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On Friday, March 27, 2020, the U.S. government passed a historic relief package to help Americans through the COVID-19 pandemic. The economic stimulus package, coming in at a record-setting $2 trillion, is the largest emergency appropriations bill ever passed. Packed in the monumental piece of legislation are provisions to assist homeowners, regular Americans, and businesses — with over $349 billion specifically designated for loans to small businesses that need relief.
That last provision is the one that we’ll be focusing on in this report. Small businesses have been hit incredibly hard by this pandemic. Many are dealing with quarantines and forced closures that have left them unable to operate. Those that are still open are having to contend with limited inventory and major disruptions to global supply chains. And on top of everything else, uncertainty about the future course of the outbreak and an unprecedented level of job losses has left consumer spending depressed on everything except the bare essentials like food, cleaning supplies, and (inexplicably) toilet paper.
But getting access to the money made available in the Coronavirus Aid, Relief, and Economic Security Act (CARES) isn’t as straightforward as just calling your local bank and asking for a loan. There are conditions on who qualifies, what the money can be used for, how much is available, and how it will be repaid. This guide will help business owners understand what the CARES act means for them and how they can take advantage of this opportunity.
If you need help with your PPP applications, we've partnered with Womply to help you fast-track your Paycheck Protection loan:
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The Coronavirus Aid, Relief, and Economic Security Act (CARES) is a bill passed by the United States Congress and signed into law by President Trump on March 27, 2020. The bill is a $2 trillion package of assorted relief measures meant to support the American people and the economy of the United States during the worst effects of the COVID-19 pandemic.
The CARES act includes a wide range of provisions that seek to support the American economy from top to bottom. Included in the act are:
The $349 billion in guaranteed loans are designated the Paycheck Protection Program loans. They are similar, but not identical, to the SBA 7(a) program (more on the differences later). These loans are especially interesting because they are able to be converted to grants if certain conditions are met by businesses that take advantage of them. That makes them a very powerful tool for companies trying to wait out the crisis — if used correctly, up to the entire loan amount can be forgiven.
There are a number of caveats that go along with these loans, however. Not every company will qualify, and the amount that can be borrowed is strictly controlled. Additionally, if conditions aren’t met, then businesses may be on the hook for the entire borrowed amount.
The Paycheck Protection Program (PPP) is a $349 billion program authorized by the CARES Act to provide small businesses with the money they need to continue paying employees during the COVID-19 crisis. The goal of the program is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls.
There are some key differences between traditional SBA loans and the PPP program, however. The biggest one is that paycheck protection program loans are forgivable up to the total amount of the loan. That means that if borrowers meet all of the conditions, they won’t have to pay back any of the loan they receive. This alone makes the PPP an incredibly powerful option for small businesses.
In addition to loan forgiveness, the PPP has some additional benefits over other SBA loans. Some of the key benefits include:
The most standout feature of the PPP is the ability for borrowers to get their loans forgiven. Up to the full amount of the loan can be converted to a grant, if certain conditions are met. Because this program was specifically created to help small businesses avoid layoffs, most of the conditions for loan forgiveness are geared around maintaining payrolls and keeping businesses operational during the crisis and any resulting quarantines.
To understand how loan forgiveness works for the PPP, it’s important to understand what the loans are supposed to be used for. These loans are meant to cover operating overhead during the coronavirus pandemic. Specifically, businesses that receive these loans are supposed to use this money on:
In order for the loan to be forgiven, businesses have to spend the loan money on these qualifying expenses. This will be verified by examining financial information during the eight-week period covered under PPP, as well as by comparing payroll figures during the covered period to an earlier period. Additionally, there are a number of exceptions that can reduce the forgiven amount. These include:
Companies will have until June 30 to return their payroll to where it was before February 15 in order to avoid any of these forgiveness penalties. In simple terms, companies will need to have the same payroll on July 1 as they did on February 14 in order to qualify for the maximum forgiveness. Due to the nature of the program and the limited resources available, the SBA expects that at least 75% of the loan amount will be used for payroll, though it’s unclear at this time if using less will result in a penalty.
The process for loan forgiveness is relatively straightforward. Companies need to submit a request for forgiveness, as well as all supporting documents, to the lender servicing their loan. These documents will include proof of payroll and an employee headcount like federal, state, and local tax fillings; documents showing any payments on rent, utilities, mortgage, or other qualifying non-payroll expenses; and a certification from a company representative that all submitted documents are accurate and true. Once this request has been submitted, lenders will have up to 60 days to make a decision on forgiveness.
It may seem, in fact, that for all intents and purposes these loans are actually grants. Businesses should avoid thinking of them as such, however. This is an unprecedented program that was rushed through legislation, before the mechanisms for supporting it were fully planned or put in place. That means that even businesses that fully meet the qualifying criteria for loan forgiveness may be on the hook for some payments as the forgiveness process is ironed out.
The PPP loan follows similar qualification rules as standard Small Business Administration (SBA) loans, but with several important caveats and exemptions. The key criteria for being eligible for a Paycheck Protection Program loan are:
The eligibility rules may seem like a mouthful, and there has been significant confusion on who exactly is eligible, but the shorthand seems to be: any registered business or non-profit with fewer than 500 employees (or fewer than 500 employees per location) that was operational on or before Feb. 15, 2020 qualifies for a Paycheck Protection Program loan.
However, keep in mind that this program is being assembled hastily and is subject to change suddenly and with little warning. This means that for many businesses, the best option is simply to apply and see if their application is accepted.
Applying for the PPP loan was designed to be a straightforward process. Small businesses and sole proprietors can apply through an authorized SBA lender beginning on April 3, 2020. Independent contractors and the self-employed can start applying on April 10, 2020. While all participating lenders need to be approved, the approval process will remain open throughout the program period — companies that currently have relationships with banks that are not approved should consult with their representatives to see if they are planning on seeking authorization.
For most businesses, the loans will be made through their primary bank, as almost all major banking institutions in the U.S. are authorized to make SBA loans. In fact, going through an existing banking relationship will likely be the easiest route for getting approved quickly.
The maximum amount of the loan will be determined via a straight-forward formula: 2.5 times a company’s average monthly payroll from 2019. As with every other component of this program, there are a few important caveats:
So for a company that averaged $50,000 per month in payroll costs across 2019, the maximum loan amount that they would qualify for under this program would be $125,000. However, if one of those employees was the CEO who earned $200,000 per year, the monthly average would be reduced by about $8,333 since only the first $100,000 annually would count. They would then qualify for a loan of only $104,167. In short, only about the first $8,000 per employee counts towards this monthly average.
Applications, samples of which can be found here, will be required to be submitted with documents showing payroll for 2019 and potentially all the way through Q1 of 2020. For most companies, this will be federal, state, and local tax filings, as well as any unemployment insurance filings. However, it would not be a bad idea to also gather any paperwork showing employee compensation, including offer letters or employment contracts, as well as a P&L statement for the period in question.
Finally, applicants will need to make a series of certifications, found on the form linked above. These attest, under penalty of fraud, that the business has been affected by the COVID-19 pandemic and needs the loan in order to maintain payroll or cover the other qualifying expenses, that funds spent on qualifying expenses will be forgiven (again, noting that only 25% of the funds may be used on non-payroll expenses,) that the business will not seek to get another loan under this program, and that all tax documents provided are accurate and the same ones submitted to the IRS.
Note: Sources indicate that the PPP program has already run out of funding after approving over a million loans, but congress is working to appropriate additional funding for the program. We will be sure to update this guide as soon as new information comes out.
For any other COVID-19-related questions for small businesses:
Originally published on April 7th, 2020, last updated on June 16th, 2022.