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Paycheck Protection Program (PPP) loans were the main small-business provision of the CARES Act, intended to prop up small businesses with forgivable loans. Since the program’s inception, it has been modified with a number of follow-up bills, including an extension of the original deadline and the provision of additional funds when the initial funding ran out. Additionally, the Paycheck Protection Program Flexibility Act (PPPFA) was approved to make PPP loans more flexible in how and when they’re used. More recently, the Biden administration implemented a two-week period during which loans are restricted to very small businesses.

Loans can be for 2.5 times payroll costs, up to $10 million, feature a streamlined application process, require no collateral and most significantly, can be forgiven. If you are interested in applying for a PPP loan, read on to understand what is required, how much you can borrow (use our PPP calculator, below), how debt forgiveness works and other key details. You may also want to research other business relief options. If you’re feeling overwhelmed, now may be a good time to consult a financial advisor.

Who Qualifies for a PPP Loan?

Any small business with 500 or fewer employees may be eligible. This includes small businesses, S corporations, C corporations, LLCs, private nonprofits, faith-based organizations, tribal groups and veteran groups. Self-employed individuals who file an IRS Schedule C with their Form 1040, such as independent contractors and sole proprietors, are also eligible. (Partners who report self-employment income, however, are not eligible as self-employed individuals.)

Throughout the term of the Paycheck Protection Program, there have been complaints about larger companies getting more loans than smaller firms who may really need them. To address this, the Biden administration is proposing a two-week period where only firms with 20 or fewer employees can get the loans. This restriction is scheduled to start on Wednesday, February 24.

Biden’s administration is also planning on setting aside $1 billion for businesses with no employees located in low-income areas.

Another change instituted once Joe Biden took office is a plan changing the calculation for self-employed people. Essentially, loans will no longer be based on the profit reported on a businesses taxes. Instead, for sole proprietors, the loan calculation for sole proprietors will be based on the firm’s gross income, which is expected to expand the pool of eligible businesses and allow some firms to get a bigger loan.

Restaurants and hospitality businesses may qualify if they have 500 or fewer employees per location. Details on the size standards and exceptions are on the SBA website.

Ineligible businesses include those engaged in illegal activities, owners more than 60 days delinquent on child support obligations, farms and ranches, sex businesses, lobbyists and gambling establishments. Also, in response to the outcry over public companies receiving PPP loans when most mom-and-pops, who really need the government help, didn’t, the Treasury has ruled that hedge funds, private equity firms and most public companies with substantial market values are ineligible for PPP loans. Also, the program is closed to companies that are involved in bankruptcy proceedings.

Do Venture Capital-Backed Startups Qualify for a PPP Loan?

Startups, by definition, tend to have far fewer than 500 employees. But in the existing framework of the SBA’s 7(a) program, startups backed by venture capital firms may be required, in their application for a PPP loan, to count both their own employees and those of the VC firm and its other portfolio companies. That could push the employee count of the startup’s PPP loan application over 500 – effectively disqualifying it. As a general rule, though, such “affiliation rules” only apply if the VC firm owns more than 50% of the startup or if it exerts operational control over the startup.

But what if several VC firms own a combined 50% or more of the startup? Would that count as an affiliation? The SBA has generally ruled no: several VC firms owning a majority of a startup’s equity does not make the startup their affiliate. You can read the April 3 guidance.

That said, the SBA has subsequently issued new guidance intended to close the PPP program to companies that can raise capital. It specifically rules out most publicly traded companies, but it also emphasizes that borrowers must certify that they need the loan to stay afloat. If funding from your backers is an option, you may be ineligible for a PPP loan – and if your loan is for more than $2 million, you will be automatically audited.

Terms of a PPP Loan

The government’s efforts to help businesses have resulted in generous terms for PPP loans. Borrowers can receive two and a half times their average monthly payroll costs (excluding compensation in excess of $100,000 per employee) incurred 12 months before the date the loan is made (some lenders are simply using 2019 numbers). For example, if your monthly average payroll (excluding compensation in excess of $100,000 salaries) in the last 12 months is $10,000, you may borrow up to $25,000. Additionally, you can include as payroll costs: payment for vacation, parental, family, medical and sick leave (that is not covered by another emergency loan/grant); payment for dismissal or separation; payment for group health care coverage, including insurance premiums; payment for retirement benefits and payment of state and local taxes assessed on employees’ compensation.

Also, you can add to your total loan amount the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less any “advance” that is forgivable under an EIDL COVID-19 loan.

The maximum any business can borrow is $10 million. This calculator gives a snapshot of what you can borrow:

The money can be used for payroll (no more than $100,000 annual salary per employee, which comes out to $46,154 per individual over a covered period of 24 weeks or $15,385 per individual over a covered period of eight weeks), benefits (including paid sick leave and insurance premiums) and taxes on compensation. Up to 40% of the loan may be used to cover mortgage interest, rent and utilities (the ceiling was 25% before the new bill, the PPPFA, became law).

The PPPFA also expands the amount of time borrowers have to spend their loan and have them forgiven. Before, covered expenses had to be incurred over the eight weeks right after loan disbursement. Now, small business owners may opt for the 24 weeks after the disbursement of their loan. Also, they have until December 31, 2020 (instead of June 30) to rehire or restaff up to their pre-pandemic level.

Any portion of the loan that is not forgiven will carry an interest rate of 1.0% and is due to be paid back within five years. (Loans made before June 5 have a two-year term, as they were disbursed before the PPPFA was enacted.) Payments may be deferred for the first six months. There’s no pre-payment penalty.

PPP Loan Forgiveness

Borrowers will have their loans forgiven if they use the money for designated expenses. Participants are eligible for loan forgiveness for the amounts spent on authorized expenses over 24 weeks after loan disbursement (or eight weeks if they choose).

Total payments for payroll may be forgivable. Mortgage interest, rent and utilities are also forgivable, up to 40% of the PPP loan. (Note that if your loan is forgiven, theses expenses covered by the loan are not tax-deductible, the IRS recently stated in Notice 2020-32.)

To get the entire amount of the loan forgiven (assuming that at least 60% is spent on payroll and the rest on permitted expenses), you must meet two criteria. First, the full-time employee head count cannot decline from average monthly levels during 2019 or during the past 12 months. If your business launched in the second half of 2019, you can use average head counts from January 1, 2020 to February 29, 2020. If your business is seasonal, you can base your monthly averages on numbers from February 15, 2019 or March 1, 2019 to June 30, 2019.

Employers who already let workers go have until December 31 to restaff. Exceptions for maintaining head counts will be made if you can’t rehire the people you let go and you cannot find qualified replacements. Exceptions will also be made if you cannot return to your pre-pandemic level of business activity due to social distancing and other coronavirus-related restrictions.

Second, for loans to become full grants, employers cannot cut salaries or wages. If they do, the forgiven amount will be reduced.

The SBA released the application for PPP loan forgiveness (before the passage of the PPPFA, so the numbers below are old.) It is two pages, plus nine pages of instructions and worksheets.  Three big changes to note:

  1. Instead of having to use your loan to cover the eight weeks right after loan disbursement, borrowers can start with the first pay period after the loan disbursement. (So if you receive the loan on Thursday, and your next pay period starts on Sunday, you can start with that Sunday pay period.)
  2. Borrowers are not required to report all allowed non-payroll costs (i.e., rent, mortgage interest and utilities) if they don’t want to include them in the forgiveness amount. Before, there was some confusion over this; the flexibility may help borrowers keep their non-payroll costs within the required percentage (25%).
  3. The SBA recognizes that some employees who have been let go may get new jobs or some may be fired with cause. So now there is a safe harbor for these situations.

Since the passage of the PPPFA, the SBA has revised the PPP forgiveness application and released an “EZ version” of it. You can use the shorter application if you are self-employed and have no employees; did not reduce the salaries or wages of employees by more than 25% and did not reduce employee hours; or if you did not reduce employee salaries or wages by more than 25% and your business activity has been lower as a result of health directives related to COVID-19.

Is a PPP Loan Right for You?

Initially, most business owners probably think that of course they’ll apply for a PPP loan. It’s free money if you qualify for forgiveness, after all. But after more consideration, some decided to pass.

One reason was the fact that the loan provided funds to cover payroll for only eight weeks. So business owners who thought it would take longer than that for their revenues to return did not see the point in borrowing the money to make payroll for eight weeks only then to let people go. This was especially the case if most of their workers are minimum wage or close to it, since the CARES Act that created the PPP also authorized a $600-per-week boost to unemployment benefits. So minimum wage workers and other low-wage workers would get more money unemployed ($600 per week, plus the regular amount allowed by the state program) than employed.

Also, the lack of clarity, especially when it comes to forgiveness, was giving many businesspeople pause. The legislation was written so quickly and the program launched so hastily that the guidelines are riddled with holes. The Treasury and SBA have been issuing new guidance to address problems as they arose and even offered a safe harbor until May 18 for any borrowers with second thoughts to return their loans penalty-free. Still, business owners remained wary.

That is, they were wary, but the PPPFA may make the PPP more appealing. Primarily, it gives borrowers 24 weeks (instead of eight weeks) to spend the money and allows them to use up to 40% (rather than 25%) on non-payroll costs such as rent and utilities. Also, employers who have let people go are not required to restaff if their business activity has not fully rebounded. We will continue to update this story as new legislation and rulings come out.

When and How to Apply

Sign saying a business is closed because of Covid-19To increase your likelihood of getting money in the new round of funding, you should line up a bank and apply right away. Applications have slowed down compared to the first round, but the program is first-come, first-served. As noted at the top of this article, the new deadline is August 8.

Borrowers can apply to any SBA-approved lender, including participating commercial banks and credit unions. A list of approved lenders can be found on the SBA website. Note that many lenders are limiting eligibility to those businesses with whom they have a pre-existing relationship, such as previous loans or a business checking account. Check out our list of participating banks and their requirements.

In December 2020, a second COVID-19 stimulus bill was passed, and it included an additional $284 billion in PPP loans. These loans are available both to businesses that did not receive a loan in the first round and for companies that need another loan, though there are more stringent rules for applying for a second loan. For more details, read here.

The interim bill set aside $30 billion for lending by midsize insured depository institutions and state and federal credit unions (all with $10 billion to $50 billion in consolidated assets). Another $30 billion will be set aside for lending by small banks and credit unions (with less than $10 billion in consolidated assets) and community financial institutions (e.g., minority depository institutions and SBA-certified development companies). The idea behind these measures is to help ensure that more rural, minority-owned and women-owned businesses get loans this round.

The program also provides for waivers that would normally be applied to SBA loans. Those include waivers for fees charged to borrowers and lenders, as well as prepayment fees. A requirement that borrowers also have credit elsewhere is likewise being waived for this program. There are no requirements for collateral or personal guarantees.

Business owners must submit applications to a participating lender, who in turn sends them to the SBA for approval. The SBA evaluates them the same day they are received.

You must submit your loan application to a lender, but you can find a sample application at the SBA website. The SBA estimates the application process should take about two hours and 10 minutes. However, this is assuming all required documents are available. It may take a few days to gather the necessary paperwork. Additionally, due to the volume of applications, lenders may be struggling to process applications in a timely manner. Indeed, many banks are asking for customer patience on their websites.

The Bottom Line

Woman in closed shop

The Payroll Protection Program provides a total $659 billion to small businesses and independent contractors who maintain payrolls and head counts during the COVID-19 crisis. The lending program uses a streamlined, low-documentation process and does not require collateral. And, if qualifying employers generally don’t lay off employees or cut wages, the loans can be forgiven, effectively making them full or partial grants, depending on how borrowers put the proceeds to use.

The PPP loan program is one of many government programs to help small businesses. And private initiatives, such as Facebook grants, are also available.

Tips for Business Owners During the Coronavirus Crisis

  • Many financial advisors specialize in working with business owners. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • In addition to the new PPP loan, the SBA also has other loan programs to help small businesses, including Economic Injury Disaster Loans (EIDLs).

Photo credit: ©, ©, © bracho

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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