SBA Paycheck Protection Program (PPP) Loans Explained: How They Work, Who Qualifies, & Where To Apply
The federal relief package, known as the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), was signed into law on March 27, 2020. As of April 3, small businesses that qualify can apply for loans to cover up to eight weeks of cash-flow assistance. (Some small businesses already have their appointments lined up as the past two weeks took a toll on businesses everywhere, and any or all financial reserves might already be depleted.)
While the CARES Act has many moving pieces and parts, the sections dedicated to protecting small businesses and the people they employ will be a salve amid a tragic month of anxiety. One of the specific offerings in the stimulus package is the Paycheck Protection Program. These loans come with stipulations but are equipped with some generous benefits to help protect payroll.
Keep on reading to find out what they might mean for your business.
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Looking for more resources as we navigate this pandemic? Our coronavirus hub is packed full of useful information for businesses. Start with this post and then move on to Small Business Loan Resources & Guides For Businesses Affected By The Coronavirus.
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What PPP Loans Are & How They Work
The Paycheck Protection Program loans are designed to protect payroll. Under this provision, the SBA is backing loans through local lenders to help provide immediate assistance for small businesses hurt by the coronavirus. The PPP loans have a $10 million ceiling, but businesses will qualify for an amount 2.5 times the average from the last 12 months of payroll (February 15, 2019-February 15, 2020). For example, if the average monthly payroll is $30,000, that small business will qualify for $75,000 in Paycheck Protection loans. These loans are capped at a 1% interest rate for the life of the loan and have a five-year loan term. (Side note: If your business hasn’t been operational for a full year, the government provides alternative ways to measure average payroll.)
The PPP loans are also designed to cover payroll costs, including salary, wages, retirement contributions, vacation/sick leave/family leave, and group health premiums. There are also provisions to cover rent, mortgage interest, utilities, or other interest on debts. (Businesses must cover and guarantee payroll first for a minimum of eight weeks, and after that, the money can go to loans/rent, etc.)
These loans are also extended to independent contractors, gig economy workers, sole proprietors, and tribal businesses. They cover an employee’s salary up to $100,000. This means that if an employee makes over $100,000, they can receive payment up to that amount; any overages are not covered under PPP loans.
However, the best part of a PPP loan is that if you use it on operational costs (payroll first) during the first 24 weeks following the disbursement of funds, some of your loan proceeds may be forgiven. Now, as always, it’s essential to understand that the loan will only be forgiven if the borrower follows the guidelines outlined in the CARES Act. The Paycheck Protection Flexibility Act passed in June updated some of the original guidelines. One of those stipulations is that your company maintains the same number of employees during the period from February 2019-February 2020. In basic terms: You cannot qualify for loan forgiveness if you lay off your employees. Now, if you decided to lay off employees before the CARES Act became law, there is a provision where you can rehire employees with full wages and not incur the penalty.
Local lenders are providing these loans, so check with your lending institution to make an appointment — the interest on these loans is high, and the need is extraordinary, so the time to get your ducks in a row is now. To prepare, use this helpful checklist from the US Chamber of Commerce.
Who Qualifies For A PPP Loan
While the terms are broad, the first qualification is that you must demonstrate a need based on the current COVID-19 world. Be sure to specify that you are seeking aid related to the COVID-19 disaster. To qualify for a PPP loan, your business must:
- Have fewer than 500 employees — note that independent contractors and freelancers do not count as employees. You cannot include independent contractors and freelancers in your employee count when applying for a PPP loan. Self-employed individuals have a separate PPP loan application process, which began on April 10.
- Been in business since February 15, 2020.
- Be able to demonstrate the economic impact of COVID-19.
Unlike other loans, you can already have an existing line of credit open and still qualify for the PPP loans, and you can already have loans with the SBA and still qualify.
Where To Get A Paycheck Protection Loan
Applications for funds related to the CARES Act opened on April 3, 2020. The SBA closed applications, but Congress has approved a second round of money to replenish the PPP loans program. At the moment, there are over 1,800 banks and lenders preapproved with the SBA to help meet the need and respond to the second rush of applications. And yes, there will be a rush, so get in there now and with all your information ready. Experts say it’s best to go through an FDIC-insured bank (other lenders might be brokering for a fee — best to go right to the source), and anecdotally, small banks and credit unions have had better success.
Another option is to work with a matchmaker; many of those lenders are working around the clock on COVID-related funding. As a next resource, check out the SBA Preferred Lending Partners.
Here are four lending vendors offering Paycheck Protection loans, available now:
Fundera works together with small businesses to match them with their best loan options, and Merchant Maverick deems it one of the best loan matchmaking vendors out there. The experts at Fundera have an easy application process for PPP loans. After providing average monthly payroll and number of employees, Fundera will contact you with loan options. If the thought of applying for a PPP loan is overwhelming, consider working with Fundera.
Lendio is also a loan matchmaker and will work on your behalf to aggregate loan options. Links to apply for PPP loans are available on Lendio’s site. Lendio makes it easy to apply and compare options, and it advertises funding within 24 hours. Due to the terms of the CARES Act, there are no fees for the borrower.
Credibly has funded small businesses with over $1 billion and is equipped and ready to assist with PPP loan applications. From the front page of Credibly’s website, borrowers can find a link to the application. Customer service is efficient and can walk first-time borrowers through the process with efficiency.
BlueVine is an online lending service dedicated to helping small business owners conquer their borrowing struggles. BlueVine is assisting with PPP loans and working diligently with businesses to submit paperwork to the SBA and secure funds. With a big pivot, Blue Vine is making PPP loans a priority and is a valuable option. Lending information is available on the front page of BlueVine’s website.
Final Words On PPP Loans
No matter where you choose to apply, it’s important to get your payroll information ready and be one of the first to jump on the PPP loan train. The first round of money went very quickly, and it is anticipated that the second round will be quickly depleted as well. With loan forgiveness options and generous terms, this is a great opportunity, but since the totality of these loans is capped, the need might outweigh the resources, and the key is quick efficiency. May the odds be ever in your favor.
Looking for more resources as we navigate this pandemic? Our coronavirus hub is packed full of useful information for businesses. Have any questions for us? Leave them in the comments, and we’ll help direct you to the right place to find your answer.