What is the Paycheck Protection Program?
The Paycheck Protection Program (also referred to as PPP) is a loan that provides an incentive for small businesses to keep their workers on the payroll. It’s designed to help small businesses as they react to COVID-19 and manage the fallout from the Coronavirus crisis.
How Much Can I Borrow?
The SBA’s PPP loan amount can be for a maximum of two months of your average monthly payroll costs from the previous year plus an additional 25% of that amount. The loan amount is capped at $10 million.
How Much Can be Forgiven?
Loans will be forgiven up to the loan amount for a borrower’s payroll, rent, mortgage, and utility costs incurred and paid during an eight-week period after a loan is originated.
Loan forgiveness will be reduced to the extent of:
- Any reduction in employee headcount during this period (as compared to the prior year)
- Any reduction in pay of an employee by more than 25% (as compared to their prior year compensation)
Borrowers that rehire workers will not be penalized for paying them less when they are rehired.
Let’s Review an Example
The SBA wants to loan you 2 months of payroll (calculate the max loan amount based on the average monthly payroll in 2019). To add a “buffer” for rent utilities, etc, they will increase the loan amount by 25%. Yes, that is 25% of the total loan amount.
Thus, mathematically, a 25% increase of the whole loan amount, which is based on two months of payroll payments, is the same as saying “2.5 months of payroll” which is where the confusion ensues.
Now, when it comes time for forgiveness, the actual payroll paid during an 8 week period (with certain limitations like no annualized pay over $100,000) is the basis for this forgiveness calculation. Thus, the SBA will forgive 2 months of payroll and not 2.5 months of payroll. However, they will also forgive rent and utilities for that same 8 week period up to the loan amount (with some exceptions and limitations), which is why they provide this excess “25% of the loan amount” on top of the 2 months of payroll to help cover your rent and utilities.
To clarify even further, when applying for the PPP loan, the SBA is not looking at rent and utilities. Instead, they are “baking” rent and utilities into the Max Loan Amount Calculation by providing an additional 25% on top of the loan amount that was calculated solely from your payroll records. Later, to get loan forgiveness, the SBA should forgive amounts you can prove (through canceled checks and other documentation) for 8 weeks of payroll, rent, and utilities. Note that this is actual expenses and not 2.5 months of actual payroll.
PPP Loan Example
2 Months of 2019 Payroll = $100,000
25% Buffer = $25,000
Total PPP Loan = $125,000
PPP Forgiveness Example
2 Months of 2020 Actual Payroll = $94,500
Actual Expenses for Rent and Utilities = $17,500
Total PPP Forgiveness = $112,000
PPP Loan Repayment Example
$125,000 Original Loan
$112,000 Allowed Forgiveness
$13,000 Due to SBA
A Word of Caution
Please remember, the CARES Act was drafted and approved in record time. Many parts of it are very confusing.
The nation is facing a crisis and we are all doing the best we can to understand the financial aid available so that we can share information and help each other out in this time of need. This blog post is based on my reading and re-reading of the statutes in conjunction with multiples conversations with bankers and SBA representatives.
Please do not rely solely on this information as we cannot guarantee its accuracy as rules shift. I do feel pretty good about it in it’s current state and CorpNet will continue to provide updates as changes are rolled out.
Learn More About SBA Loans and Grants
On March 29, 2020, following the passage of the CARES Act, the SBA provided small business owners and non-profits impacted by COVID-19 with the opportunity to obtain up to a $10,000 Advance on their Economic Injury Disaster Loan (EIDL). The Advance is available as part of the full EIDL application and will be transferred into the account you provide shortly after your application is submitted. To ensure that the greatest number of applicants can receive assistance during this challenging time, the amount of your Advance will be determined by the number of your pre-disaster (i.e., as of January 31, 2020) employees. The Advance will provide $1,000 per employee up to a maximum of $10,000.
|Paycheck Protection Program (PPP)||Economic Injury Disaster Loans (EIDL)||Emergency Economic Injury Grant|
|Type of Funding||Forgivable Loan (7a)||Disaster Loan (7b)||Disaster Loan Advance (Grant) (7b)|
Debt Obligations Before 02/15/2020
Other Expenses That Can't be Paid Due to Disaster's Impact
|Dollar Amount||Up to $10,000,000|
2.5 Business' Average Monthly Payroll
|Up to $2,000,000||Up to $10,000|
|Percentage Rate||1% Fixed||3.75% Fixed for Businesses|
2.75% Fixed for Non-Profits
|Payment Terms||2 Years||30 Years||Not Applicable|
|Forgiveness||100% Is Eligible||0% Is Eligible||100% Is Eligible|
|Additional Information||Loans are available through SBA Approved Lenders. Many lenders are imposing strict eligibility requirements.||To access the advance, you first apply for an EIDL and then request the emergency advance. The advance of up to $10,000 is paid within 3 days and does not need to be repaid under any circumstances.|
- Last 4 quarters of payroll tax forms (Form 941)
- A payroll report with each employee's 2019 compensation
- A general ledger showing health care benefits paid per employee
- A general ledger showing retirement benefits paid per employee
Since the Coronavirus relief programs are being rolled out quickly, other items may be required to obtain a PPP loan. Please contact CorpNet with any questions.