What Small Business Owners Need to Know About the Paycheck Protection Program

If you own a small business, you’re probably losing more sleep than usual as you try to figure out how to make ends meet in the coming months. Thanks to the $2 trillion stimulus package President Donald Trump signed into law last week, some big help is on the way. A major portion of the package designates $350 billion in federally guaranteed loans — which generally can be forgiven — for businesses with 500 or fewer employees.

This provision, known as the Paycheck Protection Program, is part of the larger Coronavirus Aid, Relief, and Economic Security (CARES) Act. Its goal is to quickly provide relief for small businesses (and their employees) that are having a hard time weathering the financial hardship caused by the coronavirus.

Here are some highlights for what small business owners need to know about the Paycheck Protection Program and the loans included in the stimulus package.

What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) offers forgivable loans of up to $10 million for businesses that retain most of their employees. The hope is that the loans will help replace some of the revenue that is being lost during a time when many businesses have had to shut their doors — which, in turn, helps keep employees on payroll.

Who is eligible for the business loans?

If your business has fewer than 500 employees (even if you’re a sole proprietor) and you have been affected by the coronavirus pandemic, you can now apply for loans through this program, which launched on April 3. Starting April 10, independent contractors will be able to apply. Loans will be administered by the Small Business Administration, although the program is separate from existing SBA disaster relief loans.

You can apply for loans through the program up to June 30, 2020. But the government encourages potential borrowers to act quickly given the number of people who are expected to apply and potentially long process times, which will depend on the individual lenders.

How do I apply?

The Small Business Administration has a network of 1,800 approved lenders to process small business loans, with plans to add more. Check with your bank to see if it is an approved lender. If it’s not, or if you’re looking for a new lender to work with, you can find a list on the SBA website. Loans are expected to be handled on a first-come, first-served basis.

How much can I apply for?

The maximum you can apply for is $10 million, but that does not mean you’ll get $10 million. How much you qualify for is based on a calculation that takes payroll costs into account. Most businesses will see their borrowing capped at 2.5 times their average monthly payroll cost. At least 75 percent of any loan proceeds must be used for payroll costs.

When can I expect to receive the funds?

This is difficult to predict. In a statement posted on March 31, Treasury Secretary Steve Mnuchin said the government is setting up a system for same-day loan approvals so that borrowers will be able to receive funds on the same day they submit an application. How that looks in practice, however, is hard to determine.

What are the loan terms?

Based on guidance from the SBA, it appears that the loans will generally have an interest rate of 1 percent and a two-year term. For amounts that are not forgiven, the CARES Act states that loans are capped at an interest rate of 4 percent and a term that’s no longer than 10 years. Because the government is guaranteeing them, you won’t need any collateral and you won’t be charged any fees. Also, you won’t have to make any payments for at least six months.

What portion of the loan can be forgiven?

The maximum amount of the loan that is forgivable is based on certain types of costs and how much you spent on them during the eight weeks following the origination of the loan. Those costs include:

• Payroll costs (up to $100,000 per employee, as prorated over the eight weeks).
• Interest on a mortgage (as long as that mortgage had existed before February 15, 2020).
• Rent (as long as the lease had existed before February 15, 2020).
• Utilities (as long as the utility service was started before February 15, 2020).

To have the loan forgiven, you must keep your workers employed and paid. The amount forgiven will be reduced if any employees are let go or have their pay cut significantly. (In other words, to get any loan forgiveness you need to retain your workers.) If the loan is forgiven, you won’t owe income tax on the debt, which effectively makes the forgiven portion a non-taxable grant to the borrower.

Deciding to take on a new loan is always a difficult and important business decision, so consult with your accountant or attorney about whether this is the right move for you.