The PPP, which goes live tomorrow (April 3), is considered the most generous stimulus program in the history of the Small Business Association (SBA) and should have the attention of every small business owner, independent contractor, or self-employed individual who has been adversely impacted in any way by COVID-19. I hate to use the term “free money” that others have used to describe this program. At worst, this represents the most generous loan offer that businesses have ever seen or will ever see. At best, the PPP is a grant from the federal government to pay 8 weeks of expenses for small businesses that need financial assistance during these unprecedented times.
The CARES Act outlined the general PPP terms and then Treasury issued guidance on March 31. Banks, however, are still waiting on yet-to-be-released guidance from the SBA. As a result, there is still uncertainty on several items and banks may not begin taking applications right away until the SBA issues formal guidance. I will update if there are any important changes but here is a summary of advice on PPP based on what is known right now.
Who qualifies for this stimulus program?
Small businesses with less than 500 employees; sole proprietors, self-employed individuals, independent contractors, and 501(c)3 non-profits that have been in operation since at least February 15, 2020 (along with a few specific other entities). The applicant must attest that economic uncertainty related to COVID-19 makes the request necessary and that proceeds will be used to support ongoing operations of the business.
What are the unique loan terms that make this so attractive?
- Up to 100% of the principal amount may be forgiven if used for payroll (including owner compensation up to $100,000), rent, utilities, employee benefits (including medical insurance), and interest on existing mortgage debt over an 8-week period after loan approval.
- Loan forgiveness is not taxable
0.5%1.0% annual interest rate on any loan proceeds that do not qualify for forgiveness (SBA updated 4/3/2020 from 0.5% to 1.0%)- No payments for the first 6 months of the loan followed by an 18-month amortization (2 year total term)
- Streamlined funding process (the simplified application should require no more than 10-30 minutes to complete)
- No collateral or personal guarantees
- No prepayment penalty
- All borrower fees are waived
How much can I borrow?
2.5x your average monthly payroll measured over the twelve months before the date of the loan ending December 31, 2019 (revised in updated application 4/3/2020). Notably, there is a per-employee cap of $100,000 for this calculation. Seasonal businesses and new businesses established in the last 12 months have slightly different formulas. A business with an owner who makes $200,000 per year and four employees who get paid $50,000 per year is eligible to borrow $62,500 (average monthly payroll = $25,000 since owner’s comp is limited to $100k; $25,000 x 2.5 = $62,500). There is a maximum loan size of $10 million.
What counts as payroll for this formula?
Salaries, medical benefits, tips, commissions, bonuses, retirement benefit payments, and payment of state and local tax on compensation, among other items. For self-employed or independent contractors, net earnings of the business is treated as payroll.
What are the eligible uses for loan proceeds?
Payroll expenses (including benefits noted above), rent, utilities (including cell phones, Internet), and interest on existing mortgages.
How does the loan forgiveness work?
In the eight-week period following the loan proceeds being disbursed, any of the expenses noted above (payroll, rent, utilities, etc.) are eligible for forgiveness. The forgiveness amount is formulaically reduced for businesses that reduce the number of employees as of June 30, 2020 and/or reduce the wages of employees earning less than $100,000 by more than 25%. Provided that your headcount is not reduced, the program effectively pays all your operating expenses for an eight week period. And to the extent that you do not have 100% of the loan forgiven based on the formula, you’re still borrowing money at a whopping interest rate of 0.5% 1.0%.
Should I apply?
There are going to be some businesses that have not been adversely impacted by COVID-19 (i.e. truckers, bankruptcy attorneys, toilet paper manufacturers). The overwhelming majority of small businesses or self-employed individuals have been or will be negatively impacted by COVID-19 to some degree and should pursue this opportunity. Moreover, there is no size that is too small – because of the simplified and streamlined underwriting process, banks have indicated a willingness to lend to borrowers of any size for any amount.
How do I apply?
The PPP is being administered by banks and other financial institutions approved by the SBA. Because of the enormous demand for these loans and the uncertainty for lenders, most banks are expected to loan only to their existing customers – at least in the first few weeks. As a result, the best approach is to reach out to your current bank to inquire about applying. The loan terms are standardized by the SBA regardless of lender so there is no need to “shop around”. Only if your banking partner denies your application should you reach out to another lender.
How soon should I apply?
The program is supposed to go live tomorrow (April 3rd; although self-employed and sole proprietors cannot apply until April 10th) but it is unclear on when regulations and guidance will come from SBA so applications may not begin until sometime during the week of April 6th. The PPP is capped at $349 billion as a first-come, first-served lending program so some lenders are suggesting that businesses should apply as soon as possible. There is some debate here. Other lenders have gone on record saying that there is no way Congress lets this program run out of money before June 30th without catastrophic consequences and that it’s likely to be expanded, as needed. Businesses that have been already been forced to lay off or furlough most employees may want to delay applying until closer to June 30th since the loan forgiveness formula will be more favorable if and when the business is operating at closer to capacity.
Hope this helps provide a rough outline of the program. If you have any questions, want to discuss this program in more detail to see if it applies, or just want to better understand some of the technicalities of the program, I encourage you to reach out or comment below.
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