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Paycheck Protection Program Loan: Small Business Life-saver
Orange lifebuoy in sea on water. Life ring floating on top of water. Life ring in ocean.Toning.
Business and money

Paycheck Protection Program Loan: Small Business Life-saver 

Okay, let’s get straight to the point: You want to explore a paycheck protection program loan if your small business has been or will be beat up by the COVID-19 crisis.

In this blog post, therefore, I’m going to give you a really quick overview. I hope you can read this in two to three minutes. That’ll give you the nudge to explore further this option.

Then, at the end of the post, I describe how you start the loan application process. Which you want to begin immediately. Like after you finish reading this…

How a Paycheck Protection Program Loan Works

The paycheck protection program (or PPP) loan provides you with money to pay employee payroll and related costs, your rent, your utilities and a handful of other business expenses over two months, or eight weeks.

The loan amount? Basically 2.5 times the average monthly payroll costs your small business incurs over the twelve months that precede you getting the loan.

Example: You pay $10,000 a month on average for wages, health insurance, and state payroll taxes. You therefore qualify potentially for a $25,000 loan.

Example: You pay $1,000,000 a month on average for wages, health insurance, and state payroll taxes. You therefore potentially qualify for a $2,500,000 loan.

Payroll costs include payments made to a sole proprietor from money earned in the trade or business.

Example: A sole proprietorship generates $50,000 in self-employment earnings for its owner. From these earnings, the owner takes a $4,000 monthly draw. Probably, the $4,000 counts as payroll cost.

Loan Limitations and Restrictions

The law limits the loan amount to firms with fewer than 500 employees (for all practical purposes).

The maximum loan amount equals $10,000,000.

Further, you can only count payroll costs up to $100,000 per employee per year.

Example: A firm with ten employees each making $100,000 annually qualifies for same size loan as a firm with ten employees each making $200,000 a year.

Eligibility for a Paycheck Protection Program Loan

Your small business is eligible for a loan if you can self-certify that you really need the loan.

The actual language from the statute says you must provide, “a good faith certification… that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient…”

You also need to indicate that you will use the funds, “to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.”

What this language means isn’t precisely clear… but I think you read it to say (a) you honestly believe your firm won’t be able to operate without the loan and (b) you absolutely must use the money for payroll, the rent, loan payments, and utilities.

How the Paycheck Protection Program Loan Becomes “Free Money”

If you use the loan proceeds for an “approved” expense (payroll costs, rent, mortgage interest or utility expenses) and then you can also document that, the lender forgives the loan after two months.

Example: You borrow $100,000. Over the next eight weeks, you then use the $100,000 for employee payroll (an approved expense.) You don’t have to pay back the $100,000 loan. Really.

But two critically important wrinkles to this… First, if you reduce the average number of full-time employees in your firm after receiving the loan, that reduction in headcount also reduces the amount of loan forgiveness.

Example: You reduce the number of employees in your firm from ten workers to eight workers, a 20 percent reduction in workforce. Though you spent $100,000 in payroll costs, rent, and utilities during the eight weeks that followed receipt of your loan, you only receive forgiveness for 80 percent of the $100,000 loan because you only retained 80 percent of your workforce.

To determine whether you’ve reduced the number of full-time employees, the loan forgiveness formula compares the full-time employees during the eight weeks after you get the loan to the average number of full time employees you paid from February 15 through June 30 of either 2019 or 2020. You choose, by the way, whether the comparison looks at 2019 or 2020.

A second wrinkle: If you reduce the wages you pay people by more than 25%, that reduction also reduces the amount of loan forgiveness.

Example: To economize, you reduce employee salaries by 30 percent after you receive your loan. In this case, you only receive forgiveness for 70 percent of the loan because you pay employees only 70 percent of what you paid when you got the loan.

And Your Next Steps Are…

Two quick last points…

First, the statutes that create this package provide $349,000,000,000 in funding. That amount sounds like a lot of money. But it isn’t. Spread the amount over ten or twenty million small businesses, and you’re talking $20,000 to $30,000 (roughly) per firm.

Accordingly, if you need this help, contact your bank immediately. (Some people say this program won’t be available for weeks. Or months. And that’s maybe true. But government officials say they want these loans rolled out more quickly.)

Note: I’m currently aware of only two banks that are, sort of, accepting and processing queries about this program, US Bank and Live Oak Bank.  But if you know of an online loan application form or query tool that’ll let you or some other small business owner start the process of applying for a paycheck protection loan with an SBA approved lender, please post a comment with a link to the appropriate page.

A second point: Make sure you haven’t made some change to your payroll that sabotages the loan amount you might receive. Work through the numbers. Maybe with your accountant’s help. You can’t artificially fudge your payroll costs to inflate the loan amount. (Thank goodness.) But you probably can inadvertently reduce the loan amount you qualify for.

Some Other Paycheck Protection Resources

Senator Marco Rubio, who spearheaded this bit of the CARES act, provides a good FAQ about how these paycheck protection loans work here.

Note that if you can’t use the paycheck protection program, you may still qualify for an employee retention credit, something I describe here: The 50 percent Employee Retention Credit.

If you want to get up to speed on the other forms of tax-related assistance the Federal government provides, check out this blog post: COVID-19 Small Business Tax Relief.

Finally, as you work through your business plan for continuing operations over the next couple of months, you might find this useful (or at least encouraging): Small Business Survival Guide to the Corona Virus Crisis.

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