A Guide to the Paycheck Protection Program for Small Businesses

Employers are worried not only about themselves and their business, but their hardworking employees as well.

The purpose of the Paycheck Protection Program is to provide an incentive for small businesses to keep their employees on payroll in spite of the coronavirus crisis.

In this guide, we show you what the Paycheck Protection Program is as well as how it applies to your small business.

What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a key part of the $349 billion stimulus package initiated by the federal government providing forgivable loans to small businesses. The PPP specifically aims to help businesses continue to cover their monthly operating costs, such as:

  • Payroll costs
  • Interest on mortgages
  • Rent
  • Utilities

Loans received from SBA-approved lenders under the PPP are eligible for complete or partial forgiveness — they will not need to be fully repaid. The goal is to help small businesses keep their employees and stay in business.

PPP loans have an interest rate of 1% and a maturity of 2 years. However, businesses will not need to pay any lender fees or interest on the loan amount that is forgiven. Payroll costs are capped at $100,000 on an annualized basis for each employee, and loan payments will be deferred for 6 months (for whatever amount of the loan is not eligible for forgiveness).

The program is open until June 30, 2020. On April 22, 2020, the federal government allocated an additional $320 billion to the program. However, businesses have already rushed to get in their applications and the PPP funding will soon be used up. If you haven't already, check with your local bank or small business lender to submit an application and find out the most up-to-date information.

Who Can Apply for the Paycheck Protection Program?

All businesses with 500 or fewer employees can apply. This includes nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors.

Small businesses in the hospitality and food industry with more than one location could also be eligible if their individual locations employ less than 500 workers.

Starting April 3, 2020, small businesses and sole proprietorships can apply for the PPP. Independent contractors and self-employed individuals can apply starting April 10, 2020.

Businesses in certain industries that have more than 500 employees may be eligible if they meet applicable SBA employee-based size standards for those industries. You can use the SBA’s Size Standards Tool to find out if your company counts as a small business.

What Can the Paycheck Protection Program Loans Be Used For?

The Paycheck Protection Program covers payroll costs, which include employee benefits such as costs for parental, family, medical, or sick leave. It also covers interest on mortgage obligations, rent, and utilities, all of which must have been incurred between February 15, 2020 and June 30, 2020.

If you use the loan amount for anything other than these things over the 8 weeks after getting the loan, you will owe money when your loan is due. Only the portion of the loan used for eligible expenses may be forgiven. In addition, the total forgiveness will be reduced if your company’s full-time headcount declines or if salaries or wages decrease. Furthermore, a total of 75% or more of the forgiven loan amount must have been used to cover payroll costs.

How Do I Apply for the Paycheck Protection Program?

You can apply through any approved SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that’s participating.

To find an SBA-approved lender in your area, you can use this interactive map from the SBA. Enter your zip code and find an approved lender near you, then contact them to set up an appointment. You fill out and bring in the PPP application along with the required documentation to expedite your application process.

How Large Will My Loan Amount Be?

Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. The step-by-step process for determining the maximum loan you can take out under the PPP is given in the CARES act as follows:

Step 1: Take your aggregate payroll costs from the past twelve months for employees who reside in the US. This includes compensation in the form of salary, wages, commissions, or similar compensation, such as cash tips, etc, payment for vacation and other forms of leave, health care and other benefits, and payment of state and local taxes assessed on employee compensation

Step 2: Subtract compensation paid to any employees or independent contractors who received greater than $100,000 in the year.

Step 3: Divide that amount by 12 to determine your average monthly payroll costs.

Step 4: Multiply your average monthly payroll costs by 2.5, or 250%

Step 5: Add to this amount any outstanding Economic Injury Disaster Loans (EIDL) made between January 31, 2020 and April 3, 2020.

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