Money Health

What is the Paycheck Protection Program?

Paycheck Protection Program
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The coronavirus pandemic has taken a toll on millions of businesses across the country. Many of them have faced significant revenue loss and laid off employees as a result. To address this issue, the Small Business Administration (SBA) has created the Paycheck Protection Program (PPP), which is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Designed to encourage businesses to keep their employees on payroll and continue operations, the PPP provides a forgivable loan of up to $10 million that can be used to cover payroll and several other expenses. Since April 12th, $205 billion of the $350 billion in funds allocated toward the PPP have been claimed. So if you’re a small business owner interested in the program, it’s essential to act quickly.

Since there is no shortage of information about the PPP floating around these days, we’ve compiled the key facts about this loan into a short guide. Below, you’ll learn more about what the Paycheck Protection Program is, who it’s for, and how you can apply for it.

How the PPP works

Essentially, the PPP is a modified version of the SBA 7(a) loan, which provides financial assistance to small businesses. The PPP is a combination of a loan and grant and involves these steps.

  • Apply for a loan: As a business owner, you can apply for the PPP with a bank, credit union, or an online lender who offers it. We’ll dive deeper into what you can expect from the application process a bit later.
  • Wait for approval and payment deferral: Once you’re approved for the PPP, the lender will defer your payments for six months after they issue the loan.
  • Apply for forgiveness: As long as you don’t lay off employees and use the money for eligible costs, your loan can be forgiven. You can apply for forgiveness after eight weeks from the date you receive the funds.
  • Repay the balance: You’ll have two years to repay the balance of any portion of the loan that is not forgiven with a 1% interest rate.

What does the PPP cover?

The PPP is intended to cover eight weeks of costs that will help your business run and keep your people employed, and help protect paychecks for yourself and your employees. While loans go up to $10 million, the maximum you can borrow is one month of eligible payroll costs times 2.5. Eligible costs include:

  • Payroll expenses
  • Salaries and commissions for employees
  • Paid, sick, medical, and family leave costs
  • Insurance premiums
  • Rent and interest on mortgage obligations
  • Utilities such as electricity, gas, water, transportation, internet and phone services
  • Interest on debts incurred before the covered period

Who is eligible for the PPP

If you own a business with fewer than 500 employees and are not involved in any bankruptcy proceedings, you may be eligible for the PPP. This is particularly true if your business was established before February 15th 2020, and you have employees you report on payroll tax or contractors you report on an IRS Form 1099-MISC.

When and how to apply for the PPP

Applications for the PPP began on April 3rd for small businesses and sole proprietorships, and April 10th for independent contractors and self-employed individuals. Since this loan is available on a first-come, first-served basis, it is recommended that business owners apply as soon as possible.

If you’d like to apply for the PPP, find out if the bank you use for your business needs offers PPP loans. If it doesn’t, you’ll have to find another lender that does. Although the format will vary from lender to lender, the SBA requires that all lenders request the same information. When you fill out the application, you’ll need to provide the following:

  • Basic business information: This includes business type, legal name, business address and phone number and Employer Identification Number or Social Security Number.
  • Loan amount and purpose: You’ll enter the average amount your business spent on payroll over the past year and multiply your average monthly payroll by 2.5. In addition, you’ll state how you intend to use the funds.
  • Owner details: The application will require you to list all business owners who have at least a 20% stake. You’ll need to provide trustor information if your business is owned by a trust.
  • Answer a few questions about the business and owners: These questions will help determine whether you’re eligible for the loan.

Once you complete the application, you’ll have to wait for a decision from the SBA. If you get approved, the lender will distribute the funds via ACH transfer to your business bank account. Since this is a new program and difficult time for our country, you should expect delays. In addition, there has been no shortage of reports regarding the loophols and problems with the program. However, it remains a key resource for small businesses who are struggling.

PPP resources

If you’d like to apply for the PPP, here are some resources that can help you out.

  • Sample application form: This form can give you a good idea of what to expect when you apply for the PPP through an SBA-approved lender.
  • Lender search: With this tool, you can find a nearby lender that offers the PPP. Plug in your zip code and you’ll get a list of options.
  • Frequently asked questions: Have a question about the PPP? This list of FAQs can help. If you don’t find what you’re looking for, don’t hesitate to reach out to a lender who offers this loan.
  • PPP infographic: For a visual overview of what the PPP is and how it works, check out this infographic (scroll down on the page to view).

In search of more tips on how to manage your money, get out of debt, and improve your personal and business finances during the pandemic and normal times? Come back to our blog each week for more information.

Editor’s Note, April 24, 2020: While the post was initially prepared during the first roll out of the PPP, the program ran out of money. It has now been re-funded by Congress.

Editor’s Note and update, April 29, 2020: The SBA announced today that after wide criticism that smaller businesses have been shut out of access to funding, the PPP will only accept applications from banks and other lending institutions with less than $1 billion in assets from 4 to 11:59 p.m. on April 29.

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Anna Baluch is a freelance writer who enjoys writing about all personal finance topics. She’s particularly interested in mortgages, retirement, insurance, and investing.