2020 threw plenty of curveballs. While the effect of the current global situation can be felt on various parts of the society, very few had it worse than the small and minority-led businesses. In fact, according to a Fortune report, almost 100,000 establishments went under in 2020.
To boost a reeling economy and help struggling businesses get back on their feet, the Small Business Association (SBA) introduced the Paycheck Protection Program (PPP). The newest revision to which came on March 25, 2021.
What Is a PPP Loan?
Originally introduced under the CARES Act, the PPP loan is aimed at revitalizing communities and businesses that are otherwise finding it hard to survive in these tough times. Businesses with 500 or fewer employees that were in operation on Feb 15, 2020 are eligible for PPP loans. Companies that have offices in multiple locations need to show that each physical location houses fewer than 500 employees. However, the employee cap is somewhat lenient for industries like Natural Gas Extraction and Electric Power Distribution.
The updated guidelines put special emphasis on independent professionals and businesses run by underserved communities. In recent months, food and accommodation, event planning, news establishments, churches, and nonprofits have been included in the eligible list. However, businesses owned by or directly linked with the President and members of Congress are not in the running to get PPP loans.
Businesses that are eligible for PPP loans can receive it not once, but twice. For the first draw, the maximum amount is capped at $10 million or 2.5 times the average monthly payroll amount, whichever is less. Expenses covered by PPP loan amounts are now tax-deductible.
Second Draw PPP Loans
Businesses that received the first PPP loan may be eligible for a second round. The second draw PPP loan was introduced after seeing the sustained impact of the current global situation on the economy. It differs from the first draw in terms of employee count and the maximum amount given to borrowers. The requirements for second draw PPP loan are:
- Having 300 or fewer employees;
- Showing that a business’s gross receipts have seen a reduction of 25 percent or more in a quarter in 2020 in comparison to a similar one in 2019, and;
- Having used or planning to use 100 percent of the first draw loan before the second round.
The maximum amount for the second draw PPP loan is $2 million. New and seasonal businesses that were not fully operational in 2020 will receive the amount following the calculation of payroll cost and total months of operations.
Borrowers receiving PPP loans of $150,000 and less can see their amount being completely forgiven if the expenses meet the criteria. For starters, at least 60 percent of the total loan amount must be spent on the payroll in a period between eight to 24 weeks.
The other eligible expenses for PPP loan forgiveness include:
- Rent, mortgage interest, and other utilities;
- Cost of buying employee protection gear and keeping workspace safe and healthy;
- Cost of uninsured property damage triggered by the civil unrest in 2020;
- Cost of essential supplier goods with transactions taking place before receiving the loan, and;
- Cost of essential business operation investments, such as software, cloud infrastructure, and HR.
Borrowers need to provide simplified data of transactions, payroll, and the number of employees to lenders. The new changes mean that businesses can be eligible for Employee Retention Credit (ERC) and PPP loans at the same time. If an employer has enough non-payroll-related expenses, then it can be capped at 60 percent for PPP loan forgiveness and the rest can be used to claim ERC.
How to Apply for a PPP Loan
Due to the streamlining of the procedures over the months, applying for PPP loans has become considerably simpler. As such, you will need to keep in mind a few details and follow some steps to expedite your application.
For first draw and second draw PPP loans, the deadline is May 31, 2021. Lenders will have till June 30 to address the applications.
For borrowers, you can start by downloading the official forms from the SBA website. You’ll need to keep all the relevant documents handy. These include your:
- Tax details
- Payroll records;
- Official active passport or driver’s license, and;
- 25 percent reduction proof for the second draw loan.
SBA has a robust Lender Match program that connects businesses with institutions suitable to lend the loans. However, you might want to start with your bank first.
The PPP loan application should be simple if you follow all these steps diligently. Do not apply without filling all the fields. Avoid discrepancies and errors as they might come back to haunt you at a later stage. Support your claims with proper and elaborate documentation. Most importantly, stay proactive after submitting your application in order to fast-track your application.
Summing Up
Although the Paycheck Protection Program had a rocky start, it has only gotten better with time. Regardless, PPP loans have been nothing short of blessings for struggling small businesses and community-run businesses.
With the possibility of Congress pushing for a bigger PPP fund, you and your business should be ready to take advantage of the program. To prepare yourself, make sure to check out the SBA website to learn more about the program.