The Paycheck Protection Program (PPP)
Editor’s note: This article was last updated on June 9, 2020 to reflect loan forgiveness changes outlined in the Payment Protection Program Flexibility Act.
If you’re like many small business owners, you may be struggling to retain and pay employees during the COVID-19 pandemic. Federal financial assistance programs such as the Paycheck Protection Program (PPP) can help.
What is the Paycheck Protection Program?
The Paycheck Protection Program is a federal financial assistance program that provides forgivable loans to small businesses. PPP loans provide small business owners with funding equal to 2.5 times your average monthly payroll costs. The entire loan amount will be forgiven (you don’t have to repay it) if you use the proceeds to pay for payroll costs, rent, mortgage interest, and utility costs and you maintain staffing and compensation levels.
Who can apply for the Paycheck Protection Program?
In general, small businesses with fewer than 500 employees, non profits, veterans organizations, sole proprietors, independent contractors, and self-employed individuals may apply. In certain circumstances, businesses with more than 500 employees are eligible. Learn more about the SBA’s size standards for small businesses. Unlike many other types of business loans, no collateral or personal guarantee is required for PPP loans.
How can PPP funds be used?
The primary goal of the Paycheck Protection Program is to help small business owners continue to pay their employees. For the loan to be forgiven, business owners must spend 60% of PPP funds they receive on payroll-related expenses within 24 weeks after receiving the loan. No more than 40% of the funds can be spent on rent, mortgage interest, and utilities.
Your loan won’t be fully forgiven if you don’t use all of your PPP funds on approved expenses (payroll, rent, mortgage interest, and utilities). There are also restrictions on decreasing headcount or wages that may limit your ability to achieve 100% loan forgiveness.
How do I apply for a Paycheck Protection Program loan?
Don’t delay in applying for a PPP loan. Loans are available on a first-come, first-served basis. The CARES Act initially allocated $350 billion to the Paycheck Protection Program. Due to overwhelming demand by business owners, the initial round of funding was exhausted in mid-April. Lawmakers approved an additional $310 billion of funding shortly afterward.
Most lenders began accepting applications for Paycheck Protection Program loans in early April 2020. SBA lenders, federally insured depository institutions, and other regulated lenders approved by the Treasury can accept PPP applications. Find an approved lender here. New applications for PPP loans will not be accepted after June 30, 2020.
Some lenders (particularly largest U.S. banks) will only take applications from their current customers. They may also require borrowers to meet other criteria such as having an existing lending relationship with them. If you don’t meet their criteria, you can still apply with another lender that doesn’t have the same borrower requirements.
As a fractional CFO service provider, Momentum CFO worked with many different lenders to help clients obtain PPP loans. Generally speaking, we’ve found that the largest U.S. banks have been the slowest to provide funding and their customer service has been less than ideal. If you apply with a large U.S. bank, don’t be surprised if you receive an initial e-mail that essentially says “We have your application, but don’t contact us. We’re busy and will contact you when we’re ready.” You may receive subsequent automated e-mails that provide little information about your specific application. Connecting with a bank representative can be very difficult.
Community and small banks have been the heroes of the Payment Protection Program. Momentum CFO’s clients that applied with smaller lenders typically received personalized customer service and received PPP funding much sooner than clients who applied with larger lenders such as Chase, Bank of America, and Union Bank.
What if my PPP loan isn’t forgiven?
If you’re required to repay your loan, you’ll repayment will start 6 months after receiving the funds. Payments are deferred for 6 months, but 1% annual interest will begin accruing immediately. Full repayment is due 5 years after receiving the loan. There is no pre-payment penalty for repaying it sooner.
About Momentum CFO
Momentum CFO is a boutique firm specializing in outsourced Chief Financial Officer services for small to mid-size businesses. We bring the benefits of Fortune 500 financial expertise to your business without the expense of hiring a full-time CFO.