Okay, let’s get straight to the point: You want to explore a paycheck protection program loan if your small business has been or will be beat up by the COVID-19 crisis.
In this blog post, therefore, I’m going to give you a really quick overview. I hope you can read this in two to three minutes. That’ll give you the nudge to explore further this option.
Then, at the end of the post, I provide some links to web resources you can use to start the loan application process. Which you want to begin immediately. Like after you finish reading this…
How a Paycheck Protection Program Loan Works
The paycheck protection program (or PPP) loan provides you with money to pay employee payroll and related costs, your rent, your utilities and a handful of other business expenses over two months, or eight weeks.
The loan amount? Basically 2.5 times the average monthly payroll costs your small business incurs.
Example: You pay $10,000 a month on average for wages, health insurance, and state payroll taxes. You therefore qualify potentially for a $25,000 loan.
Example: You pay $1,000,000 a month on average for wages, health insurance, and state payroll taxes. You therefore potentially qualify for a $2,500,000 loan.
Payroll costs, by the way, include amounts a sole proprietorship earns. Quoting from the statute, for a sole proprietor, payroll costs include “any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation.”
Loan Limitations and Restrictions
The law limits the loan amount to firms with fewer than 500 employees (for all practical purposes).
The maximum loan amount equals $10,000,000.
Further, you can only count payroll costs up to $100,000 per employee per year.
Example: A firm with ten employees each making $100,000 annually qualifies for same size loan as a firm with ten employees each making $200,000 a year.
Eligibility for a Paycheck Protection Program Loan
Your small business is eligible for a loan if you can self-certify that you really need the loan.
The actual language from the statute says you must provide, “a good faith certification… that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient…”
You also need to indicate that you will use the funds, “to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.”
What this language means isn’t precisely clear… but I think you read it to say (a) you honestly believe your firm won’t be able to operate without the loan and (b) you absolutely must use the money for payroll, the rent, loan payments, and utilities.
How the Paycheck Protection Program Loan Becomes “Free Money”
If you use the loan proceeds for an “approved” expense (payroll costs, rent, mortgage interest or utility expenses) and then you can also document that, the lender forgives the loan after two months.
Example: You borrow $100,000. Over the next eight weeks, you then use the $100,000 for employee payroll (an approved expense.) You don’t have to pay back the $100,000 loan. Really.
But the one critically important wrinkle to this: If you reduce the average number of full-time employees in your firm after receiving the loan, that reduction in headcount also reduces the amount of loan forgiveness.
To determine whether you’ve reduced the number of full-time employees, the loan forgiveness formula compares the full-time employees during the eight week time period that starts when you get the loan to the average number of full time employees you paid from February 15 through June 30 of either 2019 or 2020.
You choose, by the way, whether the comparison looks at 2019 or 2020.
And Your Next Step Is…
A quick last point: The statutes that create this package provide $349,000,000,000 in funding. That amount sounds like a lot of money. But it isn’t. Spread the amount over ten or twenty million small businesses, and you’re talking $20,000 to $30,000 (roughly) per firm.
Accordingly, if you need this help, contact your bank immediately. Or some other bank. Right now, I’m only aware of one big bank that is providing a way for you to, sort of, start the process:
If you know of another bank, let me know by posting a comment. I’ll add that bank to the above list.
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