The first round of the SBA Paycheck Protection Program (PPP)—a business loan program to help small businesses and nonprofit organizations affected by the Coronavirus pay their workers and other basic business costs—totaling $349 billion ran out in just 14 days. Unlike other loans, the PPP may be partially or fully forgiven if the business keeps its employee counts and wages stable. In late April, another $310 billion was added. As of June 3, 2020, the Small Business Administration (SBA) has given out roughly $510 billion of the $659 billion allocated for PPP. This means that $130 billion remains (as of June, 16, 2020, including the loans returned to the SBA).

There are several changes in the second round of the PPP and it seems that new updates are happening constantly.

Who Qualifies for a PPP Loan?

• Any small business with 500 or fewer employees may be eligible. This includes small businesses, S corporations, C corporations, LLCs, private nonprofits, faith-based organizations, tribal groups and veteran groups. 

• Self-employed individuals who file an IRS Schedule C with their Form 1040, such as independent contractors and sole proprietors, are also eligible. (Partners who report self-employment income, however, are not eligible as self-employed individuals.)

• Restaurants and hospitality businesses may qualify if they have 500 or fewer employees per location. Details on the size standards and exceptions are on the SBA website.

Who Does Not Qualify for a PPP Loan?

• Businesses engaged in illegal activities

• Business owners who are more than 60 days delinquent on child support obligations

• Farms and ranches

• Sex businesses

• Lobbyists and gambling establishments. 

• Hedge funds, private equity firms and most public companies with substantial market values. This change is based on the outcry over public companies receiving PPP loans in the first round. 

• Publicly-traded companies

• Companies that are involved in bankruptcy proceedings.

Other Situations

• Companies that can raise capital may be ruled ineligible.

• Businesses that can get funding from their backers may be ineligible.

• If your loan is for more than $2 million, you will be automatically audited.

Do Venture Capital-Backed Startups Qualify for a PPP Loan?

Generally, the answer is yes, but there may be exceptions. Startups, by definition, tend to have far fewer than 500 employees. In SBA 7 (a) programs, startups backed by venture capital (VC) firms may be required to count both their own employees and those of the VC firm and its other portfolio companies. That could push the employee count of the startup’s PPP loan application over 500–which would disqualify it. Usually the “affiliation rules” only apply if the VC firm owns more than 50 percent of the startup or if it has operational control over the startup. 

Is a PPP Loan Right for You?

Your first thought may be, of course I’ll apply for a PPP loan. It’s free money if you qualify for forgiveness, after all. It’s something every small business should consider, but there are reasons some may decide to pass.

One reason some business owners pass is because the loan only covers payroll for eight weeks. So, business owners who think it will take longer than that for their business to rebound may not see the point in borrowing the money to make payroll for eight weeks only to have to let people go after the eight weeks are over. This is especially true if most of their workers are minimum wage or close to it because the CARES Act also authorized a $600-per-week boost to unemployment benefits. So minimum wage workers and other low-wage workers would get more money unemployed ($600 per week, plus the regular amount allowed by the state program) than employed.

The time period in which the money must be used has been extended since Congress voted nearly unanimously to pass the Paycheck Protection Program Flexibility Act of 2020 and President Trump signed it on June 5, 2020. The bill expands the period in which the funds must be spent from eight to 24 weeks or until December, 31, 2020, whichever is first.

 

Also, some people find the rules and regulations around forgiveness confusing. The legislation was written so quickly, and the program launched so hastily that the guidelines are full of holes. If you need help navigating the loan application process, you can get help from a Sky’s the Limit mentor. 

When and How to Apply

To increase your chances of getting money in the new round of funding, you should line up a bank and apply right away. Applications have slowed down compared to the first round, but the program is on a first-come, first-served basis. The deadline is June 30.

Borrowers can apply to any SBA-approved lender, including participating commercial banks and credit unions. A list of approved lenders can be found on the SBA website. Note that some lenders will only work with you on the PPP loan if you’re already a client. 

To make sure that more rural, minority-owned and women-owned businesses get loans in this round, part of the money has been set aside for community financial institutions (such as minority depository institutions and SBA-certified development companies). 

The program also provides for waivers that would normally be applied to SBA loans. Those include waivers for fees charged to borrowers and lenders, as well as prepayment fees. A requirement that borrowers also have credit elsewhere is also being waived for this program. There are no requirements for collateral or personal guarantees.

Business owners must submit applications to a participating lender, that in turn sends them to the SBA for approval. The SBA evaluates them the same day they are received.

You must submit your loan application to a lender, but you can find a sample application at the SBA website. The SBA estimates the application process should take about two hours, if you have all the required documents. It may take a few days to gather the necessary paperwork. Due to the high volume of applications, lenders are struggling to process applications quickly and many banks are asking for customer patience on their websites.

The PPP loan program is one of many government programs to help small businesses. And private initiatives, such as Facebook grants, are also available. In addition to the new PPP loan, the SBA also has other loan programs to help small businesses, including Economic Injury Disaster Loans (EIDLs).

Terms of a PPP Loan

• Generous terms are available for PPP loans. Borrowers can receive two and a half times their average monthly payroll costs (excluding pay over $100,000 per employee) earned 12 months before the date the loan is made (some lenders are using 2019 numbers). For example, if your monthly average payroll (excluding compensation in excess of $100,000 salaries) in the last 12 months is $10,000, you may borrow up to $25,000. 

• Other payroll costs can be included, such as vacation pay, parental, family, medical and sick leave (as long as it’s not covered by another emergency loan/grant); payment for dismissal or separation; payment for group healthcare coverage, including insurance premiums; payment for retirement benefits and payment of state and local taxes assessed on employees’ compensation.

• Outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less any “advance” that is forgivable under an EIDL COVID-19 loan. The maximum any business can borrow is $10 million. 

• The money can be used for payroll (no more than $100,000 per employee annual salary) as well as benefits (including paid sick leave and insurance premiums) and payroll taxes. Up to 25 percent of the loan may be used to cover mortgage interest, rent and utilities.

• The covered expenses have to be from Feb. 15, 2020 through June 30, 2020. Businesses have to have been operating by Feb. 15, 2020.

Any portion of the loan that is not forgiven will carry an interest rate of 1.0 percent and is due to be paid back within two years. However, payments are deferred for the first six months. There’s no prepayment penalty.

PPP Loan Forgiveness

• Loans can be forgiven if the money is used for eligible expenses. Participants are eligible for loan forgiveness for the amounts spent on authorized expenses over the eight weeks after receiving the loan.

• The total amount of payroll payments over the eight weeks after receiving the loan may be forgivable. 

• Mortgage interest, rent and utilities are also forgivable, up to 25 percent of the PPP loan. (Note that if your loan is forgiven, these expenses covered by the loan are not tax-deductible, the IRS recently stated in Notice 2020-32.)

To get the entire amount of the loan forgiven, you must meet these conditions:

• At least 75 percent is spent on payroll and the rest on permitted expenses.

• You have to have the same number of full-time staff as your averaged monthly 2019 or during the past 12 months. If your business launched in the second half of 2019, you can use average headcounts from January 1, 2020 to February 29, 2020. If your business is seasonal, you can base your monthly averages on numbers from February 15, 2019 or March 1, 2019 to June 30, 2019.

• For loans to become full grants, employers cannot cut salaries or wages. If they do, the forgiven amount will be reduced. Employers who already let workers go (between February 15 and April 26, 2020) have until June 30 to rehire staff.

The SBA has released the application for PPP loan forgiveness. It is two pages, plus nine pages of instructions and worksheets. Three big changes to note:

1. Instead of having to use your loan to cover the eight weeks right after you get the loan, borrowers can start with the first pay period after it’s received (so, if you receive the loan on Thursday, and your next pay period starts on Sunday, you can start with that Sunday pay period).

2. Borrowers are not required to report all allowed non-payroll costs (such as, rent, mortgage interest and utilities) if they don’t want to include them in the forgiveness amount. Before, there was some confusion over this; the flexibility may help borrowers keep their non-payroll costs within the required percentage (25 percent).

3. The SBA recognizes that some employees who have been let go may get new jobs or some may be fired with cause. So now there is a safe harbor for these situations.

The SBA has a summary of loan terms here.

And don’t forget about our Rise & Thrive Relief Fund, emergency funding for Sky’s the Limit entrepreneurs affected by COVID-19.