15 things every small business owner should know about the Paycheck Protection Program
Right now, business owners across the U.S. are applying for the Paycheck Protection Program, a $349 billion initiative to help small businesses keep their staff employed. But, so far the program has been pretty confusing. Here are 15 questions every small business owner — from dentists and attorneys to real estate companies and restaurateurs — should know the answer to.
1. What is the PPP?
The Paycheck Protection Program is a component of the CARES Act, the federal stimulus package signed into law on March 27, 2020. It’s an amendment to the U.S. Small Business Administration’s 7(a) Loan Program. It’s dedicated to helping small businesses remain intact despite the economic impacts of COVID-19.
2. Am I eligible?
If you’ve been in business since February 15, 2020, have less than 500 direct or affiliated employees, and have been impacted by the economic uncertainty from COVID-19, you’re likely eligible.
3. How much money is available? What happens if it runs out?
$349 billion has been allocated for the program. Treasury Secretary Steven Mnuchin has said he will return to Congress to ask for additional funds if that amount is not enough.
4. How does it work?
The Paycheck Protection Program offers two-year term loans to small businesses to cover payroll and other expenses. If you spend all of the money as directed in the 8-week period after you receive a PPP loan, the loan is forgiven. There is no requirement for collateral, or credit component to this loan, which makes it incredibly unique. Companies with fewer than 500 direct or associated employees who have been directly impacted by the economic uncertainty of COVID-19 are eligible to apply.
5. What’s in the fine print?
You can borrow 2.5x monthly average qualifying payroll costs, up to $10 million. Companies must use at least 75% of the proceeds of the loan to cover direct payroll costs, and the additional 25% can be used to cover costs like rent, utilities, and mortgage payments. If the loan is utilized in line with the directed purposes and within the 8-week period, the full amount is forgivable and does not have to be repaid. Any amount that was not used during this period will be converted to a two-year year loan, at 1% interest.
6. How do I apply?
PPP loans are made by banks and non-bank lenders that are guaranteed by the Small Business Administration, an agency of the U.S. government.
That means they’re a bit complicated to apply for: You need to apply through a bank or a non-bank lender that has agreed to work with the SBA. You can start by reaching out to your local bank, or by filling out a pre-application through Rho Business Banking.
7. What about the disaster loans? Can I apply for that too?
The SBA’s Economic Injury Disaster Loan Program is a program to assist businesses that have been impacted by disasters including hurricanes, fires, and more. This program became available to small businesses across the U.S. impacted by COVID-19 when President Trump declared a state of national emergency. You can apply for an Economic Injury Disaster Loan (EIDL) directly through the SBA, here.
If you’ve already received an EIDL for COVID-19, you can generally refinance the EIDL into the PPP loan. However, you may not take out an EIDL and a PPP for the same purposes.
8. What exactly can I spend a PPP loan on?
Here’s the list from the SBA:
1.) Payroll costs.
2.) Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
3.) Mortgage interest payments (but not mortgage prepayments or principal payments.)
4.) Rent payments.
5.) Utility payments.
6.) Interest payments on any other debt obligations that were incurred before February 15, 2020.
7.) Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
9. How do I calculate the maximum amount of a PPP loan I can borrow?
You can borrow 2.5x monthly average qualifying payroll costs, up to $10 million.
Here’s how to calculate that number: First, total up payroll costs for employees in 2019. Then, subtract any compensation paid to an employee in excess of an annual salary of $100,000. (That’s the cap.) Then, divide that number by 12, to reach your average monthly payroll costs below the $100,000 cap. Finally, multiply that number by 2.5, and add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020.
That’s how much you can borrow. Further details can be found in the Q&A section here.
10. I only have one salaried employee, but I use a lot of contractors. Do they count in payroll costs?
No. Independent contractors have the ability to apply for a PPP loan on their own as early as April 10, so they do not count for purposes of a borrower’s PPP loan calculation (or loan forgiveness).
11. The number of employees I have fluctuates. How do I determine how many I can apply to PPP with?
Here’s the answer the SBA gave in its sample application form: “For purposes of calculating ‘Average Monthly Payroll,’ most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee. For seasonal businesses, the Applicant may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. For new businesses, average monthly payroll may be calculated using the time period from January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.”
12. What counts as payroll costs?
Payroll costs consist of: “Compensation to employees in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation,” according to the U.S. Treasury Department. Payroll costs are limited to employees based in the U.S.
13. I need a loan now. How long will it take for me to get the money?
It isn’t yet clear how long it will take for the federal stimulus money to reach the hands of business owners. Applications for EIDLs are open, and can be completed directly through the SBA. Some SBA lenders have begun processing PPP loans, but priority for new applications varies bank-by-bank.
14. If I borrow more than I end up needing to maintain payroll, do I pay interest on the rest of the loan amount?
Yes. If the full amount of the loan is not spent within the 8-week period after the loan is received, the lender will continue to process the unforgiven portion at an interest rate of 1%, with a term of 2 years.
15. Can you apply for PPP at multiple banks?
You cannot submit an application at multiple banks. However, you can sign up for wait lists and pre-apply at multiple banks and at bank networks like Rho. Once your application is signed and accepted by a bank or SBA lender you are only allowed to submit it once.
At Rho Business Banking, we’re working to connect small businesses with the lenders who can help them the quickest. We’ve received tens of millions of dollars in loan pre-applications from hundreds of small businesses across the country. Looking to connect with an SBA lender? Pre-apply with Rho here.
