Top Three Questions on the Paycheck Protection Program
April 28, 2020 | Lena Rizkallah, JD, CRPC® – Conte Wealth Advisors
If you’re a small business owner or sole proprietor you may have already applied for a forgivable loan established by the Cares Act, the Paycheck Protection Program (PPP). This program provides loans to employers with fewer than 500 employees and whose business has been affected by the coronavirus shut-down. The allowable loan a business owner can receive is 2 ½ times the average monthly expenses for the last 12 months and a $10 million maximum. The loan is forgivable if by June 30 2020, the employer can show that 75% of the loan was used to pay employee salaries (including wages and tips) and the remainder on rent, sick/holiday pay, mortgage interest, utilities and other expenses.
The Cares Act initially provided $349 billion in funding for the PPP and within two weeks those funds were allocated to various businesses. Last week, Congress secured an additional $310 billion for the PPP which is likely to be allocated within a few days.
There has been a lot of confusion regarding the details of the loan program, including eligibility, the application process and forgiveness. Below are answers to three of the biggest questions on the PPP.
- I applied for a PPP loan but did not get funding the first time around. Do I need to start the application process again?
- Once you file an application with a lender you don’t have to apply again. Some businesses applied through multiple lenders—for example with a large bank as well as with a community bank—to increase their chances of receiving a loan in a timely manner. While there’s no prohibition against filing an application with several lenders, remember that you can only accept one loan.
- The loan application is a 5 part process. You must first apply with a bank or lender; the bank approves the application and then sends it to the SBA. Once the SBA approves it, your application is assigned a loan number. Once you receive funding for the loan you are good to start using it.
- If you applied the first time but didn’t get a loan number, or received a loan number but the funding was not available, check with your lender and make sure you’re still in the queue and the status of funding.
- How do I know if my loan will be forgiven?
- The PPP is meant to be a forgivable loan to small businesses that have suffered hardship due to the coronavirus shut-down but the main goal of the program is to keep people employed. That’s why the majority of the loan amount you receive (75%) must be spent on employee wages.
- There are 4 components of forgiveness:
- Once your application is approved and you receive the loan, make sure to track your expenses. One way is to open a new bank account for the loan and that way you can easily track how you spend the loan money. You must quantify how you spend the loan proceeds for the best chance at loan forgiveness
- You must retain or hire back your employees by June 30, 2020. While it’s not necessary to retain the same people, you must have the same number of employees that you noted on the loan application.
- Keep paying your employees at the same rate they were receiving before the shut down—at least 75% or more of the pre-covid rate.
- By June 30, you must show that you have spent 75% of the loan proceeds on retaining your employees. The rest can be spent on rent, utilities, sick pay, etc.
- What if I get a loan but use less than 75% of the proceeds on paying employees? Do I have to pay the whole loan back?
- NO. This is not an all-or-nothing loan. If you don’t spend 75% of the loan on salary or can’t prove it- the proportion of the loan that should have been used on salaries but was not will be due. So if you receive a $100,000 loan and only use 60,000 to pay salaries and the remainder on bills, you will have to pay back $15,000 because you should have spent $75,000 or 75% on salaries and fell $15,000 short.
- Remember that if you do need to repay the loan, there is a 6 month deferral and a 1% interest rate on most loans.
Sources: SBA, US Chamber of Commerce, CLA