The Paycheck Protection Program (commonly referred to as a PPP) provides funding for small businesses to survive during the COVID crisis, as well as an incentive to maintain employment levels and lower unemployment. In effect through June 30, this program would provide eligible small businesses with government-backed interruption loans via the Small Business Administration, which could then be forgiven based on the borrower keeping its employees on payroll. The benefits of this program include:

• A flexible loan to cover operating expenses. The program would provide a loan equal to 2.5 months of a company’s payroll, up to $10 million. This could be used to pay payroll costs (including costs related to the continuation of group health care benefits, mortgage interest payments, rent, and utilities.

• Loan forgiveness. Borrowers can have 8 weeks of payroll, rent, mortgage interest payments, utilities and interest on prior debt forgiven if they maintain their workforce. Loan forgiveness is reduced relative to any layoffs or salary deductions. That means, that if you get the full 2.5 month value on the loan, and you spend the money correctly, you could see the entire amount forgiven.

• Incentives to rehire. This legislation allows companies that already laid off workers to rehire them while still benefiting from full loan forgiveness.

• Broadened eligibility. Participation in the program is open to all businesses and 501(c)3 nonprofits with fewer than 500 employees or that meet SBA’s small business criteria, as well as independent contractors. 

• Streamlined application process. The program operates directly through financial institutions, with the government waiving many requirements normally associated with such loans in order to provide small businesses relief as fast as possible. Applicants are not required to demonstrate any specific hardship, only make a good faith certification of the loan’s necessity and that it will be used to retain workers.

PAYCHECK PROTECTION PROGRAM F.A.Q.

How do companies participate in the program?

The Paycheck Protection Program operates via the Small Business Administration’s existing 7(a) lending program, through which SBA offers guarantees on loans originated by participating banks and financial institutions. Applicants apply for a 7(a) guarantee directly through a participating bank or other approved SBA lender, and, if approved, receive an SBA guarantee on their loan.

Under the program, approved lenders will be directly delegated the ability to approve loans on behalf of the SBA as well as forgiveness applications. This program is normally run through a select group of SBA lenders, but the SBA is looking to dramatically increase the number of lenders in its pool. Currently, there isn’t a lot of detail on what the SBA is looking for with this loan, but you can take some insight based on the old SBA 7(a) loans—which requires several dozen pieces of documentation ranging from resumes to financial statements and can take several months. The current SBA loan process is quite cumbersome, and it looks like the SBA and federal government is going to reduce the requirements significantly, streamlining the process, and getting money into the hands of small businesses faster.

For this reason, it’s hard to estimate exactly what the mechanics of the process will be until the SBA issues guidance. As of right now, borrowers have to “certify” that the current public health crisis makes the loan necessary for their continued operations, and that they will use the loan to maintain their previous average number of monthly full-time equivalent employees. This good faith certification is in contrast with any specific demonstration of need, which could have slowed down the application process.

The legislation does have several measures that would speed up the rollout of the program, including:

• Waiving application fees.

• Reimbursing financial institutions for processing applications.

• Extending participation to additional lenders.

• Waiving the requirement that an applicant cannot find credit elsewhere.

• Waiving requirements for collateral and personal guarantees.

We’ve also included two free resources for you to use to help you calculate everything. The first document here, helps you determine what the maximum amount you can apply for, and what the maximum forgiveness could potentially be. Note: this spreadsheet does not work with seasonal businesses. The second free resource will help you calculate the cost of your employees for both Emergency Paid Sick Leave and Expanded Family and Medical Leave. This second spreadsheet also helps you weigh your options against the Paycheck Protection program. 

What documents are needed for the loan?

Borrowers should expect to submit documentation such as payroll numbers demonstrating their eligibility to participate in the program. Additionally, the legislation explicitly requires contractors and sole proprietors to establish their eligibility with payroll tax filings, Form 1099-MISC, and documentation of income and expenses.

Which businesses are eligible?

Participation in the Paycheck Protection Program is open to businesses, 501(c)3 nonprofits, and veterans’ organizations that have fewer than 500 employees. Sole proprietors, independent contractors, and some other self-employed individuals are also eligible. Additionally, restaurants and hospitality businesses with multiple locations are eligible, so long as they have fewer than 500 employees per location. Affiliation rules are waived for restaurants and hospitality locations with fewer than 500 employees, franchises, and businesses financed by small business investment companies.

What much can you apply for?

SBA will offer a 100 percent guarantee on a loan amounting to the recipient’s average monthly payroll costs over the previous year, times 2.5. In other words, this loan amounts to two and a half months of payroll costs. The maximum loan amount is $10 million.

What expenses are covered?

For the purposes of loan amount and forgiveness (see below), payroll is defined as consisting of: 

1. salary, wage, commission, or similar compensation; 

2. cash tip or equivalent; 

3. payment for vacation, parental, family, medical, or sick leave; 

4. dismissal or separation pay; 

5. health care or retirement benefits; 

6. state and local payroll taxes;

7. payments to sole proprietors and independent contractors that are a wage, commission, income or otherwise net earnings from self-employment. 

The calculation of payroll costs excludes compensation to employees exceeding $100,000 on an annualized basis, federal payroll taxes, compensation to employees residing outside the United States, and leave for which the employer is receiving a tax credit under the FFCRA corona virus response. This is important: If you are receiving a tax credit, you cannot also double dip and get the expense forgiven. 

While loan amount is calculated based on payroll costs, the loan itself can be used for a variety of essential business expenses including payroll, rent, mortgage interest, interest on debts, and utilities, but only up to 25 percent of the payroll cost.

How  does the loan forgiveness system work?

Loans made under the program can be forgiven for the total amount that the borrower spent on payroll (excluding annualized compensation over $100,000,) mortgage interest, rent, and utilities in the eight weeks following their loan’s origination. Employers are additionally allowed to make extra payments to tipped employees to account for their  loss of tips. Forgiven expenses are generally restricted to obligations undertaken before February 15 of this year.

Importantly, the forgiven debt is not counted in taxable income.

The amount of forgiveness is reduced proportionally to any reduction in the borrower’s workforce, as well as any reduction in employee salary beyond 25 percent. Borrowers that have already taken action to reduce their workforce and eliminate any reduction in staff or salary through this program, however, will not be penalized. In essence, if you have already furloughed or laid off your employees, you can bring them back and place them on payroll. The amount of the loan forgiven is related to the amount of the workforce you bring back. It has not yet been determined what the exact relationship between workforce and forgiveness will be. 

To calculate the portion of the borrower’s covered costs that will be forgiven, participants should multiply their eligible operating costs by the quotient of:

• Their average monthly number of full-time-equivalent (FTE) employees during the eight-week period, and;

• The borrower’s average monthly number of FTE’s during their choice of two periods—February 15, 2019-June 30, 2019 or January 1, 2020-February 29, 2020.

To achieve forgiveness, a borrower submits to their lender documents including: 

1. state or federal payroll documents;

2. documentation of mortgage interest, rent, or payroll expenses; 

3. certification that the information is true;

4. any other documentation that SBA determines is appropriate. 

The lender will then have 60 days to determine the appropriate level of forgiveness, at which point SBA would purchase and forgive the relevant amount of the initial loan.

Any portion of the loan not forgiven will remain guaranteed by SBA and have a 10-year maturity and at most a four percent interest rate. Lenders will be required to defer payment of that loan for between six months and one year, with the ultimate deferral period set by SBA.

How does this program interact with SBA’s Economic Injury Disaster Loans (EIDL)?

Borrowers who have received a COVID-19-related EIDL loan are allowed to apply for a Paycheck Protection loan but must refinance their EIDL into a Paycheck Protection loan. Any EIDL grant award provided under the bill (outlined in the following section of this post) is subtracted from a borrower’s loan forgiveness. However, a borrower cannot receive an EIDL loan and a Paycheck Protection Loan for the same reason (meaning you cannot receive a EIDL and PPP loan for COVID-19). You can receive a EIDL grant and never receive a Paycheck Protection loan.

How about independent contractors?

With 30 hours to spare, the SBA slid in some last minute guidance on what you should do if you are self employed. Here it is in a nutshell:

1. This calculation is based on 2019, so you’ll need to get your 2019 taxes done, if you haven’t already.

2. You maximum loan is calculated by looking at you schedule C income divided by 6 (2 months).

3. There is no forgiveness requirement, you just get that part forgiven (yes, we’re shocked about that too, and we’ll believe it when we see it).

The problem here is that, obviously, the PPP applications are closed. If you were waiting for this moment, go ahead and apply. Get to the front of the line in the event that more funding comes along.