Paycheck Protection Program (PPP)
SBA is currently accepting applications again. The new Prioritized Paycheck Protection Program Act (P4) extended the window for business owners to apply for PPP loans to May 31, 2021.
SBA released the Loan Forgiveness Application. As of June 17th, SBA & the Treasury released the EZ and Revised Full Forgiveness applications. Learn more here.
Don’t forget that self-employed, sole proprietors, gig workers, and independent contractors are also eligible!
You don’t need to have employees to qualify for a PPP loan. If you’re self-employed, you are your own “employee” and your net profit is your “payroll.” So, your PPP application is based on your “owner compensation” as reflected in your 2019 Schedule C line 31 net profit amount (which you must reduce to $100,000 if your net profit was more than that). Take that net profit figure and divide by 12, then multiply by 2.5. That’s that “payroll” that a PPP loan can finance for your sole proprietorship. And all you have to do is use it to pay yourself to keep your business alive, and you will have essentially met the requirement for full PPP forgiveness. This is explained more fully in the Interim Final Rule #3 (see p. 21748 starting at the top of column 3 through p. 21750 for full details) – and “How to Calculate Maximum Loan Amounts by Business Type”
- Nonprofits (Q 3)
- Agricultural producers (Q 34)
- Cooperatives (Q 35)
- Nonprofit hospitals even if they aren’t formally structured as a 501(c)(3) nonprofit (Q 42)
- Tribally owned business (Q 3)
For more detail on the following:
Program Changes as of July 14, 2020:
A few minor changes to the PPP program were published in a supplemental Interim Final Rule
- All legal gaming businesses are eligible regardless of what % of their revenue come from gambling.
- ESOP-owned businesses are eligible.
- Hospitals owned by state/local governmental entities are eligible provided they don’t get 50% or more of their revenues from their governmental owners (exclusive of Medicaid).
- Businesses in bankruptcy, including businesses with any owner in bankruptcy, are ineligible.
- Hedge funds and private equity firms are ineligible for PPP.
- Portfolio companies of private equity funds were reminded to closely verify their eligibility before applying.
- SBA will automatically pay the principal, interest, and fees of new 7(a), 504 and microloans funded prior to September 27th.
And several more FAQ’s were also issued today:
- Agricultural producers are confirmed to be eligible provided they either have not more than 500 employees or otherwise meet SBA “small business” size standards.
- Cooperatives are eligible.
Here is a broad overview of the PPP loan program:
- The Lender: PPP loans will be made by banks, credit unions, and other regulated lenders, not by SBA. PPP loans will be backed by 100% SBA loan guarantees. SBA may approve additional lenders. Check with your local business banker to see if they are in the process of getting on board to deliver PPP loans, but realize that banks are still learning about their important role in delivering this program too. SBA’s PPP Lender Search Tool
- Eligible Borrowers: PPP loans will be made available to:
- Businesses (including nonprofits, sole proprietorships, independent contractors, and the self-employed) of all industry sectors (no mention so far of any excluded business sectors)
- in operation as of 2/15/2020
- with 500 or less employees (though there is special provision that may allow lodging, food service, and franchise businesses to qualify based on # of employees per location) – or businesses with more than 500 employees who nevertheless meet the SBA size standard for their industry sector.
- Loan Size: PPP loan size is set by the business’s typical pre-coronavirus average monthly payroll times 2.5, but not to exceed $10 million.
- Monthly payroll is calculated based on the business’s wages/salaries/commissions/tips paid (counting only employees whose principal residence is in the US; not to exceed $100,000 per employee) plus benefits and payroll taxes – using the documented amount paid over the last 12 months, divided by 12.
- Payments made to 1099 independent contractors are not included in monthly payroll. (Independent contractors instead are able to apply for their own PPP loan.)
- If the business received an EIDL between 1/31/2020 and 4/3/2020, the amount of the EIDL loan balance amount will be added to the PPP loan amount, so that the EIDL loan can be fully refinanced by the PPP loan. (If the business received a forgivable $10,000 EIDL Advance, the advance portion of the EIDL will not be refinanced with the PPP – because the Advance will be forgiven and so there is no need to alter its status.)
- Use of Loan Proceeds: The loan is only to be used for the following:
- ≥ 75% of loan proceeds must be used to pay payroll and health care benefits for employees whose principal residence is in the US (including to re-hire recently laid-off employees). Note that 75% of the PPP loan size (i.e., equal to 2.5 months’ payroll) equates to 8 weeks of payroll. The intent of the PPP loan is to supply forgivable financing sufficient to cover at least 8 weeks of payroll during the disruption of operations caused by coronavirus.
- if applicable: An added amount will be loaned to refinance any EIDL loan received between 1/31/2020 and 4/3/2020 that was used for payroll costs. This amount will be counted as part of the required ≥ 75% payroll use.
- ≤ 25% of loan proceeds may be used for:
- interest (but not principal or prepayments) on mortgages and other debt obligations incurred before 2/15/2020
- rent due on leases in place before 2/15/2020
- utility services in place before 2/15/2020
- No other use of funds is allowed. If you use PPP for any other purposes, you will be required to pay back the unauthorized amount. Knowingly using PPP funds for unauthorized purposes will subject the business and its owners to liability and possibly fraud charges.
- Collateral: None required
- Personal Guaranties by Owners: None required
- Demonstrated Financial Need/Credit Elsewhere Test: Not applicable for PPP loans
- Underwriting, processing and approval:
- Lenders confirm receipt of required application (with certifications) and average monthly payroll amount documentation, and comply with normal Bank Secrecy Act rules.
- Lenders have delegated authority to approve PPP loans relying on applicant certifications and documents submitted.
- It appears the lender completes an “SBA Form 2484 (PPP Lender’s Application for 7(a) Guarantee)” as part of the process for getting SBA’s 100% guarantee.
- Loan Structure: 1.0%, 2-year term loan – first payment deferred for 6 months, during which interest will accrue. No prepayment penalty.
- Loan Fees: The business pays no fees. It appears SBA will pay a fee to the lender for processing and administering the loan, and the lender may elect to pay a portion of this to any agents they use, BUT the business is not to pay any fees.
- Required Application Documents:
- SBA Form 2483 (PPP Borrower Application Form)
- Payroll records (such as payroll processor records, payroll tax filings, Form 1099-MISC, income & expenses for sole proprietor, or other supporting documents sufficient to demonstrate qualifying payroll)
- When and How to Apply:
- Starting 4/3/2020 through 6/30/2020 (or until the $349 billion allocated to the program is exhausted).
- Applications will begin to be accepted as soon as lenders are ready to receive them.
- Applications will be processed on a first-come-first-serve basis.
- Lenders may use electronic signatures.
- Loan Forgiveness:
- 8 weeks after the PPP loan is made, the business provides documentation to their lender verifying the # of employees on their payroll and how the PPP loan funds were used.
- All or part of the loan (principal and interest) may be forgiven. The amount will depend on how the PPP loan funds are used, with payroll being the primary use that leads to debt forgiveness.
- Not more than 25% of debt forgiveness may be given when the loan is used for mortgage interest, rent, and/or utilities.
- The full formula for debt forgiveness is still not entirely spelled out, so watch for additional details. But using the PPP loan to pay payroll and maintain your workforce is the main path to maximum debt forgiveness. It appears that if 75% or more of the loan is used for payroll, and the remainder is used for interest, rent, and/or utilities, the entire loan may be forgiven.
- Note: According to the SBA web site, PPP forgiveness will be reduced if the PPP borrower’s full-time headcount declines or if salaries and wages decrease. No additional details on this are available.
- Repurchase and advance repurchase of the forgiven PPP loan by SBA.
- The portion of the loan that is forgiven to the business is reimbursed to the lender by SBA under the 100% guarantee, so the lender suffers no loss due to the debt forgiveness.
- Lenders may request reimbursement from SBA at the end of the 7th week of their PPP loans’ term in anticipation of that portion of their PPP portfolio that are expected to submit documentation requesting forgiveness.
- SBA will reimburse lenders within 15 days of the lender’s request.