The Paycheck Protection Program (PPP) is a new loan from the Small Business Administration (SBA) intended to help businesses meet payroll costs. The loan can be forgiven and converted effectively into a grant for up to eight weeks of qualified expenses. We’ve collected questions from around the web and on Facebook and provided answers to the most frequently asked questions (FAQs) about the Paycheck Protection Program loan.
Congress authorized an additional $320 billion in funding for the Paycheck Protection Program. Similar to the last round of funding, this allocation will likely be depleted quickly. We recommend submitting an application through Lendio, a broker that has handled thousands of applications in the previous round.
General
Is this a loan or a grant?
The Paycheck Protection Program is a loan that can be converted into a grant. Borrowers that spend loan proceeds on qualifying expenses like payroll, utilities, and rent or mortgage interest, can get up to eight weeks of those expenses forgiven. Otherwise, the loan has a two-year term and has a 1% interest rate.
What is the difference between a grant and a loan?
A grant does not need to be repaid, unlike a loan, which has a repayment term. While there isn’t an established name for a loan that can become a grant like the Paycheck Protection Program, some lenders have taken to calling it a “groan.”
What can I do right now?
While there have been some holdups in issuing funds, multiple SBA lenders like Ready Capital and brokers like Lendio are accepting applications. Funds will be available on a first-come, first-served basis, so submitting a completed application sooner can be beneficial.
How does the SBA guarantee loans?
The SBA offers to repay lenders a portion of the loan amount if a borrower defaults, reducing the risk that a lender must take and increasing access to capital. The SBA usually guarantees up to 70% of the loan amount; however, in the case of the Paycheck Protection Program loan, it is guaranteeing the full 100%.
Qualifications
Is there a requirement to look for traditional financing options?
Unlike other SBA loans, there is no requirement that you look for traditional financing options first or that you cannot find credit elsewhere. This was specifically outlined by the SBA, making these loans more accessible than traditional SBA loans.
Does a business need more than one employee to qualify?
A business doesn’t need more than one employee to qualify. Sole proprietors and independent contractors can qualify for the program. While the SBA has not released official rules related to these parties, some proof of income or past earnings will likely be required.
Can a franchise qualify for the loan?
An individual franchise owner is considered a separate entity from the larger franchisor in this case, qualifying it for the program. Franchise owners can apply like other small business owners and can get loan forgiveness for the portion used for payroll.
Who qualifies for this loan?
Businesses that qualify for funding must:
- Be small businesses, nonprofits, veterans organizations, or tribal businesses
- Employ fewer than 500 employees
- Fit the definition of size standards set by the SBA; for example, a restaurant must have less than $8 million in annual revenue and convenience store chains must have fewer than 500 employees
- Be operating as of Feb. 15, 2020
- Pay payroll taxes
- Submit a Form 1099-MISC if they have paid contractors
In addition to these criteria, the act also allows financing for:
- Sole proprietors and self-employed individuals
- Businesses that fit under NAICS code 72, with 500 or fewer employees per location
- Franchises
- Businesses receiving financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.
Can businesses that laid off employees still qualify?
A business that laid off employees can still qualify for funding, both for the remaining employees and for rehiring the employees that were laid off. Whether you choose to rehire those employees is up to you. However, the loan can be used to cover the entire cost of payroll for eight weeks.
Are certain businesses or borrowers disqualified?
The SBA has not released specific restrictions for borrowers and businesses. However, some ex-felons may not be able to qualify. Businesses can be too large by SBA size standards, whether measured by revenue or number of employees. In most cases, the limitations take effect around $10 million in annual revenue or more than 500 employees, but the exact cutoff varies for different industries.
Can a business owner that draws from the business but doesn’t get a W-2 qualify?
There is no clear answer to this question at this time. If a business owner pays payroll taxes on the draws made from the business, then that business owner may be able to qualify. However, we are eagerly awaiting further information from the SBA on how this would work. In the meantime, it may make more sense to apply for an Economic Injury Disaster Loan (EIDL).
Are gig economy workers eligible to apply?
Gig economy workers are considered self-employed and can, therefore, qualify for funding. The SBA has not released specific rules for determining income and the size of the loan and forgiveness. As these rules become available, we will update this guide.
What types of businesses are eligible for funding?
Small businesses, nonprofit organizations, tribal organizations, and veterans organizations are all eligible for funding under the Paycheck Protection Program.
Can a business with no 2019 income tax returns qualify?
A business with no 2019 income tax returns can qualify based on the payroll costs of the first two months of 2020. If those taxes have not been filed yet, then small business owners can provide alternative proof of payroll costs via bank statements and previous filings.
Estimating Funding
What do payroll costs include?
Payroll costs include:
- Salary, wages, commission, or similar compensation
- Cash or tip equivalent
- Vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Provisions of group healthcare benefits, including insurance premiums
- Retirement benefits
- State or local tax that’s part of employee compensation
Is paid sick leave covered by the Paycheck Protection Program?
Sick leave is covered by the program as well as vacation, parental, family, and medical leave.
How much can small businesses borrow?
A small business can borrow up to $10 million or 2.5 times the average monthly payroll over the last year, whichever is lower. There is a further restriction as 75% of the loan must be used for payroll, with the remainder available for utilities, rent, and mortgage interest.
Are independent contractors considered employees?
Independent contractors are not considered employees, according to the SBA. The reasoning is that independent contractors will be able to apply on their own for the program.
What expenses can be included in utilities?
There is no specific guidance around utility expenses from the SBA, leading us to believe that lenders will judge these expenses on a case-by-case basis.
Expect utilities to include:
- Electricity
- Water
- Sewage
- Garbage services
- Cable
- Internet
- Phones
How can I calculate the best amount to borrow?
The best way to calculate a borrowing amount is by estimating payroll and utility costs for eight weeks. It’s usually better to ask for a little more since you can always borrow less than is offered. Because the loan has a short repayment term, it isn’t the most viable option for refinancing other debt.
For employees earning over $100,000, are they completely excluded or only for earned income over $100,000?
In the payroll calculation, employees earning more than $100,000 are capped at $100,000. This means that if you have five employees earning $200,000 each, then when calculating annual payroll, you can only include up to $100,000 per employee or $500,000 and have it forgiven.
Is the salary of a business owner covered by the PPP as well?
The Paycheck Protection Program covers the salary of a business owner.
Costs
What is the interest rate for the loan?
The interest rate for all borrowers is 1%.
Is there a payment deferment period?
Loan payments are deferred for six months for all borrowers.
Does the loan accrue interest?
The loan does accrue interest during deferment. However, the overall cost is relatively low. For a $100,000 loan deferred for six months, the total interest charges would be $500.
Are there any fees associated with the loan?
The SBA will compensate lenders and anyone preparing an application on your behalf. There are no fees associated with the loan at all.
Can someone charge a fee for preparing the loan?
Absolutely not. The SBA specifically prohibits anyone from charging fees in connection with these loans.
Terms
When is the loan due?
Every loan issued will have a term of two years.
Can the loan be repaid sooner?
The loan can be repaid at any time.
Is there a prepayment penalty for the loan?
There is no prepayment penalty associated with the loan.
When is the first payment due?
The first payment is due seven months after the loan is issued, immediately after the six-month deferral period is complete.
Conditions
Does this loan require collateral?
The loan offered under the Paycheck Protection Program does not require collateral.
Does this loan require a personal guarantee?
This loan does not require a personal guarantee.
Is there a personal or business credit check?
There is no minimum credit score requirement. However, to comply with certain regulations, banks may run a personal or business credit check.
Are Paycheck Protection Program loans nonrecourse?
These loans are intercourse. However, this may change with the portion of the loan that remains after forgiveness. For the most accurate answer to this question, consult your lender.
Providers
What banks are offering PPP loans?
There are multiple banks, including Wells Fargo and Bank of America, offering PPP loans.
Are there other places where businesses can apply for a PPP loan?
Brokers like Lendio and South End Capital are working to package loans and handle the incoming volume on behalf of banks. There are also qualified nonbank institutions like Ready Capital, the 12th largest SBA lender in the country.
Will banks provide same-day funding?
There has been some misinformation about this process, and we have confirmed with numerous banks that they will not be offering same-day funding.
Application
When do applications open?
Officially, applications opened on April 3, 2020. However, the SBA has not started processing applications yet, so no one has received funding.
Where are the applications available?
Applications are available online with participating lenders. While lenders are signing on one-by-one we recommend working with a nonbank SBA lender or a loan broker for your application. Our top two recommendations are Ready Capital and Lendio.
What documents or information does the application require?
The documents required to apply include:
- IRS Form 940
- IRS Form 941
- Articles of incorporation
- Bylaws/operating agreement
- Color copy of all owners’ driver’s licenses
- Payroll summary report or employee pay stubs
- Most recent filing of IRS Form 1099-MISC
- Trailing 12-month profit and loss (P&L) statement
- Most recent business mortgage or rent statements
- Most recent business utility bills
How long will the program be available to small businesses?
The CARES Act currently indicates that the program will run through June 30, 2020.
Can a business apply for more than one PPP loan?
A business can apply for more than one loan but can only sign one loan note and accept a single loan. A business might apply with multiple lenders to increase their chances of getting an application approved.
Is there a deadline to apply for the loan?
The current deadline to apply for the loan is June 30, 2020. However, small business owners should apply sooner because the program has a limited amount of funds.
Can someone help me apply for the loan?
Attorneys, accountants, consultants, and brokers are all authorized to help with the loan application. However, none of these entities should charge a small business owner a fee for their services.
How many quarters of IRS form 940/941 need to be submitted?
While some lenders are considering the most recent quarter sufficient, it’s best to have a full year’s worth of IRS forms 940 and 941 to submit when applying for the loan. In any case, if you don’t submit enough information, your lender will reach out to you with a request.
Funding Speed
How quickly will funds be available?
We’ve seen estimates from a few days to as long as 60 days for funding to become available. This leads us to believe that these are mostly educated guesses by lenders and that no one has the right answer yet. Most of the holdup in the process is now related to getting the SBA to process these loans.
Post Funding
What can the proceeds of the loans be spent on?
Small business owners can use the loan to pay:
- Payroll costs, including taxes
- Insurance premiums and costs associated with healthcare benefits during periods of paid sick, medical, or family leaves
- Employee salaries, commissions, or similar compensations
- Mortgage interest
- Rent
- Utilities
- Interest on debt incurred before the covered period
When do loan payments start?
Loan payments start after the first six months of deferred payments.
Can a business rehire employees it laid off?
A business can rehire employees and receive forgiveness for their payroll costs for up to eight weeks.
Can a business fire employees after it gets the loan?
The loan does not prevent business owners from firing employees. However, this will reduce the amount of the loan that can be forgiven.
What’s the best way to document payroll?
The best way to document payroll is by tracking expenses in accounting software and bank statements. The most accessible accounting software to set up is QuickBooks.
Loan Forgiveness
How much of the loan will the SBA forgive?
The SBA will forgive up to eight weeks of qualifying expenses.
What is the process to request loan forgiveness?
While there is no formal process yet, lenders have assured us they will be reaching out to help small business owners submit forgiveness requests.
Will loan forgiveness be automatic?
So far, no lenders have revealed a system for automatic loan forgiveness. If a lender or the SBA offers such a program, we will update readers immediately.
For an unforgiven portion of the loan, what is the monthly payment?
To calculate the payments, you can use our spreadsheet. Alternatively, you can calculate payments using the =PMT function in Excel or Google sheets. Remember to use 18 months for the term and to divide the 1% interest rate by 12 when inputting it into the function.
Is the forgiven portion of the loan taxable as income?
While debt forgiveness is usually considered taxable income, in the case of the Paycheck Protection Program, it will not be taxed.
Is federal withholding of Social Security and Medicare payments from payroll included in forgiveness?
All expenses that are part of payroll and are not otherwise reduced with tax credits can be forgiven.
Other Loans
Is the PPP loan the same as a disaster assistance loan?
The Paycheck Protection Program loan is not the same as the EIDL. However, both are intended to help small businesses recover from the economic impact of COVID-19. The PPP loan can be forgiven and has a short repayment period, whereas the EIDL cannot be forgiven but has a much longer repayment period.
Can a business apply for both a disaster loan and PPP loan?
A business can apply for both loans and even receive forgiveness for a portion of the disaster loan that is used for payroll. However, we recommend that most businesses that need money for payroll apply for the PPP loan. If your business needs a larger loan and long-term assistance, then the disaster loan is a better solution.
Will this loan prevent me from getting SBA loans in the future?
Getting this loan will not prevent you from qualifying for SBA loans in the future. However, failure to pay or fraudulent activity in connection with this loan can make borrowing from a federally guaranteed source in the future very difficult.
Can I refinance a bridge loan with the Paycheck Protection Program?
You can refinance the portion of the bridge loan that was used to cover qualifying expenses like payroll, rent, and utilities. In this case, up to eight weeks of total expenses can be forgiven.
Unique Cases
Are multiple loans allowed under this program?
An individual borrower can receive multiple loans for multiple business activities. For example, a business owner that also does contracting on the side and receives a 1099 can apply twice. The first time for the business and the second time for the 1099 income. However, the same entity cannot receive multiple loans.
Are the loan and the payroll tax credit mutually exclusive?
The loan and tax credit are not mutually exclusive. However, small businesses cannot double-dip and claim a benefit for payroll once with the loan and, then again, with the tax credit. A business can take advantage of both by covering part of payroll with the loan and claiming the tax credit for the remainder.
Bottom Line
As we receive more questions and find more answers, we will keep this article updated. There will also be more information from the United States Treasury Department, lenders, and the SBA in the near future that should bring more clarity to this process for small business owners.
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