The Paycheck Protection Program (PPP) is a loan designed to provide a direct incentive for small businesses to keep their workers on payroll. Borrowers may be eligible for PPP loan forgiveness.
SBA is currently offering PPP loans originated only by participating community financial institutions including Certified Development Companies (CDCs), SBA Microlenders, Community Development Financial Institutions (CDFIs), and Minority Depository Institutions (MDIs) until May 31, 2021 or until remaining funds are exhausted.
What are the Eligibility Requirements?
Any business who did not apply for PPP loans last time is eligible to apply this time. This includes 501(c)(6) nonprofits, local news media organizations or housing cooperatives.
Another piece of positive news is that there will be a second draw of PPP loans. This means that any business who received a PPP loan in 2020 now has the chance to apply for another PPP loan in 2021. There are stricter eligibility criteria to receive a second draw loan and these vary on a community by community basis. In general, if you experienced a drop in revenue by 25% there is a good chance you will qualify for a second PPP loan.
The bottom line is that all businesses should be applying for a PPP loan. It does not take much time to apply and it could result in a more secure foundation for your business.
How to Use a PPP Loan?
The main rule that must be followed for PPP loans is that 60% of the PPP loan needs to be spent on employee salaries, wages or benefits. You have a lot more flexibility with respect to the remaining 40% of the loan and can use that for just about whatever your business needs.
This includes expenses such as rent, interest, utilities, raw materials, supplier costs, computer related expenses and more.
However, it is important to note that you cannot use a PPP loan for salaries or wages of employees who earn over $100,000 per year.
How Much Money Can You Business Receive?
All PPP loans are capped at $2 million, but remember that if you are eligible for a second draw this means you can get another PPP loan of $2 million which brings your total to $4 million.
The maximum loan you will receive is 2.5 times your average monthly payroll in either 2019 or 2020. So if you average monthly payroll is $75,000, you will be eligible for a PPP loan of $187,500. If your business is in the food, restaurant, hotel or accommodation industry, then you can receive up to 3.5 times your monthly payroll.
How Much Does a PPP Loan Cost?
PPP loans are meant to be affordable and support small business. The loans charge an interest rate of 1%. There are no fees, no collateral and no personal guarantees required. The best part is that these PPP loans are easily forgiven and turned into a grant. This means that it’s possible to get a PPP loan that is basically free money from the government.
Your PPP loan will be forgiven as long as you use the money on one of the following expenses:
- Payroll, salary, wages, benefits and sick leave for employees who earn under $100,000 per year
- Mortgage interest or rent
- Utilities
- Supplier costs for any goods or products that are required to run your business such as raw materials, COGS or similar items
- Workplace safety expenditures
It is very important to keep accurate logs and records of these expenditures. Without accurate records, your business might not be able to get PPP loan forgiveness or your business might be at a greater risk of audit.
1. Find an eligible lender that is participating in PPP:
(Please note that not all community financial institutions are participating in PPP.)
2. Identify a loan:
- First Draw PPP loans: If you have not received a PPP loan before, First Draw PPP loans are available to you.
- Second Draw PPP loans: If you have previously received a PPP loan, certain businesses are eligible for a Second Draw PPP loan.
First Draw PPP Loan forgiveness terms
First Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
- Employee and compensation levels are maintained
- The loan proceeds are spent on payroll costs and other eligible expenses; and
- At least 60% of the proceeds are spent on payroll costs
Second Draw PPP Loan forgiveness terms
Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
- Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan
- The loan proceeds are spent on payroll costs and other eligible expenses; and
- At least 60% of the proceeds are spent on payroll costs
How and when to apply for loan forgiveness
A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.
Sources:
- https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-progra
- https://bench.co/blog/operations/paycheck-protection-program/
