Our month of exploring resources, tools, and considerations for small businesses in the time of COVID-19 kicks off with a look at the Paycheck Protection Program, otherwise referred to as the PPP loan. In response to the sudden and extreme loss of revenue small businesses have experienced as a result of COVID-19, the Federal Government created the PPP loan as part of a larger relief bill known as the CARES Act.
A Brief History
Facilitated by the Small Business Administration, and administered by participating lenders, the program was given an initial $349 billion through the CARES Act. The PPP loan was made available to small businesses on April 3, 2020 and within less than two weeks, exhausted the initial pool of funding. The launch of the program also saw its fair share of hiccups with the system being overextended by applications, small businesses being shut out by larger participating lenders, and questionable approvals of funding provided to larger businesses. This one was particularly troubling given that that program was designed specifically to help small businesses, who typically have a harder time than their larger counterparts, obtain financial assistance.
A second round of funding in the amount of $310 billion was added to the program with the SBA resuming loan acceptance on April 27, 2020. However, given the demand for the program and the backlog of applications, it is anticipated that funding may run out in the next week or so.
Program Provisions
Eligibility for the PPP loan extends to any small business with 500 or less employees, as well as, independent contractors and sole proprietors. Additional size standards and other exceptions may apply, and can be found on the SBA’s website. Under the program, small businesses may receive a loan of up to $10 million to be used on expenses incurred between February 15, 2020 and June 30, 2020. One of the perks of this program is the ability it carries for loan forgiveness.
Upon receiving the loan, small businesses have an eight week period in which the funding used for eligible expenses can be forgiven. The formula requires participants spend at least 75% on payroll costs, and no more than 25% on other eligible expenses like rent. Providing this has been achieved and the business maintains their full time employee head count utilized during program eligibility, along with performing no salary or wage cuts, the loan converts into a grant with repayment forgiven. Any portion of the loan ineligible for forgiveness will be subject to a 1% interest rate with repayment due within 2 years. Participants are also given a 6 month payment deferral should they need it.
Post Approval Considerations
A Small Business has made it through the application process and has been approved for the loan…now what? From this point moving forward, small businesses have a number of things to consider with the first being expenses. In order to ensure they are maximizing the opportunity for loan forgiveness to the fullest extent, it is recommended small businesses create an itemized plan of action for how funding will be allocated to expenses. This will help to ensure that only eligible expenses are being considered and fall within the 75% / 25% loan forgiveness formula.
The next item to think about is how funding will be held and tracked. Some small businesses have opted to have their PPP loan funding placed in an account separate from all other revenue sources. Others have applied internal tracking measures to tag any expense paid with the PPP funding. Regardless of the decision made on tracking practices, it is imperative that it is done in a manner that allows for a clean and easy accounting of the way funds were spent. This will be critical when it comes time to provide financial records needed to accompany the loan forgiveness application submitted to lenders.
And finally, throughout the process, small businesses will want to make sure they maintain frequent communication with their lender as a means to stay abreast of any changes made to program guidelines, repayment, and forgiveness requirements among other things. The same is true for checking the SBA’s website for program updates and guideline changes.
For those small businesses who were unable to obtain funding through PPP or who came to the conclusion that the program was not the right fit for their needs, hope is not lost as there are a number of other resources out there that may be able to provide or point you in the right direction for the assistance you may need. To find more information on alternative options for assistance, you can visit the SBA’s website, the Governor’s Office of Business and Economic Development (GO-Biz) website, or keep checking back here throughout the month of May, where we will be exploring other resources available for Small Businesses during these challenging times.