Small businesses will again have the opportunity to receive forgivable loans under the Paycheck Protection Program, which has received $284 billion in additional funding as part of the $900 billion COVID-19 relief and economic stimulus package. The new PPP loan program comes with several new rules and hopes of a streamlined application and forgiveness process. Whether this will be your first or second time applying for a PPP loan, here's what you need to know about what's changed since the program's inception last March with the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
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What is the Paycheck Protection Program?
The Paycheck Protection Program, or PPP, was established on March 27 when President Donald Trump signed the CARES Act into law. The PPP, which is administered by the U.S. Small Business Administration (SBA), extended forgivable loans to businesses for the purposes of paying wages, salaries, rent, mortgages and utilities. Eligible businesses were entitled to up to 2.5 times their monthly payroll expenses, with loans capped at $10 million each.
Demand for the loans was so high that the program exhausted its $349 billion funding in just 13 days, but Congress soon replenished it with additional funding. The program was also plagued by high-profile incidents such as large corporations receiving loans while small businesses waited without word on their application status. One of the most prominent incidents involved burger giant Shake Shack returning a $10 million loan; although Shake Shack has more than 6,000 employees nationally, no single location has more than 500 employees, so the company was able to secure funding through the PPP.
New round of PPP could address early missteps
Congress has imposed new restrictions on applicants to rectify the previous issues, including these criteria:
- Borrowers must have 300 or fewer employees.
- Borrowers must demonstrate a 25% reduction in quarterly revenue year over year.
- The maximum loan amount is $2 million.
"These changes prohibit publicly traded companies from getting PPP loans," said Chris Hurn, founder and CEO of SBA lender and PPP participant Fountainhead. "It's Congress' attempt to shrink the universe of prospective second-draw PPP borrowers further … They are trying to help small businesses that really are small businesses, because they are the ones who were hurt the most."
Improved application process
According to Greg Ott, CEO of Nav, a company that helps connect small businesses with lenders, the application process is expected to operate more smoothly this time around, and the SBA's improvements to the back-end infrastructure should prevent high traffic from crashing the system.
"SBA uses a back end called E-Tran, which is built for doing about 5,000 loans per month," Ott said. "[In the first round], they were trying to do 5 million in a month. We anticipate those issues have been mostly resolved; they've built more technical scalability, which enables the lenders themselves to create a much more seamless process."
The application process could be extremely simple for businesses that previously applied for a PPP loan, Ott added. Businesses applying for the first time will need supporting documentation, but this process should also be expedited from earlier this year.
"If you didn't get a loan the first time, you will still have to produce some documentation to verify the drop in revenues and verify your payroll expenses," Ott said. "Either way, more of this will be done online and digitally versus the first wave."
More flexible approved uses for funds
In addition to narrowing the eligibility requirements, Congress expanded the purposes for which funds can be used, Ott said. Previously, forgivable expenses only included rent or mortgage, wages and salaries, and utilities. Covered uses for PPP funds include the purchase of personal protective equipment (PPE) or installation of dividers and barriers to improve customer and employee safety as the COVID-19 pandemic continues.
"There is more flexibility in how you can use the loan to really just keep your business alive," Ott said. "The emphasis is still on payroll, but there is more flexibility on it."
Streamlined forgiveness process
The new round of PPP is expected to streamline the loan forgiveness certification process for loans of $150,000 or less. This forgiveness application is expected to be a single page, although the SBA has yet to release any specific documentation.
"They're definitely working hard to further streamline forgiveness, especially for smaller-dollar loans," Ott said. "For loans of $150,000 and less, there will essentially be a one-page application process."
Tax deduction for forgiven PPP loans
Congress has instructed the IRS to allow businesses to deduct forgiven loans from their tax bill. Previously, the IRS maintained that forgiveness precluded businesses from taking the loan amount as a tax deduction, complicating accounting and increasing the tax burden on businesses that received a PPP loan.
"This makes it a lot easier to talk with your CPA, and there is no weird math you have to do on your tax return," said Healy Jones, vice president of financial planning and analysis at Kruze Consulting.
Small business takes priority in new round of PPP funding
There is a sense of optimism that these changes will not only direct more funds toward truly small businesses and allow them to use the money for a wider range of purposes, but also result in an easier application process.
The application period for the new round of PPP loans is not yet open. The SBA has 10 days from Dec. 27 to produce regulatory guidance on the application process, and lenders will then have to prepare their own processes before borrowers can be approved and funds can be distributed.
"The funds actually won't start processing from any lender just yet," Ott said. "The SBA has to release further guidelines. They have 10 days to do that. Then lenders have to first decide if they're going to participate."
After that, borrowers will be able to submit applications through participating lenders.
What should small businesses do in preparation for PPP applications?
If you plan to apply for a PPP loan in the new round of funding, there are a few things you should consider. While the application period is not yet open, you can take several important steps in the meantime.
1. Suspend the ongoing forgiveness certification process.
If you haven't already been approved for PPP loan forgiveness, suspend your forgiveness certification process immediately. Now that more approved uses of PPP funds have been added and the forgiveness process for smaller-dollar loans has been streamlined, it could behoove your business to recertify under the new rules.
"More sophisticated borrowers have held back forgiveness submissions to lenders because of anticipation it will be much more streamlined," Hurn said.
Pausing forgiveness certification also allows employers to examine the employee retention credit, which was previously unavailable to PPP borrowers.
2. Explore the employee retention credit.
If your business has fewer than 100 employees and experienced economic harm in the form of a government-mandated shutdown or a 20% year-over-year reduction in gross receipts in a single quarter, you are eligible for both the PPP loan and employee retention credit. The employee retention credit is $7,000 per employee, per quarter and reduces the payroll tax burden on a business.
"The employee retention credit is now available to folks who have also applied for a PPP loan," Jones said. "Basically, it lets you take a meaningful percentage of an employee's wages and reduce your payroll tax burden. Nobody was doing this before, because you could pick either PPP or employee retention credit. This would cut your spend or burn rate super quickly. You should definitely talk to your CPA about this."
3. Prepare any documentation needed to apply.
Businesses applying for the PPP loan need to verify their profit and loss statements and provide supporting documentation when applying for a loan. If you were previously approved for a PPP loan, it is likely the information that you previously submitted remains valid. If you have not applied for a PPP loan before, you can expedite the application process by having these documents in order ahead of time.
"The biggest thing a business owner can do is to try and determine if they have at least one quarter in 2020 where they can demonstrate a 25% revenue reduction or greater," Hurn said. [Read related article: How to Get Your Business Loan Application Approved]
4. Identify a participating SBA lender.
Some lenders that participated in the first round of PPP are expected to withdraw in this new round, so check with your existing bank or SBA-approved lender to see if they will be participating. Coordinate with them ahead of time to ensure your application is ready to go as soon as the SBA releases more guidance. Additionally, you can submit multiple applications with different lenders, so explore your options and see which business loan lenders are willing to work with you.
"There is no constraint against submitting multiple applications," Ott said. "Don't put all your eggs in one basket with one lender, but parallel-path with multiple lenders. Ultimately, you can only get one loan approved, but it's up to you to decide how aggressively to submit applications. The drawback is you multiply the time it takes to fill out applications."