Understanding the Paycheck Protection Program: How Does It Work?

To the small businesses hurting across the country from COVID-19 impact, know that there’s hope and help is here.

In late March, the federal government approved a $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest stimulus bill in U.S. history, to support those affected by this pandemic and the suffering economy.

One of the measures in the bill is the Paycheck Protection Program (PPP), available through August 8th, which is specifically designed to aid small businesses. This program will help businesses to keep the lights on and their workers employed—it’s the cornerstone for SMBs during this challenging time.

Here’s everything you need to know.

How does the PPP Program work?

The Paycheck Protection Program (PPP) is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This $669 billion program provides eight weeks of cash-flow assistance through 100% federally guaranteed loans to keep the small business workforce employed during the COVID-19 crisis. Eligible loans may be forgiven and function as a non-taxable grant.

Key details

  • Loan up to 2.5x your average monthly payroll costs, with a 1% interest rate
  • Funds can be used on payroll costs like employee salaries and insurance benefits, insurance premiums, mortgage interest payments, rent payments, and utility expenses
    • Per SBA program rules, payroll must be 60% of the forgiven amount
  • No payments for the first 6 months
  • No additional SBA fees or need for collateral or personal guarantees

Who is eligible for PPP loans?

The good news? Nearly every small business in the U.S. will qualify. The primary requirements is that your business needs to have fewer than 500 employees who reside in the U.S. Here’s the breakdown of those who qualify for PPP:

  • S corporations, C corporations, and partnerships
  • Sole proprietors and single-member LLCs
  • Independent contractors
  • Restaurants, hotels, or businesses under “Accommodation and Food Services”
  • Nonprofit (501(c)(3) organizations
  • Veterans 501(c)(19) organizations
  • Tribal businesses meeting the SBA’s size standard

The SBA applies detailed affiliation requirements, requesting a business to aggregate all of its parent companies, affiliates, and subsidiaries in determining whether the business meets the small business size requirements and borrowing criteria. You can view the full list of affiliate rules for this program on the SBA site.

How much funding you’ll receive

How much in PPP loan your business will qualify for depends on last year’s payroll. Take your average monthly payroll cost in 2019 and multiply it by 2.5; this number is the maximum loan amount, up to $10 million.

For seasonal businesses, you can choose a 12-week period beginning February 15, 2019, or March 1, 2019, to dictate your average monthly expenses. Whatever your choice, the ending date has to be June 30, 2019.

And if your business wasn’t in operation before June 30, 2019, lenders will consider your 2020 January and February costs.

How can PPP loans be used?

For loan forgiveness to take place, businesses have to use the funds on payroll costs, insurance premiums, mortgage interest payments, rent payments, and/or utility costs. The costs need to occur over an 8-week or 24-week period after receiving the loan—all while maintaining employee numbers and compensation levels.

It’s important to note that insurance premiums and mortgage interest payments have to be incurred by February 15, 2020, for loan coverage eligibility. Similarly, rent lease agreements and utility services must be in place before February 15, 2020.

The SBA is still creating rules for loan forgiveness and we’ll provide more information as it becomes available.

What is considered payroll within the Paycheck Protection Program?

Payroll costs include:

Forgiveness eligible payroll costs
  • Compensation (salary, wage, commission, or similar; payment of cash tip or equivalent)
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment required for group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Payment of state or local tax assessed on the compensation of employees
Non-eligible payroll costs
  • Employee/owner compensation over $100,000 (this is already removed and calculated in the BlueVine product)
  • Payments made to independent contractors
  • Federal employment taxes
  • Compensation of employees whose principal place of residence is outside of the U.S.
  • Qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act

Tip: Keep a documented record of all of your expenses because you’ll need them when seeking SBA’s loan forgiveness through your lender.

How to stay informed

Explanation of the Paycheck Protection Program, a measure of the government’s $2.2 trillion Coronavirus stimulus bill called the CARES Act

BlueVine and Researchscape’s latest survey of over 500 small business owners

We understand this is a difficult time for everyone, and we’re committed to helping business owners with government emergency relief resources and clear steps.

BlueVine is an official direct non-bank lender for the government-backed SBA Paycheck Protection Program. Our entire PPP application process, including retrieving your loan number, is automated and online. Get started with a fast and secure online PPP loan application.

Disclaimer

The information, opinions, and advice in this blog post are provided for educational purposes only, and do not necessarily state or reflect those of BlueVine and/or its partners, including The Bancorp Bank and Celtic Bank. Neither BlueVine nor its partners are responsible for the accuracy of any content provided by author(s) or contributor(s). For information about BlueVine products and services, please visit the BlueVine FAQ page.