3 Things Small Businesses and Nonprofits Need to Know About the CARES Act Paycheck Protection Program
Small businesses and nonprofits experiencing serious challenges due to the COVID-19 crisis can now apply to receive critical assistance through the Paycheck Protection Program (PPP), a $349 billion program established on March 27 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Determining how this new program might help you and your organization can be confusing and, in some cases, is still unclear.
We’re here to give you the facts, as well as some practical advice. Here are three things to know as you determine how to access financial assistance from the PPP:
What is the Paycheck Protection Plan (PPP)?
The CARES Act established the Paycheck Protection Plan (PPP) to give small businesses and nonprofits loan assistance, designating $349 billion to the Small Business Administration (SBA) to run the program. The loans’ structure incentivizes organizations to keep their employees on payroll during the COVID-19 crisis.
Due to revised eligibility, not just small businesses qualify for the PPP — all 501(c)(3) nonprofits and businesses with a maximum of 500 employees, as well as veteran’s organizations and tribal concerns, can apply for loans.
Key elements of PPP loans are:
- 100% guaranteed by the SBA
- 2-year terms with 1% interest
- A maximum loan amount of 2.5x the organization’s average monthly payroll costs or $10 million, whichever is the lesser amount
- Payment deferment for six months
- Possibility of loan forgiveness for loans used during an eight-week period towards payroll, mortgage, rent, and utility payments — with the forgiveness amount reduced by any decrease in salaries or number of full-time employees
These terms include some limitations – for example, payroll costs do not include compensation exceeding $100,000 per employee. To dive more deeply into the PPP’s features and how it is relevant for you, these resources provide additional detail:
- The Small Business Owner’s Guide to the CARES Act, U.S. Senate Committee on Small Business & Entrepreneurship
- How to Apply for Small Business Loans, Vox
- Understanding the Paycheck Protection Program in the CARES Act, Tax Foundation
- The Small Business Owner’s Guide to the CARES Act, The Hustle
How is the PPP different from other federal loan programs?
The PPP is part of the SBA’s 7(a) loan program, a longstanding federal program for small businesses. In this program — and, by extension, in the PPP — the SBA approves lenders, typically banks and credit unions, who then provide loans to small businesses. For this reason, applying for a PPP loan requires finding an SBA-approved lender rather than receiving loans from the SBA itself.
The key loan program to distinguish from the PPP is the Economic Injury Disaster Loan (EIDL) Program. This program provides loans directly from the SBA to businesses with less than 500 employees, nonprofits, and veterans organizations and can include a loan advance of up to $10,000 that does not need to be repaid. While the EIDL loan maximum is $2 million, the use of funds that it covers are broader than the PPP. You can apply for an EIDL loan through the SBA’s online portal, and it is possible to apply for both the PPP and the EIDL loans.
What steps should I be taking to apply for the PPP?
Demand for PPP loans has far exceeded expectations, and so it’s unclear when an organization that qualifies and has filled out an application form would be able to get a loan. We’ve been hearing in these early stages that banks are overwhelmingly offering PPP loans to their existing clients, so your ability to connect with an SBA-approved lender is likely limited.
Given this situation, these are our suggestions for what you can do:
- Contact someone at your bank or use your network to get on the phone with another bank in your region. Make sure you have a strong pitch about why your organization is essential. We have no visibility on how banks decide which applications to prioritize, so you need to find someone at the bank to give you insight.
- Contact your supporters (donors if you’re a nonprofit) and try to lock in bridge financing that you can repay when you receive the funds. Seek out additional loan and grant programs that you may qualify for; as a starting point, Duke’s Center for the Advancement of Social Entrepreneurship has pulled together a database of capital relief resources (grants, loans, and other cash equivalents) for entrepreneurs, nonprofits, and businesses.
- Call your landlord or other major service providers. Ask if they have applied for PPP. If you are being forced to not use your office, it seems logical that rent payments should be put on hold. The PPP will help fill the gap for your landlord.
- Seek business support. You have a lot on your plate — find a retired banker or accountant and ask for help. These people have skills and time to help, and there is nothing more satisfying than putting one’s skills to work in a time of need.
Please reach out and let us know what else we could share to be helpful and/or if you or your organization have investment or recoverable grant opportunities to help rebuild communities in response to the COVID-19 crisis.