UPDATE 4/3/20: As of today, further discussions are taking place regarding the ability of several banks to begin processing PPP loans, and not all lenders are ready to do so, as of the original start date of 4/3/20. Also, the interest rate on these loans has been increased to 1.0% from 0.5%. Stay tuned for further updates.
This past Friday, President Trump signed a massive $2 trillion stimulus package aimed at helping to stop the bleeding caused by COVID-19—and stabilize the economy for both citizens and businesses. As expected, it’s a welcome sigh of relief to many in the small business community, who in no doubt, have been hit extra hard in the wake of closures, shelter-in-place restrictions, employee furloughs and more.
One of the biggest dilemmas facing small businesses right now is how to cover payroll, and luckily (and some might say, miraculously), the federal government has stepped up to help with this exact issue.
The Coronavirus Aid, Relief, and Economic Security Act (CARES) contains a $349 billion dollar lending program that will be administered by the Small Business Administration (SBA). Known as the Paycheck Protection Program (PPP), the application process begins this Friday, April 3, 2020.
As with any new legislation aimed at stimulating the economy, this can be highly complicated stuff. So here, we’ll be walking through some of the key elements that’ll hopefully help you formulate your next steps.
Breaking Down the PPP
What it is:
In a nutshell, the PPP is designed to incentivize small businesses to keep their employees on payroll. Aimed at businesses with 500 employees or less, the program provides up to $10 million in financing.
For qualifying businesses, loans will be issued without the need for collateral or personal guarantees (No, we’re not making this up!).
And…are you ready for this? The SBA may forgive these loans—meaning they don’t have to be paid back—if all employees are kept on payroll for at least eight weeks following the issuance of the loan, and if the cash is used exclusively for payroll, mortgage, rent, utilities or interest.
When you can apply:
According to the U.S. Treasury, small businesses and sole proprietorships can apply starting on April 3, 2020. Those who are self-employed, as well as independent contractors can apply on April 10, 2020 to cover payroll and other qualified expenses.
How Will PPP Loans Be Administered?
PPP loans will be issued by commercial banks and lenders who are considered to be qualified 7(a) lenders (that basically means they’ve been vetted by the SBA to administer the various types of 7(a) loans, which—in normal times—are designated for small businesses).
These lenders have been given the authority to offer and approve these loans.
What You’ll Need To Apply—and Where To Do So
You’ll need to complete the Paycheck Protection Program loan application and submit it along with your company’s payroll documentation to an approved lender by June 30, 2020.
You can apply through any participating federally insured bank, credit union, or Farm Credit System institution. You should consult with your local lending institution to ensure that it is participating in the program. You can also visit the Small Business Administration for a list of SBA lenders.
What Are the Qualifications?
Lenders offering PPP loans will be required to verify that an applicant was in business on February 15, 2020 with salaried employees or compensated independent contractors. What’s different about PPP loans when compared to other 7(a) loans is that applicants won’t have to put up collateral, as is required in other 7(a) situations. Even better, PPP loans will be backed and guaranteed by the SBA.
How Much You’ll Qualify For
Conceivably? Up to $10 million. But in reality, the amount your business would qualify for is based on your actual payroll expenses. The math works out to 2.5 times average payroll expenses per month, based on the past 12 months. Costs will then be capped at $100,000 per year for each employee, which means that anything over the first $100K of an employee’s salary can’t be included in calculating monthly payroll costs.
What Do Payroll Costs Consist Of?
According to the U.S. Treasury, payroll costs include:
- Salary, hourly wages, commissions and tips—for each employee earning $100K or less annually
- Employee benefits including:
- Parental, family, medical, or sick leave
- Separation or dismissal
- Group health care benefits and retirement benefits
- State and local taxes assessed on compensation
Interest Rates on the Loan
Interest rates are fixed at just 1.0%. Even without the forgiveness, that’s not a bad deal at all.
When You’d Have to Pay It Back
Payments will be deferred for the first six months, but interest will accrue over this time. The loans will be due to be paid back two years after being issued, and there will be no prepayment penalties.
How the Loan Forgiveness Provision Works
This is the best part of the program. To be clear, according to the U.S. Treasury, you could be eligible for forgiveness of the loan proceeds spent over the eight-week period following the date you first received the loan. To qualify, these expenditures would be strictly limited to the expenses listed above (payroll, mortgage, rent, utilities or interest).
It’s important to note that if your full-time staff decreases during this time, or if payroll costs go below your stated average, then the portion of the loan that might otherwise be eligible for forgiveness, would be reduced.
Getting Started with PPP
First off, please note that we at Shippo are not financial planners or financial consultants. Our aim is to help you make sense of these new developments, so that you can navigate the current situation more easily. If you do have further questions, please consult the SBA, your lender, or a certified financial professional.
That said, the CARES Act and more specifically, the Paycheck Protection Program will hopefully help provide the breathing room that so many small businesses are in need of right now.
Our advice to you: don’t wait. Be sure to apply immediately on April 3, 2020 as demand for this program will be massive.
To get ready in advance, download the application now. Best of luck!
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