What is a Paycheck Protection Program (PPP) Loan: An Essential Guide

Is your small business currently struggling and experiencing loss of revenue? You’re not alone. More than 100,000 small businesses have closed in 2020. The good news is that there are relief programs that you might qualify for to help your small business. PPP loan, or Paycheck Protection Program loans, fund payroll, rent, mortgage, interest, and utilities.

Find out more in our essential guide below!

What is the Paycheck Protection Program, and Do You Qualify for a PPP Loan?

The Paycheck Protection Program, also known as PPP, is a section of the Coronavirus Aid, Relief and Economic Security Act (CARES). This program has designated more than $300 billion for small business loans.

PPP loans are for small businesses to support their payroll and other specific expenses. If you are a small business owner, you may be able to receive a loan for up to 2.5 times your average monthly payroll. The average is from the year that precedes the application you submit.

Small businesses that qualify for PPP loans need to have been in business before February 15, 2020. Also, a small business is defined as having fewer than 500 employees, or otherwise meeting the Small Business Association’s requirements for size.

Additionally, small businesses that are sole proprietors, self-employed people, or independent contractors who regularly carry on a trade or business are eligible. There are also certain hospitality and food service businesses that may qualify for this loan.

Lastly, some non-profits, organizations, and tribal businesses may qualify. But it’s important to know that not every business type is eligible, so it’s important to understand your specific eligibility.

How Can You Apply for a PPP Loan?

The Small Business Administration, or SBA, funded the Paycheck Protection Program with $349 billion. This will provide loans to businesses with the intention of the business to have eight weeks of payroll, along with other costs to help their employees pay their bills.

PPP loans are through lenders that have been approved by the SBA. This means you are able to apply for a PPP loan through any of the participating lenders or another federally insured depository institution. This might be your local credit union.

There are currently 1,800 SBA approved lenders, but the list is still growing. Lenders are able to apply for the program. Start your application by working with a lender in your area and asking if they are participating in PPP.

It’s important to only go through an approved lender and avoid all scams. Also, you should download the application from the SBA website and read through the instructions.

You will need to collect certain documents to prove you are eligible, like the number of workers you employ and the length of time your business has been operating. You should also note you’ll need to prove your average monthly payroll costs.

Understanding the Qualifications

One qualification you may be wondering about is if you need to look for other funds before you seek out PPP.

The SBA has actually waived the requirement that small businesses should get some of the loan proceeds from alternate sources, like a credit union. So, you don’t need to worry about finding another source funds when starting your application for a PPP loan.

If you have other SBA loans, you might also want to know if you can keep those loans and get a PPP loan at the same time. You are able to apply for both PPP loans and other SBA loans that provide financial assistance. This includes the Economic Injury Disaster Loans, or EIDLs.

The only problem here is that you aren’t able to use your PPP loan and the other SBA loans for the same purpose. Meaning, your PPP loan cannot be for payroll if you already have another SBA loan that is providing those funds to you.

Applying for Multiple Loans

As mentioned above, you can also apply for EIDL and a PPP loan. So, if your business has sustained economic loss as a result of COVID-19, you’re able to apply for both loans.

If the EIDL is under $200,000, no personal guarantee will be needed. But the loan is only based on your credit score. Both loans have low-interest rates, but EIDL does not come with loan forgiveness.

While you are able to apply for a PPP loan with multiple lenders, you are only able to receive one loan. Loans given are based on your Taxpayer Identification Number, and each person is only eligible for one.

How Can You Use a PPP Loan?

A PPP loan can’t be for every business expense, so it’s important to understand the purpose of these loans.

These loans can be used for employee salaries, costs relating to healthcare for your business, insurance, and other payroll costs. You can also use a PPP loan for rent, utilities, and interest on debt.

The Paycheck Protection Program is set up so that you are able to use your loan for an eight-week period after the funds are initially disbursed to you. This means you’re able to receive funds for two months after the first amount is in your bank account.

What Are the Loan Details and What is Loan Forgiveness?

The details of your loan, like the means at which you’re expected to pay it back, will be just as important to you as applying for the program.

PPP loans have a 1% interest rate. But the loan will be fully forgiven if the funds are used for the designated reasons. Meaning, if you use your funds for utilities, rent, mortgages, and payroll, you’ll likely have the loan forgiven.

Along with a low-interest rate, loan payments will be deferred for six months. Also, no personal guarantee is necessary. You can also rest assured that your lender will not be able to charge you any fees for a PPP loan.

PPP Loan Forgiveness Details

Whether or not you’re eligible for loan forgiveness is based on rehiring employees. So, the employer’s ability to maintain and rehire employees, along with keeping up with paying payroll, will determine if the loan is forgiven.

The forgiveness option is reduced when the full-time headcount decreases. This is also the case if wages and salaries decline.
In order to receive forgiveness, payroll costs need to be more than 60% of the amount forgiven. Only 40% of the amount that’s forgiven will be able to be used on any expense that’s not related to payroll.

It’s important to note that forgiveness won’t occur until the end of the loan. So, this will be at the end of the 24-week period of employment that follows receipt of the PPP loan.

It is possible that an employee is asked to return to work, but the employee declines the invitation. If this happens, your loan forgiveness amount will not be reduced. This is an exemption that is listed in the CARES Act.

How to Document Payroll for Forgiveness

When you’re using a PPP loan for payroll, you will want to stay highly organized. It’s important to collect the right documents so that you can ensure future forgiveness.

The first set of documents you’ll need when applying for loan forgiveness is your payroll tax filings that were reported to the IRS. You’ll also be required to include the tax filings you have for state income, payroll and unemployment.

Other documentation will include cancelled checks, transcripts of accounts, payment receipts, and anything that shows you’ve covered your mortgage obligations.

Also, proof of covering utility payments will be needed. You’ll also have an SBA Administrator who may request additional documents.

It might be easiest for you to keep funds and expenses for your PPP loan in a separate bank account. This is not a requirement but could help you to keep track of the money coming in and going out during those eight weeks.

Use This Guide to Understand the Basics of a PPP Loan

When your business is struggling financially because of what’s going on in the economy, you’re going to want to receive federal relief wherever you can. A PPP loan could be exactly what you need to continue operating and pay your employees.

These loans come with specific requirements, so it’s important to understand what is necessary to qualify. When you are ready to apply, make sure you use an SBA-approved lender. Also, remember to collect documentation so that you can later apply for loan forgiveness.

Apply now for business funding and learn more about what other business services are available for you!