Guide To PPP Loan Rules For Restaurants

When the COVID-19 pandemic began, you saw a divide begin to emerge between businesses that could function well under “social distancing” and those that saw their work heavily disrupted or even ground to a halt. One type of business that’s been hit particularly hard is restaurants. This has been compounded by the arrival of cold weather, which makes outdoor dining a much less desirable option.

Over 110,000 restaurants have closed (many of them permanently) since the pandemic began according, to a study by the National Restaurant Association. As many as 500,000 are in danger of failing, with 87% of full-service restaurants experiencing an average 36% drop in revenue.

Needless to say, the new December 21, 2020 stimulus package goes out of its way to note the plight of the foodservice industry and is offering some special considerations for businesses that fall into this category.

How Restaurant PPP Loans Are Different From Other Industries

Restaurant owners seeking a PPP loan should know that nearly all of the processes and rules governing PPP loans will apply to you. That means the things you’re required and allowed to spend the PPP money on — and still qualify for loan forgiveness — are the same. For example, you’ll still have to spend 60% of the funds on payroll expenses.

In fact, for restaurants seeking a PPP for the first time — referred to as “first draw” — there is no difference between restaurant PPP loans and any other type of PPP loan. The difference comes into play with second draws.

The new stimulus bill allows businesses that have previously drawn on PPP to make a second draw if they meet certain criteria.

Second draw loans are capped at $2 million compared to first draw’s $10 million. However, restaurants have an extra provision. Where most businesses can only borrow up to 2.5x their monthly payroll, restaurants can borrow up to 3.5x their monthly payroll expenditures. So as long as you’re not maxing out the $2 million second draw, you’ll be able to borrow more compared to most other industries.

Borrower Requirements For Restaurant PPP Loans

Borrower requirements for both first and second draw PPP loans are the same for restaurants as any other qualified industry.

To qualify for a first draw PPP loan in 2021, you must:

• Have been in business prior to February 15, 2020
• Have fewer than 500 employees
• Have a business that is still operational

To meet the criteria for a second draw, there are a few additional stipulations:

• You have to have used your first PPP draw funds.
• You have to demonstrate that you’ve experienced at least a 25% loss of revenue in one quarter of 2020 compared to the same quarter in 2019.
• You have to have fewer than 300 employees.
• You cannot be a publicly-traded company.

PPP Loan Forgiveness Rules For Restaurants

While restaurants will qualify for more money the second time they go to the PPP well, the rules governing loan forgiveness are the same for restaurants as they are for other businesses. To qualify for full forgiveness, you have to spend your funds on approved expenditures. Partial forgiveness is still an option if you stray slightly from the formula. The loans use a 24-week cycle for expenses, so keep in mind that any money not used during this period will not be forgiven.

The biggest restriction on the use of PPP funds is that at least 60% of the funds must go to payroll (it is called the Paycheck Protection Program for a reason). Specifically:

• You must retain your staff, or rehire them within the 24-week period. Exemptions exist if your staff turns down good faith offers to return to work, or your can’t find employees.
• You must maintain payroll, aka, not decrease salaries of anyone earning less than $100,000/yr by more than 25%.

The remaining 40% can be spent on qualified expenses. While not unique to restaurants, the 2nd round of PPP loans does expand the list of what you can spend your money on while still qualifying for forgiveness. You can spend the portion of your PPP loan not dedicated to payroll on:

• Mortgage interest
• Rent
• Utilities
• Software expenses
• Necessary supplier costs
• COVID protection measures including masks, sneeze guards, and personal protective equipment
• Property damages related to civil unrest

Note that EIDL grants no longer count against loan forgiveness if you get both a PPP loan and an EIDL grant. Additionally, you can deduct normal expenses off your taxes as you would in any other year even if you spent PPP loan money on them.

Where To Apply For A PPP Loan

PPP loans are overseen by the SBA, but unlike EIDL loans and grants, the government organization doesn’t directly disburse these loans. Instead, you’ll apply for a PPP loan through an SBA-approved lender. Generally speaking, this means your local or national bank, but credit unions and online lenders are also making PPP loans.

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