PPP loan: What is the Paycheck Protection Program Loan & Forgiveness

Have you heard of the PPP loan? To assist small businesses during the pandemic, the federal government passed a number of aid packages, to provide low-cost loans and other financial support.

PPP Loans

One program created under the initial CARES Act is a Small Business Administration (SBA) loan program known as the Paycheck Protection Program (PPP). The SBA PPP provides low-interest loans, with a possibility for loan forgiveness, to eligible small businesses affected by COVID-19.

After receiving a Paycheck Protection Program (PPP) loan, it’s time to start thinking about how to use the loan to receive full PPP loan forgiveness.

Keep reading to learn more about how the PPP works, what businesses are eligible, how to apply, and how to get forgiveness.

What is the Paycheck Protection Program?

SBA PPP loans provide small businesses that have been impacted by COVID-19 with payroll assistance. These loans are backed by a federal loan guarantee.

SBA PPP loans are designed to get funds to small businesses as quickly as possible. Because of this, the application process for an SBA PPP loan will be different than the application process for other existing SBA loan programs.

One of the goals of the PPP is to incentivize small businesses to keep employees on their payrolls. Because of this, borrowers are eligible for loan forgiveness if they meet certain requirements related to the loan, as defined below.

What Businesses Are Eligible to Apply?

Businesses that have been impacted by COVID-19 and meet the following requirements are eligible to apply:

  • Businesses employing less than 500 employees (this includes all employees – full-time, part-time, or any other status)
  • A 501(c)(3) with fewer than 500 employees
  • Businesses that otherwise meet the SBA’s size standard
  • Individuals who are sole proprietors, independent contractors, or are otherwise self-employed
  • Tribal business concern that meets the SBA size standard
  • A 501(c)(19) Veterans Organization that meets the SBA size standard

First Draw PPP Loan

Loan details

PPP loan forgiveness

The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on payroll. First Draw PPP Loan can be used to help fund payroll costs, including benefits, and may also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.

SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses.

  • PPP loan have an interest rate of 1%.
  • Loans issued prior to June 5, 2020 have a maturity of two years. Loans issued after June 5, 2020 have a maturity of five years.
  • Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower’s loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (between 8 weeks and 24 weeks).
  • No collateral or personal guarantees are required.
  • Neither the government nor lenders will charge small businesses any fees.

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Who may qualify

The following entities affected by Coronavirus (COVID-19) may be eligible:

  • Sole proprietors, independent contractors, and self-employed persons
  • Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard)
  • Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
    • 500 employees, or
    • That meets the SBA industry size standard if more than 500
  • Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location

Second Draw PPP Loan

Loan details

Small business eligibility

The Paycheck Protection Program now allows certain eligible borrowers that previously received a PPP loan to apply for a Second Draw PPP Loan with the same general loan terms as their First Draw PPP Loan. 

Second Draw PPP Loan can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.

Maximum loan amount and increased assistance for accommodation and food services businesses

For most borrowers, the maximum loan amount of a Second Draw PPP Loan is 2.5x the average monthly 2019 or 2020 payroll costs up to $2 million. For borrowers in the Accommodation and Food Services sector (use NAICS 72 to confirm), the maximum loan amount for a Second Draw PPP Loan is 3.5x the average monthly 2019 or 2020 payroll costs up to $2 million.

Who may qualify

A borrower is generally eligible for a Second Draw PPP Loan if the borrower: 

  • Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses
  • Has no more than 300 employees; and
  • Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020

Note that all PPP (Paycheck Protection Program)  ends on March 31, 2021. All eligible entities can apply through a participating lender until then.

All new First and second Draw PPP Loan will have the same terms regardless of lender or borrower.

Are Forgiveness Applications Open?

Yes! The SBA is currently taking applications, however you must first apply to your lender.

How and when to apply for loan forgiveness

A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan.

If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.

1. Contact your PPP Lender and complete the correct form:

Your Lender can provide you with either the SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a Lender equivalent.

The 3508EZ and the 3508S are shortened versions of the application for borrowers who meet specific requirements. Your Lender can provide further guidance on how to submit the application.

2. Compile your documentation:

Payroll (provide documentation for all payroll periods that overlapped with the Covered Period or the Alternative Payroll Covered Period):

  • Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees
  • Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
    • Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
    • State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state
  • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount

Non-payroll (for expenses that were incurred or paid during the covered period and showing that obligations or services existed prior to February 15, 2020):

  • Business mortgage interest payments: Copy of lender amortization schedule and receipts verifying payments, or lender account statements
  • Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments
  • And, business utility payments: Copies of invoices and receipts, cancelled checks or account statements

This list of documents required to be submitted to the Lender is not all-inclusive.

3. Submit the forgiveness form and documentation to your PPP Lender:

Paycheck Protection Program (PPP) Loans

Complete your loan forgiveness application and submit it to your Lender with the re­quired supporting documents and follow up with your Lender to submit additional documentation as requested. Consult your Lender for additional guidance and provide requested documentation in a timely manner.

4. Continue to communicate with your Lender throughout the process:

If SBA undertakes a loan review of your loan, your Lender will notify you of the review and the SBA loan review decision. You have the right to appeal certain SBA loan review decisions. Your Lender is responsible for notifying you of the forgiveness amount paid by SBA and the date on which your first payment will be due, if applicable.

Please Note:

Recent legislation has eliminated the original requirement to deduct the amount of EIDL Advance you may have received from your PPP loan forgiveness. Additional guidance and updated forms are forthcoming.

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