In response to the COVID-19 outbreak, the Paycheck Protection Program (PPP) was signed into law on March 27, 2020. Shortly after, the SBA issued guidance with a sample application to help small business owners obtain a PPP loan. The following is what you need to know:
Who Can Get One?
Small businesses that were in business on or before February 15, 2020 with fewer than 500 employees are eligible for a PPP loan. These may include S Corps, C Corps, LLC’s, sole proprietorships, and independent contractors, along with select non-profits, veteran groups, and other organizations. Regardless of the organization type, applicants need to certify that their business has been economically impacted or that economic uncertainty makes the loan necessary as a result of the COVID-19 outbreak.
How Much Do You Get?
The size of the PPP loan to small businesses is determined on a case by case basis. With an eligibility cap of up to $10 million, the amount of the PPP loan is based upon its payroll costs. Payroll costs include wages, salary, commissions, state and local payroll taxes, group healthcare premiums, sick and family leave expenses, and retirement contributions. Any payroll costs exceeding $100,000.00 for any single individual is exempt from consideration. As for calculating the amount of the PPP loan, a small business will qualify for 2.5 times its average monthly payroll costs, which is calculated by multiplying the average of the prior 12 months of payroll costs by 2.5. For example, if the monthly average payroll of the prior 12 months is $40,000.00, the small business will qualify for a $100,000.00 PPP loan.
What Can You Spend It On?
PPP loan money can be spent on a variety of expenses, including payroll, mortgages, rent, utilities, and other debt obligations.
Interest Rates and Forgiveness?
PPP loans carry an interest rate of 0.5%, nearly interest-free, under U.S. Treasury guidance. While the law permits a maximum rate of 4% and the interest rate is subject to change, the current rate is 0.5% and any changes will not exceed 4%.
As for the term of the loan, U.S. Treasury guidance specifies a period life of two years with loan payment deferments through the first six months of the life of the loan. Additionally, there is no pre-payment penalty, so borrowers can repay or have the loan forgiven earlier, and there are no personal guarantees or collateral required.
Another key feature of the PPP program is loan forgiveness. A business is eligible to have all qualified expenses covered by the loan that are incurred within the first eight weeks after receiving the loan. These expenses include payroll, interest on mortgage debt, rent, and utilities. However, if the business reduces the number of full-time employees during this time frame or if payroll costs are reduced by 25% or more, then the eligible amount of loan forgiveness will be reduced. When applying for forgiveness, the bank that granted the loan will determine the eligibility and amount of forgiveness. Upon applying to the bank for forgiveness, the bank has 60 days to approve or deny the forgiveness application. Additionally, forgiven PPP loans will not be considered debt income forgiveness via a 1099-C.
Impact on Other Loan Qualifications
Upon receiving a PPP loan, a small business still qualifies for other SBA loans, it just may not exceed the total SBA loan threshold when the amount of all the loans is combined. Other loans under the Economic Injury Disaster Loan Program (EIDL) are also still fair game to any PPP loan beneficiaries. With a cap of $2 million per business, EIDL loans have low rates, longer repayment terms, and may be used to pay for a broader list of expenses than PPP loans. Although EIDL loans include grants of up to $10,000.00 that do not require repayment, EIDL loans generally do not include the same loan forgiveness benefits that PPP loans hold.
With over 30 million small business in the United States and only $350 billion of funds allocated to PPP loans nationwide, it is important to apply for a PPP loan quickly. Preferably, small business should collect payroll records for the prior 12 months, confer with the sample application above, and apply online to a FDIC-insured bank and/or banks that are SBA Preferred Lending Partners as soon as possible.
Trevett Cristo remains committed and available to its clients during this difficult time. Please do not hesitate to contact our firm if you have any questions or concerns. We are glad to provide any assistance that will increase the chances of your business surviving the COVID-19 financial crisis and thriving once we have weathered the storm.