The Paycheck Protection Program is an element of the CARES Act, a $2 trillion stimulus package passed in March. How will it help small businesses weather the coronavirus pandemic?
Update – July 6, 2020: This page has been updated to include the extension of the Paycheck Protection Program, passed by Congress and signed by President Donald Trump. The extension keeps the PPP loan program open through Aug. 8, 2020, so remaining funds within the program may be issued to borrowers approved by an SBA lending partner.
A key part of the Coronavirus Aid Relief and Economic Security (CARES) Act – a $2 trillion economic stimulus package signed into law in March – is the Paycheck Protection Program. If your small business is looking for low-cost, forgivable funding to bridge the gap during the coronavirus pandemic, the Paycheck Protection Program could be right for you. This guide explains what you need to know about applying for Paycheck Protection Program loans, when to expect to receive funding and how to qualify for loan forgiveness.
Paycheck Protection Program receives last-minute extension
On July 4, President Donald Trump signed an extension to the Paycheck Protection Program that was previously approved by Congress. With this extension, the SBA loan program is available through Aug. 8, allowing the agency and its lending partners to disburse the remaining $130 billion in funds approved for the program, said Chris Hurn, founder and CEO of SBA lender Fountainhead.
Originally, the program was set to close at midnight on July 1. However, the extension means business owners with outstanding applications and new applicants still have time to try and secure a forgivable loan through the program.
In addition to the extension, legislators are debating additional changes that could streamline the loan forgiveness certification process for borrowers with a loan of $150,000 or less, and establish an additional loan program – which would be called the Prioritized Paycheck Protection Program, or P4 – modeled after the PPP, Hurn said.
However, neither of those measures have been enacted. According to Hurn, those bills could be considered when the Senate returns from recess July 20.
What is the CARES Act?
The CARES Act is the historic $2 trillion stimulus package that was passed by Congress and signed by President Donald Trump in March. The spending package is intended to mitigate the worst economic impacts associated with the coronavirus pandemic. The measure includes:
- $500 billion in loans for distressed industries
- $350 billion in forgivable SBA loans under the Paycheck Protection Program
- $260 billion expansion of unemployment insurance benefits
- $290 billion for direct payments to individuals making up to $99,000 per year
- $17 billion in relief for SBA loan programs
- $10 billion in emergency funding for small businesses
Here's a closer look at the Paycheck Protection Program, which comprises about $350 billion of the spending provided for under the CARES Act.
What is the Paycheck Protection Program?
One of the most important elements of the CARES Act is the Paycheck Protection Program and the government-backed, forgivable loans it provides. If your business needs short-term funding to cover payroll and facilities costs, the Paycheck Protection Program is designed to provide fast, low-cost financing with the potential for full loan forgiveness.
Under the CARES Act, small businesses could qualify for loans up to 2.5 times their normal monthly payroll costs, with a cap of $10 million per loan. In addition, Paycheck Protection Program loans include the following terms:
- No application fees
- No personal guarantees or collateral requirements
- Fixed 1% annual percentage rate
- Deferment on the first six months of loan payments
- Partial or full loan forgiveness opportunities
"At a high level, this program is pretty straightforward," said Sam Taussig, head of global policy for online lender Kabbage. "The U.S. government wants small businesses to use, at minimum, 75% of this check to pay for payroll. If there is a surplus, it should be used to cover the monthly costs a business incurs, like rent, mortgage and utilities."
At the end of the eight-week period, Taussig said, borrowers could provide documentation of the use of funds to their lender, who then forward it to the U.S. Small Business Administration (SBA.) If the usage of the funds is approved by the government, the borrower is eligible for partial or full loan forgiveness.
"If you don't pay your employees, or something happens, like you simply totally go under … it's not that big of a penalty," Taussig added. "After six months – because there is an automatic six-month deferral on these loans – this supposed grant turns into a loan for two years at 1% interest, so it's a low-cost source of capital."
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How to apply for funding through the Paycheck Protection Program
According to the U.S. Treasury Department, applications for funding under the Paycheck Protection Program were open as of April 3, and funding could be disbursed to some approved applicants on the same day. On April 10, the application process will be extended to independent contractors and self-employed individuals.
Applications for funding under the Paycheck Protection Program must be submitted with required documentation to an approved lender by June 30, 2020.
To be eligible to apply for a loan through the Paycheck Protection Program, a business must meet the following requirements:
- The business must have been operational as of Feb. 15, 2020.
- The business must have fewer than 500 employees.
- The business must meet other SBA requirements.
- Sole proprietors, independent contractors and self-employed individuals are eligible.
- Hospitality and food-service businesses with fewer than 500 employees per physical location are eligible.
- Nonprofits with fewer than 500 employees are eligible.
- Veterans organizations that meet SBA size requirements are eligible.
- Tribal business entities that meet SBA size requirements are eligible.
Christopher Pippett, partner and chair of the financial services industry practice for Fox Rothschild, said in addition to the streamlined terms and low rate, the application for the Paycheck Protection Program loans is simple and short.
"In my experience, this application is about as short as I've seen," Pippett said. "It is a page and a half with mostly check-the-box items."
Applications can be submitted through any existing SBA lender, as well as any federally insured depository institution, credit union, or participating Farm Credit System institution. Only one loan may be taken out per business under the Payroll Protection Program.
Pippett said interested small businesses should reach out to their primary financial institution immediately and ask whether they are participating in the Paycheck Protection Program and whether they have an additional application process that will be required.
"They're going to have more of an incentive to make sure your application is processed and funded timely than an institution you have no relationship with," he said. "There are some institutions I'm aware of who are not even accepting applications from people who don't already have an established relationship with them."
In addition, Pippett added that getting the following documents in order can help small business owners expedite the application process:
Business entity documentation: Applicants should come prepared with all available business entity documentation, including articles of incorporation and a certificate of organization.
- Payroll documentation: Since the Paycheck Protection Program loans are based on monthly payroll, applicants should provide 12 months' documentation of payroll expenses to lenders.
Tax returns for 2017 through 2019: Additionally, applicants should submit their tax returns for 2017 through 2019, or internal documentation of revenues and expenses for 2019 if their tax return is unavailable. Tax returns will be used to verify internal payroll documentation.
- Documentation of debts and liabilities: Applicants will likely also be required to submit documentation of their outstanding debts and liabilities, such as existing loans.
In addition to this documentation, Pippett said business owners should be prepared to submit a list of all owners, as well as the identification of the application signatory.
When will Paycheck Protection Program funding be available to successful applicants?
The first round of funding from the stimulus package is reportedly expected to reach businesses as early as April 3. However, Chris Hurn, founder and CEO of SBA lender Fountainhead, said a lack of guidance from the federal government means some delays are likely.
"We're likely to see funding delivery sometime next week if the [regulatory] language is clear and understandable," Hurn said. "But we have to wait for the rules and regulations to come out … Lenders don't know how to make these loans just yet with the limited information in the law."
Amy Friedrich, president of U.S. Insurance Solutions with Principal Financial Group, said there has been no clear guidance on how quickly approved borrowers might receive funding, but it is clear the SBA wants small businesses funded as quickly as is feasibly possible.
"We haven't seen anything on how quickly they will be funded, given the potential wave of applications, but the intent is certainly to fund quickly – in days, not weeks," Friedrich said. "Lenders have indicated they may not begin processing [applications] immediately, as they continue to garner additional guidance. Of course, the SBA is hoping to get the money out as soon as possible, given the primary purpose is cash flow. The sooner they have access to the dollars, the better.”
According to Taussig, many lenders didn't receive key documents until 8 p.m. ET on April 2, so although the application process officially opened the next morning, only a limited number of successful applicants were likely to be funded by the next business day.
"You'll be able to create an application [as of April 3], but it might take over the weekend for a lender to review the application and submit it to the SBA," he said.
Pippett said that while same-day or even next-day funding might be unrealistic, he expects the process will roll out quickly.
"I would expect that funding could be delivered in the next week," he said. "Lenders have to make sure they have all the documentation; if my clients were asking me, I'd say make sure all your ducks are in a row because sooner or later, you need to be reimbursed by the SBA.
"But I do expect fairly quick processing and funding of these loans," he added.
Loan forgiveness under the Paycheck Protection Program
A major element of the Paycheck Protection Program is its loan forgiveness. To be eligible for loan forgiveness, borrowers must meet the following requirements:
Maintain staff: Loan forgiveness is reduced for companies that decrease the number of full-time employees on their staff.
Allocate funding to payroll: Paycheck Protection Program loans are applicable to payroll costs, mortgage interest, rent and utilities payments. Businesses will owe money on any other expenses the funding is used for in the first eight weeks after receiving the loan. Moreover, the SBA anticipates that no more than 25% of the forgiven amount will be for nonpayroll expenses.
Maintain wages and salaries: Borrowers who decrease salaries or wages by more than 25% for any employee making less than $100,000 per year will also have their loan forgiveness reduced.
- Rehire furloughed or laid-off staff: Borrowers must restore their full-time employment and salary levels by June 30, 2020, to be eligible for full loan forgiveness.
According to Pippett, much of any Paycheck Protection Program loan is likely to be forgiven, but even for borrowers who owe money when the loan comes due, the terms and rate are extremely favorable.
"Essentially, if you're applying for a PPP loan, probably the worst-case scenario is there is some amount of the loan that's not going to be forgiven," Pippett said. "If your worst-case scenario is paying back some of the money you borrowed over two years with virtually no interest, that's a good deal."
Taussig said most of the work to certify that funds were used properly and the loan is eligible for forgiveness falls on the lender but that small businesses can work to improve the process and better position themselves for loan forgiveness after the eight-week period.
"My advice to small business owners is … make sure you are documenting the payroll you're making to those employees," he said. "Thoroughly make that payroll statement over those eight weeks available to the lender, as well as the other 25% of the funding."
With that information in hand, Taussig said, lenders can easily demonstrate to the SBA the loan should be forgiven.
Additional coronavirus resources for small businesses from business.com
There are other elements of the CARES Act that can help provide relief to small businesses as well. These include Emergency Economic Injury Grants, which provide up to $10,000 of relief to eligible small businesses. In addition, the SBA provides Economic Injury Disaster Loans of up to $2 million, Friedrich said.
"It's important to understand if you claim [these grants or loans], you may no longer qualify for the Payroll Protection Program loan or its forgiveness, and vice versa," she added. "In many cases, the Payroll Protection Program is the right option for small- to medium-sized businesses, but it's important you work with your lender, financial advisor or attorney to determine what's right for you."
If you're one of the millions of small businesses impacted by the coronavirus pandemic and associated economic impacts, business.com has several resources dedicated to helping you weather the storm.
For more information on ways to stay afloat during this challenging time, see our COVID-19 resource page or connect with other business owners and professionals in our community for mutual support and advice.