The New PPP Loan
The Paycheck Protection Program was created last year as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). The program is backed by the Small Business Administration (SBA) and provides small businesses with cash-flow assistance to keep workers on payroll during the pandemic.
Small businesses with 500 or fewer employees are eligible for a PPP loan. These businesses include S and C corporations, LLCs, private nonprofits, faith-based organizations, and veteran and tribal groups. Self-employed individuals like contractors and sole proprietors are also eligible. Businesses that are ineligible include farms, casinos, hedge funds, private equity firms, and businesses in the process of declaring bankruptcy.
The terms of PPP loans are very generous; they have an interest rate of 1% and a maturity of two years (5 years if issued after June 2020). There are no fees or collateral required. Businesses can borrow 2.5 times their average monthly payroll cost based on 2019 (not to exceed $100,000 annually per employee) to cover eight weeks of payroll. When calculating the amount to borrow, keep in mind what PPP loans can and should be used for:
● Payroll: salaries, wages, vacation, maternity, family, medical, and sick leave, health benefits, bonuses, and hazard pay
● Rent: can be used for rent if the lease was signed before Feb. 2020
● Utilities: can be used for utility bills if service began before Feb. 2020
● Operations: software, hardware, human resources, and accounting
● Mortgage: can be used to pay interest if mortgage was signed before Feb. 2020
● Worker protection: any personal protection equipment or improvements to remain compliant with COVID guidelines
The primary purpose of a Paycheck Protection Program loan is to protect paychecks. In signing up for a PPP, you are committing to keeping the same number of employees on staff and to not cut wages. The incentive being you can have PPP loans forgiven, up to the full amount borrowed. Factors that affect the amount of loan forgiven by the SBA include reducing the number of employees or cutting wages by more than 25%.
Second Draw PPP Loan
The Paycheck Protection Program has resumed as of January 11, 2021. The SBA has begun accepting applications for First Draw PPP Loans since January 11, 2021, and for Second Draw PPP Loans since January 13, 2021.
Eligible small businesses that did not get a piece of the PPP pie in 2020 have the opportunity to apply for a first time loan this year. The Second Draw PPP loan, however, is for small businesses who received a PPP loan last year, and need to borrow more.
The Second Draw loan’s terms are identical to the First Draw, and should be used to cover payroll costs, bills, and expenses detailed above. Small businesses qualify for a Second Draw PPP Loan if your business:
● Previously received a PPP Loan and has used the entire amount according to the terms
● Has fewer than 300 employees
● Can show a 25% reduction in gross receipts from 2019 to 2020
The application for a Second Draw PPP Loan is open until March 31, 2021.