What You Should Know About PPP Loans

by Calyn Ehid

The Paycheck Protection Program (PPP) was created by the Small Business Administration (SBA) in 2020 as a response to the Covid-19 outbreak. Because of social distance guidelines, many small businesses were either forced to temporarily shut down or experienced a sharp decline in customers. This put business owners in a difficult position where they either had to lay off their employees or find a way to keep them employed until quarantine ended, despite the significant drop in customers.

PPP was created as an emergency loan program. PPP loans are classified as a forgivable loan. If the applicant meets all the eligibility requirements, he or she does not have to pay back a forgivable loan, similar to grant funding. Normally, forgivable loans are only used with students, but given the national emergency and number of jobs on the line, the SBA invested over 650 billion in PPP. In a short time, the program underwent several changes. Funding for PPP loans was quickly depleted, and as of May 2021, the program is not available.

Future of PPP Loans

PPP was considered a success, helping almost 12 million small businesses stay open and keep their employees on payroll. The program was so popular, Congress increased the funding multiple times so more businesses were able to apply for assistance. As of writing, PPP is no longer available, but that does not mean the program is over. Before receiving additional rounds of funding, PPP stopped accepting applicants, only to allow a new wave of applications a short period later. These different periods were referred to as rounds.

Given the success and popularity of PPP loans, it is possible the program will either receive additional funding in the future, or the government will pass a new variation based on the original program. Even with the quarantine officially over, many businesses are still struggling, especially locations that rely on in-person services. If the program opens up another round of funding, it is important to understand exactly how PPP loans work and the general application process.

PPP Loan Funding

In addition to funding from the SBA, other lending organizations, such as banks and credit unions, partnered with the government to help distribute PPP funds. When Congress passed the CARES act, additional companies were brought in to act as temporary PPP lenders. This not only increased funding for PPP loans, but it also presented more opportunities for businesses to apply for loans and get a quicker response. Some of the biggest lenders brought into the PPP included:

PPP Loan Eligibility

All small businesses, including nonprofits and veterans organizations, were able to apply for PPP loans if they met the necessary eligibility requirements. The business must have opened no later than February 15th, 2020 and have no more than 500 employees. The employee requirement was waived for business owners who worked in either the hotel or food services industries or were classified as a franchise in the SBA Franchise Directory. Businesses that received assistance from an approved SBA investment company were also eligible for a PPP loan.

Available Funding from PPP Loans

Businesses could receive up to 2.5 times their average monthly payroll, based on business records from the previous year. Seasonal businesses could choose from any 12-week period in the previous year. To qualify as a seasonal business, your business must be open for less than seven months a year. If your business opened in 2020, you could estimate your average payroll based on payroll from 2020. If you were self-employed, you could use your net profits from the previous year.

Requirements to get a PPP Loan Forgiven

For many small business owners, the most important part of the PPP was getting the loans forgiven. There were several eligibility requirements with forgivable PPP loans. First, you must spend at least 60 percent of the PPP loan on payroll costs.

For the purpose of the loan, payroll costs consisted of several areas. The majority of costs are made up of salary wages, which also includes commission and tips. Paid vacation, as well as medical leave and paternity programs were also included as payroll. Retirement and group benefits, such as health or dental insurance also count as payroll expenses. Finally, any state or local taxes are also considered as payroll costs.

The remaining PPP funds may be spent on other business expenses, including rent or mortgage, utilities, supplier costs, worker protection expenses and operations expenditures. Each loan has a different coverage period, which is determined after you submit your application. A typical coverage period lasted between eight and 24 weeks. You must have spent your PPP loan by the end of this period. If you had funds remaining, you could send the funds back and still qualify for loan forgiveness.

PPP Loan Forgiveness Application

You were required to submit several documents when applying for loan forgiveness. The types of documents changed based on how much you received. If your PPP loan was under $150,000, you were only required to submit a one-page document providing a general overview of how you used the PPP loan.

If you received over $150,000, the process was longer. You must have submitted a list of all your full-time employees, including pay rates. You were also required to supply all payments relating to your utilities, rent or mortgage. Finally, you must sign a statement confirming you used your PPP loan to support your payroll and make payments to keep your business operational.

Types of PPP Loans

As of writing, the program had three different loans available. First time PPP loans were available for any small business that met the general application requirements. Second draw loans were added shortly after, allowing any business who previously applied for a PPP loan to submit a second application for additional funding. A loan for additional funding later became available for businesses that either returned their first PPP loan, or did not receive the full amount they qualified for.

For the most part, the eligibility requirements for each round of funding were the same. The biggest difference was, if you previously received a PPP loan, you could only apply for extra funding if you had fewer than 300 employees and already used all the funding from the first loan. You were also required to demonstrate at least a 25 percent loss in profits from the previous year.