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Paycheck Protection Program (PPP) Loans: What you need to know

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A Paycheck Protection Program (PPP) loan is part of the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. The SBA classifies PPP loans as a 7(a) loan with $349 billion* designated for the program.  

The loans feature a streamlined application process, less documentation and fewer restrictions. If you’re considering such a loan for your business, it’s important to understand who does and doesn’t qualify, how much you can borrow, how forgiveness works and other key details.

* On 4/7/2020, the Treasury requested an additional $250 billion in funding; Congressional leadership is hoping to act this week.

 

Who Qualifies for a PPP Loan?

You are eligible if you are:

  • A small business with fewer than 500 employees
  • A small business that otherwise meets the SBA’s size standard
  • A 501(c)(3) with fewer than 500 employees
  • An individual who operates as a sole proprietor
  • An individual who operates as an independent contractor
  • An individual who is self-employed who regularly carries on any trade or business
  • A Tribal business concern that meets the SBA size standard
  • A 501(c)(19) Veterans Organization that meets the SBA size standard

In addition, some special rules may grant you eligibility:

  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

REMEMBER: The 500-employee threshold includes all employees: full-time, part-time, and any other status.

 

What are the Terms of a PPP Loan?

Borrowers can receive 2.5 times their average monthly payroll costs incurred 12 months before the date the loan is made.

The money can be used for payroll (no more than $100,000 annual salary per employee) as well as benefits (for example, paid sick leave and insurance premiums) and taxes on compensation.

Up to 25% of the loan may be used by the business to cover mortgage interest, rent, utilities and interest on pre-existing loans.

The covered expenses must be incurred from 2/15/2020 through 6/30/2020.

New businesses must have been in business before 2/15/2020.

Any portion of the loan that is not forgiven will carry a 1% interest rate and is due to be paid back within 2 years. However, payments for the first 6 months can be deferred. There’s no pre-payment penalty.

 

PPP Loan Forgiveness

A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:

  • Payroll costs (using the same definition of payroll costs used to determine eligibility)
  • Interest on the mortgage obligation incurred in the ordinary course of business
  • Rent on a leasing agreement
  • Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
  • For borrowers with tipped employees, additional wages paid to those employees

NOTE: The government is now advising that because of high participation, it is anticipated that no more than 25% of the forgiven amount may be used for non-payroll costs. The loan forgiveness cannot exceed the principal.

How could the forgiveness be reduced?

The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees.

 

When and How to Apply

On 4/3/2020 some community banks began accepting applications from small businesses and sole proprietorships.

Starting 4/10/2020, independent contractors and self-employed individuals may begin submitting applications.

The deadline for application submission is 6/30/2020.

Many lenders may limit eligibility to those businesses who have loans, checking accounts and other business with their institution. Borrowers can apply to any SBA-approved lender, including participating commercial banks and credit unions

The program also provides for waivers that would normally be applied to SBA loans. Those include waivers for fees charged to borrowers and lenders, as well as prepayment fees. A requirement that borrowers also have credit elsewhere is likewise being waived for this program. There are no requirements for collateral or personal guarantees.