There are several elements of the $2.2 trillion government stimulus package (CARES Act) to parse out and analyze. One of the most useful options for small business owners is the introduction of the Paycheck Protection Program (PPP).
While the CARES Act also bolsters unemployment benefits throughout the country, the Paycheck Protection Program specifically aims to lower the volume of new unemployment applicants by providing small business owners working capital to cover payroll expenses, rent, and utilities.
PPP loans should be used over an 8-week period to cover general payroll expenses—if done correctly, it converts into a government grant and doesn’t have to be repaid.
The first question that you must answer before applying for a PPP loan is whether you qualify for one. Read on to determine which small businesses qualify for the Paycheck Protection Program and how you can benefit from this SBA loan.
Which Small Businesses Can Apply for PPP Loans?
The federal government has made the regulations for applying for PPP loans broad to encourage a variety of small business owners to apply.
The goal is to disperse this money quickly and effectively to support the economy during the COVID-19 crisis. Companies that can apply include:
- Small businesses of 500 or fewer employees (regardless of revenue)
- A small business that otherwise meets SBA’s size standards
- A hospitality or food service business that has fewer than 500 employees per physical location (and is classified under the NAICS code beginning with 72)
- A business operating as a franchise
- A nonprofit 501(c)3 entity that has fewer than 500 employees
- A 501(c)(19) veterans’ organization
- A tribal business entity that meets the SBA’s size requirements
If you meet the qualifications above, you may be eligible for a PPP loan. However, there are some additional limitations to make sure your business meets the size requirements and operational functions of an active company.
Can Self-Employed Workers and Sole Proprietors Apply?
PPP loans are available for sole proprietors, self-employed individuals, and independent contractors. Anyone who participates in the “gig economy” and has been affected is also eligible.
The Paycheck Protection Program should cover any compensation or income, wages, commission, or net earnings from self-employment if this amount is less than $100,000 annually.
The income should be prorated for the covered period. For example, if you earn $60,000 in one year, the prorated 2.5-month period would allow you to apply for a maximum loan of $12,500.
Additional Limitations for PPP Loans
There are a few small additions to keep in mind during the application process. For example, the business must have been operational on February 15, 2020, and the business must have had employees on the payroll or an agreement with an independent contractor.
Businesses must also certify that current uncertainty from the coronavirus pandemic has made the loan necessary for the business to continue operations. Moreover, you cannot apply or receive another Section 7(a) loan for the same purposes between February 15, 2020, and December 31, 2020.
Lenders are also encouraged to distribute PPP loans to small businesses that need them the most:
- Businesses in underserved or rural markets
- Businesses owned by veterans or the military community
- Businesses owned by socially and economically disadvantaged individuals
- Women-owned businesses
- Businesses that have been in operation for less than 2 years
These limitations don’t mean that you won’t be approved for a PPP loan if you don’t fall under these criteria. It only means that lenders should be aware that it is typically harder for those business owners to bounce back from economic challenges.
What Size Loan Can You Apply For?
The size of your small business and its expenses determine how much assistance you can collect. The standard amount is 2.5 times your average payroll amount (including healthcare, retirement, benefits, etc.). You can apply for up to $10 million.
Additionally, your PPP loan may be forgiven in full if you use it to cover payroll within 8 weeks of receiving it. This means you kept your doors open and your employees employed through the worst of the COVID-19 pandemic.
Layoffs and PPP Loans
One of the main benefits of a PPP loan is that it could be forgiven in its entirety if you use it for payroll, rent, and utilities within the first 8 weeks. However, to have your loan forgiven, you must adhere to certain requirements.
The main restriction is that your payroll must remain consistent during the 8-week period, which is what you planned according to your estimate in the PPP loan application. Therefore, you should not layoff or furlough employees during this time. You cannot cut employee pay by more than 25%. If you fail to adhere to the payroll requirements of this loan, you will be asked to pay back part of the loan (though with very low interest).
If you have already laid off employees or cut their pay, you can and should rehire them and restore their income by June 30, 2020, to receive full PPP loan forgiveness.
Knowing if your business qualifies for a PPP loan can help you move forward with the application process before you run out of working capital. There is a $350 billion cap on PPP loans and a delay between the time you apply and receive the funds, so you’re encouraged to apply as soon as possible.