On December 22, 2020 Congress passed the stimulus bill which provides for new for Paycheck Protection Program loans and other small business relief. Read more about that legislation and apply for a PPP loan here.
The Paycheck Protection Program (PPP) is designed first, to keep your employees employed as well as help your business remain viable, but what does that mean? As you consider that the Paycheck Protection loans are intended to keep employees on the payroll it might make it easier to see how it impacts:
- The application process and appropriate loan amounts
- What the funds can be used for
- How that will impact any future forgiveness
Applying for PPP Loans
The first requirement to apply for a PPP loan is that your business must have been in operation on February 15, 2020 and had employees for whom you paid salaries and payroll taxes. If you are self employed and don’t have any employees, you will also qualify to apply.
The next part of the application process deals with your payroll. Your potential loan amount is based on 2.5X your annual payroll up to a maximum of $10 million (whichever is less). An employee includes full-time and part-time employees.
Independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of the PPP loan application.
What Can PPP Funds Be Used For?
As you would likely assume, because Paycheck Protection Loans are intended to keep employees on the payroll, most of the approved uses will be somehow related to payroll. The SBA says loan proceeds can be used for:
- Payroll costs
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, along with insurance premiums
- Employee salaries, commissions, or similar compensations
- Payments of interest on any mortgage obligation (but cannot be used to pay principal or prepay a mortgage)
- Rent (including rent under a lease agreement)
- Interest on any other debt obligations that were incurred before the covered period
- Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020
This relief is intended to help your business cover these expenses for the next eight weeks. The Treasury and the SBA are already thinking about making additional capital available, but there are no details yet. And, the Congress is contemplating what next steps will be once the crisis is over and thinking about making capital available for stimulus. We’ll keep you updated as things change.
How Will This Impact My Business if I Seek Forgiveness?
You can request forgiveness for the principal portion of the PPP loan for the eight-week period after you get the loan. There are stipulations however. Forgiveness only applies to:
- Payroll costs
- Interest on a mortgage
You may also receive forgiveness for additional wages paid to tipped workers.
You should be aware that no more than 25% of the forgiven amount can be attributed to non-payroll costs.
In other words, your loan forgiveness will be reduced if you decrease your full-time employee headcount; and, it will be reduced if you decrease salaries and wages by more than 25% for any employees who made less than $100,000 in 2019.
What if Use PPP Loan Funds for Something Else?
If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will likely face fraud charges. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against the shareholder, member, or partner for the unauthorized use. In other words, there are consequences for using these funds for other than the approved uses.
Make sure you’re bookkeeping is up to date and keep good records. Your bookkeeper just became your best friend. Sloppy bookkeeping could prove to be very costly right now.
Keeping Employees on the Payroll: What Should I Do Now?
Avoid the temptation to use these funds for other than payroll purposes. I’ve seen many businesses already committed to keep employees on the payroll by having them crosstrain to tackle other business needs or even continue to pay them to simply be available. Many of the businesses I know don’t have the resources to do that, but they do realize how valuable they will be when things return to normal. The PPP loans will help literally millions of small businesses keep those valuable assets as they navigate the coming weeks.
If you’ve already had to lay off employees, you have until June 30, 2020 to restore employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-time funding options with one of Nav’s lending experts, please contact us.
This article was originally written on April 3, 2020 and updated on January 11, 2021.