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Paycheck Protection Program (PPP) Loans

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Last editedJun 20213 min read

A cornerstone of the US government CARES Act, the Paycheck Protection Program (PPP) has thus far included two rounds of PPP loans to help struggling small businesses. For those wondering “what is a PPP loan,” here’s a closer look at how this program works.

What is a PPP loan?

Throughout the Covid-19 pandemic, it’s been difficult for small businesses in particular to keep staff on payroll. The Paycheck Protection Program (PPP) was designed to help with this issue, propping small businesses up with two rounds of forgivable government loans. Since the initial CARES Act, the PPP loan program has been extended with a few follow-up bills, including the most recent two-month deadline extension to May 31, 2021.

So, what is a PPP loan and how does it work? Eligible businesses can receive a loan worth up to $10 million, or 2.5 times their payroll costs. These loans don’t require any collateral and can be forgiven by the government.

The PPP loan requirements

Currently, the SBA is only offering PPP loans through eligible community financial institutions. This includes:

Certified development companies (CDCs)
SBA microlenders
Community development financial institutions (CDFIs)
Minority depository institutions (MDIs)

These are only available until the new deadline of May 31, 2021, or until the remaining funds are all used.

In addition to these choices of approved lenders, there are some general PPP loan requirements you’ll need to meet.

For first PPP loans, you’ll need to be a sole proprietor, self-employed individual, independent contractor, or small business with 500 or fewer employees. You’ll also have to have been in business since February 15, 2020.
For the second round of PPP loans, only those with 300 or fewer employees are eligible. You’ll also have to demonstrate at least a 25% decrease in revenue from 2020 to 2019. This could apply to the full tax year or simply quarterly revenue. For the second round, you must have already applied for and used the full amount of your first PPP loan.

The Biden administration included a two-week period where the smallest businesses (20 employees, maximum) were able to exclusively apply. This restriction began on February 24, 2021 and has already passed.

Some types of businesses are ineligible for the PPP loan, whether or not they meet the other requirements:

Hedge funds
Private equity firms
Public companies with high market values
Companies undergoing bankruptcy proceedings
Gambling establishments

PPP loan terms

PPP loans offer generous terms for borrowers, since they’re designed to help businesses stay on their feet. When you claim for payroll costs, you can include additional expenses like sick leave, dismissal payments, and insurance premiums, among others.

Small business owners have been given up to 24 weeks after loan disbursement to spend the loans and apply for forgiveness, expanded from an initial eight-week period. If your loan is not eligible for forgiveness, interest rates are a low 1.0% with a five-year repayment period and six-month deferral.

PPP loan forgiveness

Many borrowers will be eligible for 100% loan forgiveness provided the funds are used for their intended purpose. You’ll also need to prove that you’ve maintained employee and staffing levels, without docking pay, as a direct result of the loan. Be sure to collect and maintain paperwork to prove your eligibility, including things like payroll forms, tax forms, and bank account statements. The PPP loan forgiveness application can be returned to the SBA once you’ve used the funds.

How to apply for PPP loans

Applications for the PPP loan program are first-come, first-served, so you’ll need to act as quickly as possible. To apply for PPP loans, visit the SBA website for more details. You can search for SBA-approved lenders to administer the loan program. For the PPP loan application, you’ll need to gather some basic paperwork including your 2019 and 2020 tax returns. In addition to these, you’ll need to include identifying information such as your:

Business name and address
Business size
Payroll information for employees
Business TIN number
Business EIN number
NAICS code

The PPP loan application must be submitted directly to the SBA-approved lender, but you’ll find a sample on the SBA website.

The bottom line

Time is swiftly running out to apply for PPP loans, so act quickly to get your application in the door. It’s also possible that there will be a further extension or third round of the program, depending on demand and government decisions.

Overall, the Payroll Protection Program has offered billions of dollars in relief to small businesses as incentive to keep employees on staff throughout the pandemic. With fully forgivable loans, it’s been a boon for small business.

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