How Does the PPP Loan Program Work?
When the COVID-19 pandemic set in, it was clear from the outset that small businesses across the nation were going to need considerable assistance in order to stay afloat and meet expenses, like payroll costs, as the country weathered the storm. In addition to actions taken by the federal government, state governments across the nation have taken unprecedented actions to curtail the spread of the virus and flatten the curve of infections. Naturally, these measures have in turn led to an unprecedentedly harsh environment for businesses. Not only are consumers losing a great deal of their discretionary income, but they have also been confined to their homes, unable to frequent the small businesses they typically patronize. This has put small businesses in an incredible cash flow pinch.
In order to provide this assistance, the United States Congress and the Trump administration passed the CARES Act, which included what was coined the Paycheck Protection Program (PPP). Under this program, which was enacted on March 27, 2020 and which is being run by the United States Treasury and the United States Small Business Administration (SBA), small businesses with under 500 individual employees have been able to apply for and receive loans backed by the federal government. These loans can be used to cover both payroll costs and non-payroll costs, such as utility payments, mortgage interest payments, and more. In a first of its kind program, if borrowers meet certain criteria, including keeping all of their employees on the payroll, then they are eligible to receive a loan forgiveness amount equal to as much as the full loan amount.
Up to this point in time, the U.S. Senate and House of Representatives have allocated funds in the amount of $660 billion, with loan amounts averaging around $113,228. Over 5,400 lenders are currently participating in the program.
Despite the strong reception of the program by small businesses across the nation (the first round of funding allocated for the program, $350 billion, was completely used up just 13 days after the programs launch) the program itself has been a source of a lot of confusion, especially for small business owners who aren’t well-versed in the loan process and the logistics that go into it.
Additionally, in response to the changing needs and demands of U.S. small business owners, a number of changes have been made to the program by Congress since its launch, leading to additional confusion.
In this article, we will seek to clarify the PPP loan process under the new rules and guidelines as set by the PPP Flexibility Act that Congress passed and President Trump signed into law on June 5, 2020. We will do this by covering the basic elements of the PPP loan program and explaining what the PPP loan coverage period is, which has been a point of confusion for many borrowers, in order to bring some clarity to the issues.
PPP Loan Basics
When is the Application Deadline?
Unlike the first round of allocated funds, the second round of funding provided by Congress for loan disbursement did not run out in just a few days. In fact, of the total amount of funds allocated to the program, there is still roughly $130 billion left for small businesses to claim.
As of now, PPP loan applications must be approved by June 30th, 2020. At this point in time, there is no indication that this deadline will be extended, so if your business hasn’t applied for a PPP loan disbursement and would like to, now is the time to do so. Remember, June 30th, 2020 is the date that loans must be approved by, not applied for by. The loan process can take well over a week depending on the individual business and the lending institution, so applying any time between June 20 and June 25 would be cutting it extremely close. If you apply any time after June 25, you can be all but sure that you will not receive a PPP loan. Be sure to reach out to the lender you will be applying with for an accurate estimate of the application processing time at their institution.
What Can PPP Loans Be Used For?
The PPP loans can be used for a myriad of different business expenses. These include eligible payroll costs, lease payments, rent obligations, mortgage obligations, and more.
However, while the loan can be used for all these different expenses, there are a number of guidelines that must be followed in order for your business to be eligible for loan forgiveness.
What Requirements Must My Business Satisfy In Order to Receive Loan Forgiveness?
The biggest source of confusion with the PPP loans has been how they will be forgiven and what businesses will be eligible for forgiveness.
At this point in time, businesses should be aware of the following stipulations, which they must satisfy in order to receive loan forgiveness:
– Businesses must maintain their existing full-time employees on their payroll without instituting a salary/hourly wage reduction of more than 25%. PPP funds cannot be used to meet payments for employees whose average annual salary is in excess of $100,000 of cash compensation. (i.e. if you pay an employee $10,000 a month for a total annual salary of $120,000, you can only use the funds to pay for $8,333.33 of that $10,000, since $8,333.33 times 12 is $100,000)
– Businesses must use at least 60% of the loan (this was originally set at 75%, however, it was recently changed) for payroll expenses (this includes wages/salary and payroll taxes, such as employer contributions to social security and medicare).
– Businesses can use the remaining 40% of funds for mortgage obligations, business rent, lease agreement obligations, and utilities, including electricity, gas, water, transportation, and Wi-Fi (funds used for expenses that fall outside of these categories will not be eligible for forgiveness).
– Funds eligible for forgiveness must be used during the covered period, which we will discuss later.
– Non-payroll funds can now be used for personal protective equipment (PPE).
Treasury Secretary Steven Mnuchin has noted that the total amount of loan forgiveness does not have to be the entire loan, and even if businesses fail to meet some of these guidelines, they may still be eligible for partial loan forgiveness as long as at least 60% of the total amount of loan forgiveness went to payroll costs.
For example, let’s say a small business received a loan under the PPP loan program for the amount of $100,000. Now let’s say that the PPP borrower only used $30,000 toward covering payroll expenses, including employee salaries and payroll taxes. In this scenario, the business could be eligible for $50,000 in loan forgiveness, since, of the forgiven $50,000, at least 60% (in this case $30,000) went to keeping employees on the payroll. This business would NOT be eligible for full loan forgiveness.
That said, how loan forgiveness calculation is going to work at the end of the day is still a little bit of a mystery, as messaging for the program has been inconsistent. As such, if you want to get a good portion of your loan forgiven, we highly recommend adhering as closely to the guidelines provided by the SBA for full loan forgiveness as possible, since doing so should make your business eligible for at least partial forgiveness.
Whatever portion of your PPP loan that is not forgiven will become a regular loan with a 1% interest rate and a five year duration (this was changed from a previous borrower’s pay period of 2 years).
It should be noted that even if your business will not be eligible for loan forgiveness, in part or in full, it may still be worthwhile for your small business to take out a PPP loan because of the incredibly low interest rate and 5 year maturity. You will not find a loan anywhere else with as low of an interest rate, especially because of the long payback period.
How Do I Get My PPP Loan Forgiven?
In order to have your loan forgiven, you must fill out a PPP loan forgiveness application. This form must be submitted to either the bank or lender that approved your initial PPP loan request and provided you with the funds.
If your business fails to submit a PPP loan forgiveness application, you will not receive loan forgiveness. Businesses must apply for PPP loan forgiveness within 10 months after the conclusion of their covered period. Again, failure to do so within the time frame will result in your business being ineligible for any forgiveness.
The form itself includes a step-by-step guide to calculating out your loan forgiveness eligibility, including PPP Schedule A, which enables employers to calculate their total payroll and compensation costs. The SBA has stated that it plans to release a modified PPP loan forgiveness application on Monday, June 15, 2020.
You should be preparing to fill out the PPP loan forgiveness application throughout the duration of your coverage period. This means that you should keep a detailed payroll report, record all of your contributions to employee health insurance and retirement plans, save all bank statements, and document your employee rosters. You should also have matching documents for your pre-COVID-19 reference period, which will allow for comparisons to be made between the two periods to see if you business has fulfilled its obligations for loan forgiveness.
You should keep similarly detailed documents for all non-payroll related expenses.
You should also keep documentation of all your interactions with employees, particularly if employees decide to resign or quit on account of the virus or if you have to fire employees for valid reasons. These documents will come in handy for proving your eligibility for exemptions to certain requirements that we will discuss later.
Overall, the key to maximizing your total loan forgiveness will be keeping detailed, complete, and accurate records. Hopefully your business is already doing this anyways, as it is a good habit to have!
If you have not yet applied for a PPP loan and are trying to decide whether or not to do so, it may be a good idea to fill out some of the sections of the PPP loan forgiveness schedule, particularly PPP Schedule A. Doing so will enable you to get a good idea of how the federal government will see and assess your business expenses, and it will give you a good idea of what sort of forgiveness your business will be eligible for. This will allow you to make a more informed decision as to whether or not a PPP loan is right for your business. This is a luxury that many early PPP applicants did not have, as at the time there were very few set guidelines as to how loan forgiveness eligibility would be evaluated and distributed.
Can I Have Both a PPP Loan and an EIDL Loan?
One of the big questions many small businesses have been wondering is whether or not they are eligible to have both an Economics Injury Disaster Loan (EIDL) and a PPP loan. The answer is yes, your business can have both of these loans. The regulation is that you cannot use the EIDL loan and the PPP loan for the same expenses.
For example, if a business is using their PPP loan for employee payroll and utilities, they cannot use any funds from an EIDL loan for either of these. They could, however, use an EIDL loan for rent obligations, mortgage obligations, or various other business expenses. Remember, EIDL loans do not come with a forgiveness option and they are much more difficult to qualify for than PPP loans, since PPP loans are given out on a first-come, first-serve basis largely regardless of qualifications, whereas EIDL loans will take into account your business’ creditworthiness, financials, and more.
PPP Flexibility Act
On June 3, 2020, Congress passed new rules for the PPP loan program and loan forgiveness.
This changed the coverage period, as we will discuss later. It also changed the proportion of eligible expenses, as previously mentioned, with payroll now only needing to account for 60% of the expenses that the funds are used for.
The act also changed the deadline to apply, the eligible expense categories, and the duration of non-forgiven loans, as previously noted.
Reducing Employees and Wages
The goal of the PPP loan program was to incentivize businesses to maintain their employee levels at their pre-COVID-19 wage levels by providing them the means to cover an extended payroll period during the COVID-19 pandemic. In doing so, the PPP loan program is supposed to serve not only as a lifeline for small businesses but also as a form of support for employees who would otherwise end up unemployed as a result of the pandemic. As such, the loan program is designed to prevent business owners from cutting their expenses by either reducing the number of full-time equivalent (FTE) employees and/or wages.
At the same time, Congress has implemented a number of “good faith” exemptions for small businesses who may not be able to meet all the requirements due to extenuating circumstances.
If you reduce your business’ full-time equivalent employees and/or wages, you can expect the following eligible forgiveness reductions:
Full-time equivalent employees are based on the number of hours being worked by employees a week, calculated based on the average number of hours a work week is for a full-time employee.
For example, if you have two employees working 20 hours a week, with a base full-time work week of 40 hours, you have the equivalent of one full-time employee.
If you business reduces the number of FTEs you employ, you can expect your loan forgiveness eligibility to decrease by the same percent which your FTE employees decreased by.
For example, if your business employees 20 FTE employees before COVID-19, and you cut the number of FTEs you employ to 16, you can expect your loan forgiveness eligibility amount to be decreased by 20%.
There are two exemptions to this rule. If you have attempted to rehire employees or restore their number of hours to their pre-COVID-19 reference period levels, and you have documented evidence that your employees have rejected these attempts, you will not be penalized. The other exemption would come into effect if you have to fire an employee or an employee resigns, but you again must have documented evidence of this.
Businesses will also be penalized for reducing the annual salary or wages of employees by more than 25% for individuals who make less than $100,000 a year.
If you reduce the salary of employees by more than 25% of the what they earned before the coronavirus pandemic, your loan forgiveness eligibility will be reduced by the dollar amount by which you reduced their wages.
For example, let’s say your business has a store manager. This employee’s pay is $80,000 a year. If you reduce the salary of this employee who makes $80,000 a year to $55,000 a year, your loan forgiveness eligibility amount will be reduced by $5,000.
Exemptions for wage reductions follow the same guidelines for exemptions from FTE reductions.
New PPP Loan Covered Period
As part of the PPP Flexibility Act that was passed by Congress, the PPP loan coverage period was extended. Under the new rules, the covered period is 24 weeks instead of the original eight-week time period.
The covered period refers to the period during which the PPP funds received and used are eligible for forgiveness. Any funds provided by a PPP loan that are retained beyond the coverage period and used at a later time will not be eligible for forgiveness.
The coverage period begins when your business receives the PPP funds from the lending institution, regardless of whether you are using the eight-week period of the 24-week period.
It is important to note that the longer coverage period means that employers will have to maintain their employees salaries and hours for a longer period of time.
If you received a PPP loan prior to the change in the rules, you can still elect to use the original 8-week period, since many businesses made payroll schedules and expense schedules in accordance with this original period.
Rehiring Window Extension
One of the details within the PPP loan program enables employers to reduce the number of employees during the coverage period and still be eligible for forgiveness. Originally, if employers rehired the employees they let go by June 30, 2020, they would again be eligible for full forgiveness.
Under the new rules passed by Congress, businesses can become eligible for full forgiveness if they rehire the employees that they let go by December 31, 2020.
There are exemptions to this as well.
1. If your business is unable to rehire the same individual employee you let go or a similar employee that was working as of February 15, 2020, and you have documentation to prove your inability to do so, you will be exempt.
2. If your business is unable to return to the equivalent level of business activity that your business was experiencing prior to February 15, 2020, on account of measures imposed by federal or state governments due to COVID-19, you we will also be exempt.
I Got an EIDL Loan. Can I Refinance it into a PPP Loan?
Many small businesses went ahead and got EIDL loans early on when the COVID-19 pandemic first hit. However, since that time, many have found themselves wanting to have a PPP loan instead, since EIDL loans do not offer a forgiveness option and come with a much higher rate of interest of 3.5% as opposed to the 1% being offered by PPP loans.
These small business owners are in luck. If you have used an EIDL loan for payroll expenses, you can refinance your EIDL loan with a PPP loan.
EIDL loans have been coming with up to $10,000 in advance grants, which small businesses do not
have to repay. If your business received such a grant when it applied for an EIDL loan, the amount that you received will be deducted from your total PPP loan forgiveness amount.
Where Can I Get More Information Relevant to My Specific Business?
The number of changes that have been made to the PPP loan program since it was first instated back in April have made it incredibly difficult for small businesses to keep track of all the different requirements and options available to their business.
If you have received a loan from a bank, you should have a contact from the bank who is in charge of working with you and managing your loan. This is a great person to reach out to and ask questions if you have any questions specific to your individual business. You can also read about more specifics on the SBA website.
Unfortunately, as we previously noted, because of the fluid nature of the details and rules surrounding the program, it is almost impossible to guarantee that your business will receive full PPP loan forgiveness. However, if you attempt to adhere to the loan forgiveness guidelines as close as possible, you can be sure that you will receive a substantial sum in forgiveness. That said, you should not plan on receiving the full amount of the loan in forgiveness. If you believe that loan will not be feasible for your business unless it is 100% forgiven, you should think very carefully before taking on a PPP loan.
As previously mentioned, detailed record keeping is key! The more detailed your records are, the better the case you will be able to present for loan forgiveness, particularly if you are not granted the amount of forgiveness you feel you are entitled to the first time around.
The Paycheck Protection Program (PPP) has been a huge help to thousands of small businesses across the nation. While the roll out has not been perfect, and many of the details have been confusing and vague, the program has still managed to provide over $400 billion to struggling businesses during the COVID-19 pandemic.
It is natural for many small business owners, especially those who do not have a lot of experience with loans, to feel a little overwhelmed by the number of requirements and logistics involved in the PPP program, especially since Congress has moved the targets a number of times since the program began back in April. In fact, there were a number of small businesses that gave their PPP loans back because they were worried about the different spending requirements and whether or not they would be eligible for a refund!
However, you should not let the logistics and requirements discourage you. If your business needs help to get through this difficult time, you should not hesitate to apply for a PPP loan. Even if your loan is not forgiven in full, you will not find a loan anywhere else with an interest rate of 1% and with a pay period of five years.
Times are tough, there is no doubt about it, and they may get even tougher. But with the proper planning and a strong loan like the ones being offered by the PPP program, you can make sure that your business is around for when better times return. And better times will return!
If you have already applied and received your money, then great! Now all you have to do is focus on the details of the forgiveness program so that you can maximize your total loan forgiveness.
Be sure to keep checking our Biz2Credit blog. We have been and will continue to post tons of information on the actions you and your small business can take to weather the COVID-19 storm. As always, we are invested in your success!