What to know about the new Paycheck Protection Program
Your questions, answers.
Here’s what we know so far about the $349 billion new “Paycheck Protection Program” loans backed by the Small Business Administration in response to the economic disruption of the COVID-19 pandemic. All or part of each loan can be cancelled. Most of the information below comes from this document as well as the US Treasury Department tips posted here (supplemented by some reports I’ve done so far):
1. PPP forgivable loans are available from banks, credit unions, agricultural credit system institutions and some non-bank lenders.
Typically, SBA-backed loans are issued through approved lenders under the SBA 7(a) program, but SBA 7(a) lending partners earn about $25 billion in SBA-backed loans in an average year. To win $349 billion in the first round of PPP, the Treasury decided everyone was in on the game, allowing all banks and credit unions to register to make PPP loans.
Update: In the first round, 4,975 lenders issued a total of more than 1.6 million PPP loans, and the program ran out of money on April 16. According to the SBA, the average loan size was $206,000 and 74% of loans were $150,000 or less. Round 2 of the PPP opened at 10:30 a.m. on April 27.
There are even more lenders already signed up for Round 2, including more CDFIs (community development financial institutions), which have a specific mission to focus on lending to low-to-moderate income communities. Round 2 specifically put aside $30 billion in PPP authorization for CDFIs, as well as $30 billion for smaller banks and credit unions (those with $10 billion in assets up to $50 billion).
2. Entities eligible for PPP loans include: small businesses, 501(c)(3) nonprofits, 501(c)(19) veterans organizations, or tribal businesses that have less than 500 employees, with higher thresholds limited for certain industries based on SBA guidelines.
As of April 10, PPP applications are open to people who operate a sole proprietorship or as an independent contractor or eligible self-employed persons, including artists and performers. Self-employed people can apply for a PPP loan or the newly extended unemployment benefits, but not both, so you’ll need to determine which is best for your situation.
Also eligible is any restaurant or lodging franchise or any business site that does not employ more than 500 employees on site. Each eligible location can apply for a PPP loan.
Update: The SBA has released additional tips clarify that religious organizations can obtain a PPP loan as long as they meet the other criteria of the CARES Act.
Update: Some businesses or freelancers may not be eligible, such as legal sex workers or “passive” businesses used in real estate for funding purposes. Consult the SBA Standard Operating Procedures for Lendersfrom page 103.
3. The maximum PPP loan amount depends on your business situation. If you were in business from February 15, 2019 to June 30, 2019, the maximum you can borrow is 250% of your average monthly payroll costs during that period; if your company employs seasonal workers, you can choose to choose March 1, 2019 as the period start date.
If you were not in business between February 15, 2019 and June 30, 2019, the maximum you can borrow is 250% of your average monthly payroll costs between January 1, 2020 and February 29, 2020.
If you took out an Economic Disaster Disaster Loan (EIDL) with the SBA between February 15, 2020 and June 30, 2020 and you want to refinance that loan into a PPP loan, you will add the remaining loan amount to the pool. salary of 250%. . Depending on the terms of your specific SBA disaster loan, it may or may not be best to refinance it into your PPP loan. Check with an accountant or banker.
Regardless of your situation, the overall program cap is $10 million per PPP loan.
For sole proprietorships, independent contractors, and qualifying self-employed individuals, SBA guidelines state that their monthly payroll amount can be based on gross income from their most recent tax returns, 1099s, or even statements. 2019 bank statements that they can submit as documentation to lenders.
You can borrow more in a PPP loan than is eligible to be forgiven. See point 9 and speak with your lender to determine with certainty which part of the loan is repayable.
4. Payroll costs for purposes of calculating the loan amount you qualify for include: compensation, including salaries, wages, commissions up to $100,000 per employee, as well as payment of tips in cash or equivalent (emphasis mine). It also includes payment for vacation, parental, family, medical or sick leave and severance pay. Payments for group health care benefits, including insurance premiums, retirement benefits, and state or local taxes assessed on employee compensation are also eligible to be included.
To reiterate, your employer can apply for a PPP forgivable loan that includes lost tips — the interim final rule suggests an employer can use records or a “reasonable good faith estimate” of tips.
Update: Small businesses or non-profit organizations cannot currently count independent contractors as employees for the purpose of calculating PPP loans. Some are now calling on the SBA to reverse that stance. Stay connected for more news.
5. In addition to eligible payroll expenses, PPP forgivable loans can also cover interest payments on a business’ mortgage obligation, rent, utilities, and interest on any other debt incurred before February 15, 2020.
6. There are also costs that cannot be included in a PPP loan.
Ineligible payroll costs include: employee/owner compensation over $100,000. Taxes imposed or withheld for payroll taxes, rail taxes and pension benefits, and income taxes withheld from wages. Pay employees who primarily live outside of the United States. Sick leave and family leave for which credit is available under Sections 7001 and 7003 of the Families First Coronavirus Response Act, a separate law that provided tax credits for paid sick leave under certain conditions.
7. PPP forgivable loans do not require personal guarantees or collateral.
Cooperatives, go wild!
8. Every loan comes with a six-month deferral, and there are no fees associated with the loans, so it’s possible you could take out a PPP loan, get it forgiven later, and pay nothing for it .
9. There is a separate formula for calculating your PPP rebate amount. This is eight weeks pay plus rent or mortgage interest payments plus utility bills paid during the first eight weeks after your loan approval. The SBA and the Treasury Department plan to limit the amount of nonpayroll costs for the discount. A maximum of 25% of the rebate amount can be allocated to non-salary expenses. This means that if you don’t use any part of your PPP loan to cover payroll, none of your loan money will be returned to you.
In order to obtain the amount of your loan forgiveness, you must verify that you have paid the fees eligible for the forgiveness. You can ask your lender for a loan forgiveness eight weeks after your loan is approved, along with the necessary documentation to prove that you have spent the loan proceeds on eight weeks of payroll, rent, or mortgage interest and utilities public. Your individual lender then has 60 days to verify and process requests for loan forgiveness. If a business has maintained its headcount of employees on February 15, 2020, it will receive the full amount of the rebate. If its workforce is less than that, its debt forgiveness will be reduced according to another formula.
Small businesses cannot count payments to independent contractors for purposes of calculating loan forgiveness (independent contractors themselves can apply for loan forgiveness themselves, of course).
10. Any remaining balance of the PPP amount not covered by your PPP rebate amount will be due over 2 years at an interest rate of 1%.
However, you won’t have to start making payments for six months after getting a PPP loan, although interest will continue to accrue during this time. Update: Your rebate amount may include accrued interest. The SBA will simply pay lenders directly on behalf of borrowers up to the eligible forgiveness amount.
11. The regulations are not yet finalized, so the lenders I have interviewed so far are not 100% sure what documentation will be required for these loans or, later, for the cancellation of a loan. This is the biggest question on their minds right now, because more documentation means less risk of fraud, which means more insurance workers will benefit as promised. But the more documentation it takes, the slower the process tends to be. It’s a balance to find. In general, for loan applications, expect to bring any documentation of eligible payroll costs paid in the past year on or before February 15, 2020. For loan forgiveness, which requires a separate application eight weeks after have received a PPP loan, bring documentation of payroll paid, as well as documentation for any rental or mortgage interest payments and utility bill payments.
EDITOR’S NOTE: This is a developing story. We’ll update it as more tips become clear or change.
Oscar is Next City’s senior economics correspondent. He previously served as Next City Editor-in-Chief from 2018-2019 and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.