Understanding Payroll Protection Loan Details and Terms

The Payroll Protection Loan (PPP) is a type of loan designed to help small businesses weather the financial storm caused by the COVID-19 pandemic.

These loans are provided by the Small Business Administration (SBA) and are backed by the federal government.

To be eligible for a PPP loan, businesses must have 500 or fewer employees and operate in a specific industry.

Businesses can use PPP loan funds to cover payroll costs, including wages, salaries, and benefits.

The loan amount is calculated based on the business's average monthly payroll costs over the past year.

The PPP loan terms are designed to be flexible and accommodating, allowing businesses to use the funds as needed.

Loan forgiveness is available for businesses that meet certain requirements, such as using at least 60% of the loan for payroll costs.

The loan forgiveness process is relatively straightforward, but it does require some documentation and paperwork.

To be eligible for a Paycheck Protection Loan, you must be a small business, sole proprietor, independent contractor, self-employed person, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, or a tribal business.

You must have been in operation on February 15, 2020, and have either had paid employees or paid independent contractors. If you're a sole proprietorship, independent contractor, or self-employed individual, you must have been in operation on February 15, 2020.

The applicant and its affiliates must have 500 or fewer employees worldwide, including its U.S. and foreign affiliates, or meet the Small Business Administration's industry size standards based on average number of employees.

Alternatively, the applicant's tangible net worth must not exceed $15 million on March 27, 2020, and its average net income must not exceed $5 million for the two full fiscal years prior to the date of the PPP application.

Here are the eligibility criteria in a nutshell:

You must be located in the United States or its possessions, and your primary operations must be located in the United States or its possessions, or your business must make a significant contribution to the economy of the United States.

The loan amount for a Payroll Protection Loan is based on the applicant's payroll costs, which include salaries, wages, commissions, and other compensation paid to employees. These costs are limited to $100,000 annualized per employee.

Payroll costs also include group health benefits and insurance, as well as retirement benefits. However, they do not include the employer's portion of social security tax, the employer's portion of Medicare tax, and federal unemployment tax.

To calculate the loan amount, the applicant calculates its payroll costs between January 1, 2019, and December 31, 2019. The average monthly payroll costs are then calculated by dividing this amount by 12.

The PPP loan amount is equal to 2.5 times the average monthly payroll costs, and each loan may not exceed $10 million.

The amount of a PPP loan is based on your business's payroll costs, which include salaries, wages, commissions, and benefits.

Payroll costs are limited to $100,000 annualized per employee, and don't include the employer's portion of social security tax or Medicare tax.

To calculate your PPP loan amount, you'll need to calculate your average monthly payroll costs between January 1, 2019, and December 31, 2019, by dividing your total payroll costs by 12.

This average monthly payroll cost is then multiplied by 2.5 to determine your PPP loan amount.

Each PPP loan may not exceed $10 million, but in some cases, each affiliate of a company can apply for and receive its own PPP loan.

Second-draw borrowers can request a maximum loan of 2.5 times their average monthly payroll costs, up to $2 million.

The PPP loan amount is also affected if you have an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, and you can increase your PPP loan amount by the outstanding amount of the EIDL, less any advance received.

The terms of a PPP loan are quite straightforward. A business is not required to begin paying principal or interest until the Small Business Administration disburses the loan forgiveness amount to the lender.

The loan forgiveness amount is remitted to the lender, or if the borrower doesn't apply for forgiveness, ten months after the end of the covered period. This gives businesses some extra time to get their finances in order.

For PPP loans approved on or after June 5, the loan must have a maturity of at least five years. This is a longer repayment period than the standard two-year maturity for other PPP loans.

Lenders have the option to extend the maturity of these loans longer, but it's not mandatory. This means businesses can take up to five years to pay off their loan, giving them more flexibility.

Each PPP loan comes with an interest rate of 1 percent. This is a relatively low interest rate compared to other loans, making it more accessible to small businesses.

The Small Business Administration guarantees each PPP loan, which means businesses don't need to provide collateral or personal guarantees to apply or be approved. This reduces the risk for businesses and makes it easier to get approved for a loan.

For Borrowers, there are several resources available to help you navigate the process. Borrower Application Forms are available for both First Draw and Second Draw PPP Loans, as well as a special form for Schedule C Filers using gross income.

The Small Business Administration provides a Search Tool to help you find an eligible lender. This is a great resource if you're not sure where to start.

You'll need to provide documentation to support your loan application, and the SBA has guidelines on how to calculate maximum loan amounts for First Draw and Second Draw PPP Loans, depending on your business type.

If you're a Schedule C Filer, you'll need to use a special form to calculate your maximum loan amount. The SBA has a fact sheet on how to do this.

There are three different forms for loan forgiveness: Form 3508S for loans of $150,000 or less, Form 3508EZ for simpler cases, and Form 3508 for more complex cases. Make sure to choose the right one for your needs.

The SBA also provides a Disclosure of Certain Controlling Interests form, which you'll need to fill out as part of the loan forgiveness process.

Here is a list of resources available to borrowers:

To qualify for full forgiveness, your business must have spent at least 60% of your PPP loan on payroll, which includes all wages, commissions, bonuses, insurance payments, and retirement payments made on behalf of your employees.

The remaining 40% can be spent on eligible operating costs, such as mortgage payments, rent, software, and utility bills. These costs are essential for the day-to-day operation of your business.

Supplier costs are also eligible for forgiveness, but only if you ordered them before the beginning of your covered period. This means that if you ordered perishable goods during the period, they are still eligible for forgiveness.

If your property was damaged during the covered period and you haven't already been recompensed for this from your insurance, you may be able to include repair costs in your forgiveness application. This is a crucial consideration for businesses that suffered property damage during the pandemic.

Worker protection costs, such as personal protective equipment and barriers to keep workers safe, are also eligible for forgiveness. These costs are a vital investment in the health and safety of your employees.

Here are the eligible expenses for PPP loan forgiveness in summary:

You can apply for PPP loan forgiveness through your lender or directly from the SBA. If your loan was for more than $150,000, you must apply through your lender.

To apply through your lender, they will typically contact you if you're eligible for forgiveness. Some lenders will even draft SBA Form 3508 for you, requiring only your signature. If you haven't heard from your lender, contact them as soon as possible to inquire about the process.

You can apply for loan forgiveness directly from the SBA if your lender participated in the SBA's Direct Forgiveness program, which had around 1,400 lenders. To apply, visit the SBA's PPP Direct Forgiveness Portal and fill out SBA Form 3508S if your loan was for $150,000 or less.

You can apply for PPP loan forgiveness through the SBA or your lender. If your loan was for $150,000 or less, you can apply directly through the SBA's PPP Direct Forgiveness Portal.

To apply through the SBA, you'll need to fill out SBA Form 3508S, and if it's your first loan, you won't have to submit any further documentation. If you have a second-draw loan, you'll need to prove that you lost revenue before your loan can be forgiven.

If your loan was for more than $150,000, you can only apply for forgiveness through your lender. Each lender has a different process, but they'll typically contact you if you're eligible for forgiveness.

If your loan was for more than $150,000, you may need to provide extra documentation before your loan can be forgiven. Your lender will inform you about the loan forgiveness application process.

Here's a breakdown of the forms and instructions you may need to complete:

You can also expect to receive a loan necessity questionnaire from the SBA if your loan was for $2 million or more. This questionnaire will ask about your quarterly revenue, capital expenditures, and other financial information.

You'll have 10 business days to complete and return the questionnaire to your lender. Failure to do so may result in the SBA pursuing repayment or other remedies.

You can apply for PPP loan forgiveness as soon as your covered period ends, or you can wait until your loan matures, which is two years for loans originated before June 5, 2020, and five years for loans issued on or after that date.

To apply for forgiveness, you can submit your application directly to the U.S. Small Business Administration (SBA) if your lender was one of the 1,400 lenders that participated in the SBA’s Direct Forgiveness program.

The SBA's PPP Direct Forgiveness Portal is where you can fill out SBA Form 3508S if your loan was for $150,000 or less. Don't worry about showing how you spent the funds, and if it's your first loan, you won't need to submit any further documentation.

If you have a second-draw loan, you'll need to prove that you lost revenue before your loan can be forgiven. This is a crucial step to ensure your loan forgiveness is approved.

The deferral of principal and interest payments on your PPP loan was extended to the date that loan forgiveness is remitted to the lender or, if the borrower does not apply for loan forgiveness, ten months after the end of the covered period. This means you can delay loan payments until your forgiveness application is processed.

The Paycheck Protection Program (PPP) was enacted as part of the CARES Act, which allocated $349 billion between April 3 and April 16, 2020.

The Small Business Administration stopped accepting new PPP applications on April 16, 2020, and 1.7 million loans were made between April 3 and April 16, 2020. The average loan amount was $206,000.

Businesses in the construction industry received 13.12 percent of the total loan amounts, the largest percentage of any classification. The next four highest classifications were professional, scientific, and technical services with 12.65 percent; manufacturing with 11.96 percent; health care and social assistance with 11.65 percent; and accommodation and food services with 8.91 percent.

The Paycheck Protection Program Flexibility Act of 2020 amended the PPP, allowing loan forgiveness to be expanded from eight weeks of eligible costs to the 24 weeks or December 31, 2020, whichever is earlier.

If your business received a PPP loan before the program ended on May 31, 2021, you can apply for PPP loan forgiveness until the date when your loan matures, which is two years for loans originated before June 5, 2020, and five years for loans issued on or after that date.

You can apply earlier than that, or as soon as your covered period ends, to avoid paying back the loan 10 months after your covered period ends.

To apply for forgiveness through the SBA, you should visit the SBA's PPP Direct Forgiveness Portal. Fill out SBA Form 3508S if your loan was for $150,000 or less. You don't have to tell the SBA how you spent the funds, and if it's your first loan, you don't need to submit any further documentation.

If you have a second-draw loan, you'll have to prove that you lost revenue before your loan can be forgiven.

The Small Business Administration requires 75% of a PPP loan to be used for payroll costs, which is a stricter rule than stated in the law. This rule is causing an "unintended burden" on businesses, according to the SBA Inspector General.

Here is a summary of the forgiveness process through the SBA:

Note that the SBA has a Direct Forgiveness program, which allows you to apply for forgiveness directly from the SBA if your lender was one of the 1,400 lenders that participated in the program.

California had the most loans approved for the PPP, with a total of 1,270,600 loans. This is a staggering number, and it's no surprise that California's economy is one of the largest in the country.

The top five states for PPP loan approvals were California, Florida, Texas, New York, and Illinois. These states were followed closely by Georgia, Ohio, Pennsylvania, New Jersey, and Michigan.

Here's a breakdown of the top 15 states for PPP loan approvals, based on the data from the Small Business Administration:

These numbers give us a sense of the scale of the PPP program and the impact it had on small businesses across the country.