoid When Applying?
For starters, it may be wise at this point in time to avoid applying for the PPP loan through large banks. Naturally, when the PPP loan was first announced and the applications went live, large and well-known banks were the first to receive applications. As noted above, Wells Fargo ended their application period shortly after the program went live. Additionally, just a few days ago, J.P. Morgan Chase began urging small businesses to apply elsewhere, noting that there is a strong possibility of funds running out before they can service all of the applications they have received. In an email to small business owners who had applied for a PPP loan and whose applications were still in stage 1, they even urged that they consider withdrawing their application and applying elsewhere, even in light of added government stimulus. Since the loans are the same regardless of the financial institution you apply to, you should try to be strategic about the financial institution you apply to if you have not already submitted a loan application.
Alternative options include regional banks and credit unions. In fact, these lenders have been credited with having done a much better overall job of servicing their clients from the outset than the big banks. However, the government has allowed banks to give preference to standing and long-time customers. As a result, many smaller regional banks and credit unions are only accepting applications at this time from current customers. If you are a current customer of an institution that falls into those categories, then we suggest contacting them to see if they are still taking applications and if they expect to be able to service all of their applications.
Other options for PPP loans include PayPal, Intuit QuickBooks, and Square, all of which are offering PPP loans for current customers.
How Much Money Can Your Business Qualify For?
Businesses can currently qualify for the lesser of two amounts:
– $10 million
– 2.5 times your average monthly payroll
Do PPP Loans Require Collateral or a Personal Guarantee?
One of the best aspects of the PPP loan program is that it requires neither collateral nor a personal guarantee. The lack of a personal guarantee is particularly significant, since, historically, SBA loans have utilized personal guarantees to mitigate their risk when lending. Personal guarantees can put your personal finances on the line if your business defaults.
How Long Does the Application Process Take?
The initial loan application should take less than two and half hours. Obviously, you may need to provide more information to your potential lender after the fact, but the federal government has tried to make the process as easy for small businesses as possible. That said, small businesses have been experiencing confusion over the process, and the guidelines provided by the federal government have not be overly clear in certain cases. As such, it would be wise to keep checking in with the loan agent you will be assigned once you apply. They will be responsible for managing your application process.
Does It Matter If Your Business Has a Bad Credit Rating?
Obviously, whenever you are applying for a loan of any kind, it is not good to have a bad credit rating. However, PPP loans are not considering credit scores in a traditional manner. In fact, PPP loan applications are supposed to be considered on a first-come, first-serve basis, and while lenders have the right to give preference to long-standing customers, generally speaking loan applications should be considered in the order in which they are received. As such, credit score is not supposed to have an impact on your ability to get a loan. However, it is possible that it could decrease the amount of funding that your business will qualify for in the end.
Since there are no application fees associated with applying for a PPP loan, the worst that could happen is that you don’t receive the loan and you are out of the time you spent on the application process. This would simply leave you in the same place as you would be if you hadn’t applied in the first place. As such, if you need funding during this time, we recommend applying for a PPP loan regardless of the current condition of your business or credit rating.
What Should Small Businesses Who Fail to Get PPP Funding Do?
Given the demand for PPP loans and the limited amount of funding, if you have not already applied there is a strong possibility that you will not be able to get a loan through the program. That does not mean your business is out of luck. Currently, there are a number of different funding opportunities available for small businesses during the coronavirus pandemic.
Many state and local governments have begun activating different response programs. For example, Florida has activated an emergency bridge loan program to provide Florida small businesses with much needed cash flow.
You can also consider pursuing traditional loans. These will have higher interest rates, but if your small business needs cash now, it may be your only choice.
If you are just getting around to applying for a PPP loan and your business is in desperate need of cash flow, we highly recommend researching and considering other options during this time even as you are applying for the PPP loan, including the EIDL loan program and non-SBA programs. Getting the ball rolling for other funding opportunities will help guarantee that your business has a fallback if you are unable to secure PPP funding.
There are also a number of options for small businesses outside of loans which are being offered by the federal government. These include both payroll tax credits and payroll tax deferrals. It would be worthwhile for your business to look into both of these programs and see whether or not your small business qualifies.
Will There Be a Third Round of PPP Funding?
While it is certainly possible that the Paycheck Protection Program (PPP) could get a third round of funding, it is certainly not guaranteed. There was already a large amount of disagreement among Republicans and Democrats regarding the second round of funding, and the federal government has already spent well over $2 trillion dollars on coronavirus relief programs. So if you feel that your business really needs a PPP loan, now is the time to apply.
What Else Can Your Business Be Doing Outside of Applying for SBA Small Business Loans?
There are many different things your business can be doing right now to help weather the economic implications of the coronavirus pandemic. Your business could be taking advantage of free advertising opportunities, making a COVID-19 small business continuity plan, and using new free time to work on long-term planning and goals. Whatever you do, don’t become idle. There is still plenty to do.
At Biz2Credit, we are dedicated to providing small businesses relevant and timely information to help them mitigate the impact of the COVID-19 pandemic. So, remember to keep checking our Biz2Credit Blog. We have already posted, and will continue to post, new information that is relevant to small businesses as the situation develops.
Overall, a PPP loan could be just what your business needs to help it survive these hard times. However, we can’t stress enough that time is now of the essence for applying for a PPP loan. Funding is extremely limited given the demand, and it is only a matter of time until the new round of funding runs out. Remember, just because another $320 billion has been allocated to the program does not mean that there is now another $320 billion up for grabs. Much of this money will go to applications that were submitted before the new funding was allocated, since many lenders have a backlog of applications. That means the sum of new money available for small businesses that have not yet applied is much smaller than the $320 billion that has been allocated to the program.
Lastly, even if you don’t get a PPP loan, it is not the end of the world. There are a number of other opportunities that will enable you to keep your business afloat so that when good times return – and they will – your small business will be able to hit the ground running. So, stay diligent and keep researching and learning during the coming weeks.