In a matter of weeks during March 2020, a historically low unemployment rate of about 3.5% in the United States swung up to 4.4%, all thanks to COVID-19. That may sound like a small difference, but according to the U.S. Department of Labor, that 0.9% increase was the largest over-the-month rate increase since January 1975.
In real-person numbers: the number of unemployed persons went from 1.4 million to 7.1 million. Many of these Americans worked in small businesses that were forced to shutter their doors to help contain the virus. To offer some assistance, the government passed the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which included a section providing direct incentives to small businesses to keep their workers on the payroll. The Paycheck Protection Program (PPP) launched on April 3, used up its funds, and was restarted on April 27 after a new infusion of funds.
The Paycheck Protection Program: The Basics
The PPP was created to help small businesses keep their employees on their payroll during the COVID-19 crisis. Forgivable loans are available through an existing SBA lender or through any federally insured depository institution, federally insured credit union or Farm Credit System institution. Initially, the PPP authorized up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis, but that amount was quickly exhausted. While the additional $310 billion made available on April 27 aren’t exhausted yet, they are reportedly going fast.
Who can apply for PPP money?
Any business with 500 employees or fewer can apply for PPP, including sole proprietors, independent contractors, gig economy workers and those who are self-employed. According to the U.S. Senate Committee on Small Business and Entrepreneurship, that eligibility extends to businesses with over 500 employees that meet an applicable employee-based size standard through SBA and to businesses in food services that have fewer than 500 employees at each location. Tribal businesses, veteran organizations, nonprofits and independently owned franchises with under 500 employees are eligible as well.
What can PPP money be used for?
PPP funds can be used for employee paychecks, of course, but much more. Aside from covering payroll costs, they can also be used to pay the interest on mortgages, rent, leases and utility service agreements. Additionally, they can be used to cover other business expenses, like inventory, but that portion of the loan won’t be forgiven.
What constitutes “payroll costs”?
Payroll costs are everything that has to do with paying your employees including salary, wages, commissions and tips; these costs are capped at $100,000 annually for each employee. According to the U.S. Department of the Treasury, payroll costs also include:
- Vacation, parental, family, medical or sick leave
- Allowances for separation or dismissal
- Payment for group health care benefits including insurance premiums
- Retirement benefits
- State and local taxes assessed on compensation
Is there a cap? How much can be borrowed?
Small businesses can borrow 250% of their average monthly payroll expenses, up to $10 million in total. The government expects the amount borrowed to cover eight weeks of payroll and other debts; it can be applied to any time frame between February 15, 2020 and June 30, 2020. For seasonal businesses, expenses will be measured based on historical data from a 12 week-period beginning either February 15, 2019 or March 1, 2019.
Who is giving out PPP loans?
As mentioned above, the PPP program is administered through existing SBA lenders, banks or savings associations, credit unions or Farm Credit System institutions. This means it’s likely your bank or one in your area is already participating. There is no need to call or visit a government institution to apply—simply call your bank or an SBA-approved lender. The SBA also recommends contacting your local Small Business Development Center or Women’s Business Center to receive some guidance on lenders.
Is this loan forgiven?
Yes, to a point. The SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for only payroll, rent, mortgage interest or utilities. The U.S. Department of the Treasury anticipates that because of the high amount of businesses applying, no more than 25% of the forgiven amount may be for non-payroll costs. Loan payments can be deferred for six months.
What are some of the conditions for loan forgiveness?
The main purpose of the PPP is to allow you to keep your employees employed at their current base pay. The U.S. Senate Committee on Small Business and Entrepreneurship claims if you keep all of your employees, the entirety of the loan will be forgiven. If you have to lay off employees, the forgiveness will be reduced by the percentage you decreased employees; if you reduced staff by 25%, your forgiveness will be reduced by 25%. Also, if you had to lay off employees before applying for funding, you can still be forgiven for the full amount if you rehire your employees by June 30, 2020.
How is the PPP different from other loans?
The government has made it easier than normal for small businesses to take advantage of these funds. According to the U.S. Department of the Treasury, there are:
- No collateral requirements
- No prepayment penalties or fees
- No personal guarantee requirements
The SBA is also waiving its Credit Elsewhere requirement, so you don’t have to look first at other funds to cover payroll before applying for PPP.
In summary, any small business that can certify in good faith that they need these funds to stay open—and will use them to keep workers and maintain payroll, mortgage, lease and utility payments—can apply for funding, most of which may be forgiven.
Other Funding Options
Small businesses that missed out on the first round of PPP funds quickly felt the sting of that lost relief. While there is still hope of expanding the program, there are other stimulus options to research in the meantime, including:
- Economic Injury Disaster Loan Emergency Advance – U.S. small business owners can apply for an Economic Injury Disaster Loan advance of up to $10,000 to help cover losses of revenue due to COVID-19. Small businesses, those with fewer than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organizations or 501(c)(19) veterans’ organizations affected by COVID-19 are eligible for this program.
- SBA Express Bridge Loans – This loan allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 quickly. An SBA Express Bridge Loan covers the gap of time businesses experience while applying for a direct SBA Economic Injury Disaster Loan. If a small business has an urgent need for cash such as in the case of lost revenue due to COVID-19, they may qualify for an SBA Express Disaster Bridge Loan while waiting for decision and disbursement on an Economic Injury Disaster Loan.
- SBA Debt Relief – If you have existing debt, the SBA is stepping in to help. The SBA will automatically pay the principal, interest and fees of current 7(a), 504 and microloans for six months.The SBA will also automatically pay the principal, interest and fees of new 7(a), 504 and microloans issued prior to September 27, 2020.
- Main Street Lending Program – The Federal Reserve recently announced that it is implementing a program to support lending to small and mid-sized businesses that were in sound financial condition before the Covid-19 shutdown. Program terms are still being finalized. Once the program launches, interested parties will be able to apply through lenders.
PPP loans will have a 1.00% fixed interest rate, and repayable within two years from the loan date, although payments can be deferred for six months—and portions of the loan may be forgiven. Get all of your payroll documentation ready and download an application today.