What is a PPP Loan?
The Payment Protection Program (PPP) is a loan introduced by the U.S. Small Business Administration (SBA) intended to assist small businesses in keeping workers on the payroll during the period of mass shutdowns and reduced operation brought upon by the COVID-19 pandemic.
The program allows companies with fewer than 500 workers to apply for loans for up to 2.5 times their average monthly payroll costs (up to $10 million) to cover two months of payroll and other expenses. If PPP loan funds are used according to SBA guidelines, businesses are eligible for loan forgiveness, otherwise, they must pay the loan off at a 1% interest rate within 2 years.
The current deadline for businesses applying for a PPP loan is June 30, 2020. Loans are given on a first-come, first-serve basis, so apply as soon as possible.
How were PPP loans introduced? How much money has been allotted for PPP loans?
PPP loans were introduced as part of the CARES Act, a massive Coronavirus relief stimulus package signed into law by President Trump on March 27, 2020. Initially, $349 billion was allotted for PPP loans under the law. However, that amount was exhausted after two weeks, prompting the release of another $310 billion into the PPP loan fund by Congress as part of an additional stimulus bill.
As of May 19, 2020, just over $100 billion remains of the second round of Paycheck Protection Program funding, and businesses can still apply for PPP loans.
Who can apply for a PPP loan?
In order to qualify for a PPP loan, a business must have existed before February 15th, 2020.
According to the SBA, the following can apply for PPP loans:
- Small businesses with 500 or fewer employees, or those that otherwise qualify as a small business according to SBA industry standards
- 501(C)3) non-profit organizations and 501(c)(19) veteran organizations with 500 or fewer employees or those with 500 employees or more that meet SBA industry size standards
- Businesses in the restaurants and hospitality industry that have 500 or fewer employees per location
- Tribal business entities that meet SBA qualifications
- Self-employed individuals, independent contractors, and sole proprietors who file Schedule C on Form 1040 IRS
Which businesses are ineligible to file for a PPP loan?
The following businesses are, for the most part, not allowed to apply for a PPP loan:
- Private equity firms and hedge funds
- Public companies with large market values
- Illegal businesses
- Gambling businesses
- Sex businesses
- Farms and ranches
What are the terms of a PPP loan?
- Eligible businesses can receive 2.5 times the amount of their average monthly payroll costs from the last 12 months. However, $10 million is the largest amount any business can borrow. Use this document provided by the SBA in order to calculate the estimated size of your PPP loan.
- A PPP loan has a 1% interest rate and a maturity of 2 years (for any portion of the loan that is not forgiven).
- Businesses are required to keep 75% of their original payroll.
- Payments on the loan will be deferred for 6 months.
- PPP loans can be fully forgiven if a business uses the funds appropriately (see Loan Forgiveness section below)
How do I apply for a PPP loan?
Borrowers must apply for a PPP loan through an SBA-approved lender, most of which are commercial banks and credit unions. The following is the process for applying for a Paycheck Protection Program (PPP) loan:
- Download and complete a Paycheck Protection Program Borrower Application (Spanish version). This is just a sample application, but it is useful as it contains virtually all of the questions that a lender will ask a borrower during the application process.
- Prepare the necessary documents needed in order to apply for a PPP loan (just an example as specific requirements may vary):
- General business information
- Business and owner contact information
- Proof of ownership
- Government-issued photo IDs for all business owners with a share of the business over 20%
- Articles of incorporation or organization (if applicable)
- Proof that the business is in Good Standing and Active
- Full-time employee details and payroll information
- Proof of payroll, such as copies of 2019 tax forms
- Voided check with your business’s account and routing number
- Completed SBA PPP Borrower application
- Apply for a PPP loan with an SBA-approved lender. Here’s a list of SBA-approved PPP lenders by state. Keep your completed SBA Borrower Application handy as many of the questions on the official application will be the same as those on the sample application.
- After a PPP loan application is submitted to a lender, they will submit it to the SBA for final approval.
How will I know my PPP loan has been approved?
Right now, it’s important to keep in contact with your lender to keep tabs on the status of your PPP loan application, despite the difficulty involved. Due to a large number of PPP loan applications and a high call volume stemming from other bank customer concerns during the COVID-19 pandemic, lenders may not be as prompt with responding to borrowers as during normal times. On top of it, applications must be submitted to the SBA for final approval. As a result, businesses may be rejected for loans without even receiving notification.
Although it can be difficult to remain in contact with banks during this period, the effort is worth it. However, once a business is approved for a PPP loan, they will likely be notified promptly by the lender.
What can a PPP loan be used for?
In order for a PPP loan to be forgiven, borrowers must use the funds within the eight-week period following their dispersal (or beginning with the first payroll period after dispersal) according to SBA guidelines.
Here’s what PPP loans can be used for:
- 75% of the loan funds must go to payroll costs, which includes:
- Wages, salary, commissions, or tips
- State and local compensation taxes
- Employment benefits such as vacation costs, parental, sick, or medical leave, group health care benefits, and retirement benefits
- 25% of the loan funds may go to other business costs, including:
- Mortgage payments
- Meeting other financial obligations, such as paying contractors
How can my business qualify for PPP Loan Forgiveness?
If businesses use PPP loan funds properly during the “covered period” according to SBA guidelines, they are entitled to full forgiveness of the loan amount. Under these circumstances, the PPP loan essentially becomes a small business grant.
The general guidelines for PPP loan forgiveness are as follows: Businesses must use at least 75% of the loan for payroll costs and 25% or less for other costs while fulfilling two basic criteria:
- Full-time employee headcount must meet 2019 average monthly levels or levels from the past 12 months
- Employers must not reduce wages or salaries.
If a business reduces its employee headcount or lowers wages or salaries, then the amount of the loan that is forgiven will be reduced accordingly.
Additionally, the SBA has accounted for the initial period of the Coronavirus pandemic, when many employees were let go, or had their hours/pay reduced before the introduction of the Paycheck Protection Program by giving businesses until June 30th to restaff their businesses to meet the initial qualifications.
How to apply for PPP Loan Forgiveness
The SBA recently released a modified Payment Protection Program (PPP) loan forgiveness application. Borrowers should complete the application and submit it to their PPP lender in order to apply for loan forgiveness.
The new application contains some alterations to the initial loan forgiveness terms, including:
- Borrowers are no longer obligated to report non-payroll costs if they won’t be included in the forgiveness amount. This can help businesses keep within the required 25% for non-payroll costs.
- The SBA is more lenient about employees that were let go or fired before the PPP loan became available.
- Borrowers can begin with their first initial pay period following the loan dispersal, rather than the eight weeks immediately following the disbursement of loan funds.
Problems with PPP loans
While on paper, the Paycheck Protection Program may seem like a generous initiative with its lenient requirements and the potential for borrowers to qualify for full loan forgiveness. However, unequal distribution of funding, delays in application processing, and mass confusion over forgiveness terms have plagued PPP loans from the outset.
The following are some of the biggest issues people have had with the small business loan program.
Large public companies received millions in funds while small businesses struggled to access PPP loans.
Following the initial rollout of the program, many large public companies in the restaurants and hospitality industry, including Steak Shack and Potbelly, obtained millions in PPP loans by taking advantage of the stipulation that accommodation and food services sector businesses with less than 500 employees per location were eligible to receive funding, despite the fact that these companies have many thousands of employees, overall.
They accepted millions in loan funds while many smaller businesses experienced difficulty having their applications processed, altogether, and critics claimed that major lenders like J.P Morgan Chase and Bank of America gave priority to large businesses over small ones. The rapid depletion of the first round of PPP funding was blamed on this phenomenon.
However, in the following weeks, Treasury Secretary Steven Mnuchin announced that all loans above $2 million would be audited. Fearing reprisal, many large restaurant businesses, including Steak Shack, have returned their PPP loans, with the result being that the average loan amount has dropped significantly during the second round of funding.
Self-employed individuals were forced to wait one week after the PPP rollout, and many missed out on funding, initially.
In line with the first issue is the fact that, while many large companies were receiving generous PPP loans, self-employed small business owners were barred from applying for loans for the entire first week following the program’s launch.
In this NPR story, small business owner Trish Pugh claims that she wasn’t allowed to apply for a PPP loan for the first week of the program and then experienced confusion over which paperwork must be submitted. By the time she finally got her application through, PPP funds had run dry, and her company received a modest amount of funding which covered just 13 days of costs and payroll for her small trucking company. Although Pugh has since secured a $10,000 loan during the second round of funding, her story reflects the experiences of many frustrated entrepreneurs around the country.
E-Tran, the SBA’s loan processing site, experienced technical issues that caused many banks to build up a long backlog of applications.
E-Tran’s inability to deal with the volume of applications from the outset brought about a number of shutdowns throughout the initial round of PPP funding, resulting in backlogs of unreviewed applications numbering in the thousands for many banks around the country. This situation frustrated banks and potential borrowers, alike.
For hourly employees, taking advantage of CARES Act expanded unemployment benefits is more enticing than continuing to work for their former employer.
During the early stages of the COVID-19 pandemic, many businesses were forced to let large parts of their workforces go amid mass shutdowns of “nonessential” businesses. This happened before the introduction of the Paycheck Protection Program. Consequently, the PPP loan requirement that businesses must retain their previous workforce has been difficult for many to fulfill, especially since many former employees that are receiving more in unemployment benefits than they did while working have declined offers to return to their former positions.
The inability for many small businesses to reclaim their original, pre-COVID workforce has rendered them either ineligible for PPP funding, or potential issues in meeting the program’s loan forgiveness terms.
Businesses have experienced a number of challenges in applying for PPP loan forgiveness.
In addition to the fact that many businesses are struggling to maintain their pre-pandemic employment figures, PPP loan forgiveness poses other issues, as well.
Business owners are confused about how to calculate the forgiveness amount, have struggled to achieve the proper ratio of 75% for payroll and 25% for other costs, or are unable to properly track their expenses to a satisfactory degree. The warning from Treasury Secretary Mnuchin that businesses failing to properly meet the program’s terms would be “criminally liable” have only stoked worries about the consequences of accidental misuse of PPP funding, or making a mistake when applying for forgiveness.
While the recent release of new guidelines on PPP loan forgiveness has cleared things up and assuaged fears to some degree, many business owners remained concerned about the potential outcome for their businesses if they make an unintended error.
Will there be another round of PPP loans or a replacement program?
With the second round of PPP funding currently underway, there has been discussion about whether a 3rd round is necessary, or if a replacement program should be created offering aid to small businesses during the COVID-19 pandemic.
However, with second-round PPP funds still available, there are no concrete plans to issue a third round of funds, nor to establish a replacement program. One reason for this is that demand for PPP loans has gone down significantly, and the average loan amount has dropped, as well. The average PPP loan during the first round was $206,000 and funds ran out in two weeks, while the average second-round PPP loan is less than half of that amount.
Find more information on COVID-19 Reopening Guide for Small Businesses here.
To sum it up
In total, Congress has allocated $669 billion for Paycheck Protection Program loans during two rounds of funding, yet the program has faced its share of difficulties: there has been significant confusion over PPP loan terms, and many businesses experienced difficulty in securing a loan altogether due to the limited funds available and the alleged prioritization of large public companies. However, the situation has improved significantly in recent weeks, and small business owners should be able to apply for a PPP loan from an approved lender without significant difficulty.
If you think your business stands to gain from applying for a PPP loan, act now, as time is running out and funds will only be available for a limited time. Just be warned: if you anticipate problems meeting PPP loan forgiveness qualifications, the loan may become more of a burden than a boon.