How Does the Paycheck Protection Program Work?

Update as of January 26, 2021: This article may no longer be up-to-date. Read this article for the most up-to-date information the most current round of the Paycheck Protection Program.

For small business owners, one of the most essential parts of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) may be the Paycheck Protection Program (PPP). The program provides up to $350 billion in new business loans, and unlike other emergency loans, much of the money you receive from the PPP could be forgivable in the future. 

In many cases, these COVID-19 relief loans may act more like grants—money that you receive to help run your business and don’t have to repay. 

Funding Circle, the largest small business lending fintech is one of a few non-depository online lenders in the United States that was recently approved to provide Paycheck Protection Program loans.

The Paycheck Protection Program (PPP) will serve as an extension of the Small Business Administration (SBA) 7(a) loan program. It will allow small businesses to apply for federally guaranteed, forgivable loans. The Small Business Association fully guarantees the PPP loans, and lenders across the country will distribute the funds to eligible businesses. The loan terms will be the same for every business:

• A low, 1% interest rate
• A two-year term
• No payments for six months
• No collateral or personal guarantee
• No fees for borrowers or lenders

You should receive the same terms from any lender, although the process and requirements may vary slightly. For example, some banks are only accepting applications from businesses that previously opened a business bank account. 

The money will be distributed on a first-come, first-served basis. It is important to note, too, that there’s an expected high-demand for these COVID-19 relief loans.

Here’s how the Paycheck Protection Program works: 

Which Businesses Can Qualify for a Paycheck Protection Program Loan?

If you started your small business before February 15, 2020, and either paid yourself, employees, or contractors, you may qualify for a loan. The program is open to: 

• For-profit companies
• Non-profit organizations
• Veterans organizations
• Tribal business concerns
• Sole proprietorships, self-employed individuals, and independent contractors

To qualify, you’ll need to have fewer than 500 full-time and part-time employees or meet the SBA’s size standards. However, the SBA is waiving the affiliation standards and counting employees on a per physical location basis for:

• Franchises 
• Businesses within the accommodation and food services sector (whose NAICS codes begin with 72)
• Businesses that get financial assistance from a small business investment company (SBIC) licensed by the SBA 

Business Owner Requirements

Unlike with many small business loans, you may be able to qualify regardless of your credit and income. Additionally, the loan provided under the Paycheck  Protection Program doesn’t require collateral or a personal guarantee.

However, each person who owns at least 20% of the company must certify that:

• The business needs the loan for continued operations.
• You will use the money for payroll, mortgage, lease, and utility expenses.
• Aside from certain emergency loans received after January 31, 2020, you haven’t already applied for or received a loan to pay for the same expenses. 
• You’ll try only to purchase American-made equipment and products, when possible.

There are also personal circumstances that could lead you or the business not to be eligible. For example, each owner must also certify: 

• You are a U.S. citizen or have Lawful Permanent Resident status
• You and your businesses (including other businesses you own) haven’t defaulted or been delinquent on an SBA loan in the last seven years, which led to the government losing money.
• Not presently involved in a bankruptcy. 
• Not incarcerated; on probation or parole; or subject to an indictment, criminal information, or arraignment. 

How Much Can You Borrow?

The maximum amount you can borrow is the greater of 2.5 times your average monthly payroll from the last 12 months or $10 million. Please note- PPP loans taken through Funding Circle have a max of $500,000.

Seasonal businesses can alternatively use 2.5 times their average monthly payroll for the 12 weeks following either February 15 or March 1, 2019. 

For example, if you spent $2.4 million on eligible payroll expenses last year, your average monthly expense was $200,000, and you can apply for up to $500,000 through the PPP. 

If you received an Economic Injury Disaster Loan (EIDL) from the SBA after January 31, 2020, you can also add the remaining loan balance to your total loan amount and refinance the EIDL with the proceeds from your PPP COVID-19 relief loan. 

Calculating Your Average Payroll

To determine your average payroll costs, add up the payments you made for the following expenses during the previous 12 months, and divide the result by 12:

• Compensation: Including salary, wages, commissions, tips, and severance for employees.
• Benefits: Including vacation time and medical, family, parental, and sick leave. Also, your portion of the payments for group health care benefits, insurance premiums, and retirement benefits.
• Taxes: State and local taxes you paid on employees’ compensation. 

Do not include: 

• Payroll, income, and railroad retirement taxes. 
• Compensation for employees whose principal residence is not in the U.S. 
• For employees who have an annual salary of over $100,000, subtract a prorated portion of their compensation for February 15 to June 30, 2020. 
• Sick leave wages if they qualified for certain credits under the Families First Coronavirus Response Act.

For sole proprietors, self-employed individuals, and independent contractors: You can add up the previous 12 months’ wages, commissions, income, and net earnings that you received, up to the $100,000 annual cap. Divide this amount by 12 to determine your average monthly “payroll” amount. 

How Can You Use The Money?

There is a limited list of uses for money provided through the Paycheck Protection Program:

• The types of payroll expenses you included when calculating your average payroll amount. 
• Interest payments on mortgages, but not principal payments or interest prepayments, for mortgages that began before February 15, 2020.
• Rent for lease agreements that began before February 15, 2020.
• Utilities for that began before February 15, 2020.
• Interest on other debts that you took out before receiving this loan.

How Do Forgiveness and Repayment Work?

Two clocks start ticking once you receive the loan. 

The first is a deferment period, which can last six to twelve months. Interest will accrue during deferment, but you don’t need to make any payments. 

The second is an eight-week period, which will be used to determine if and how much of your COVID-19 relief loan will be forgivable.

Forgiveness

The loan proceeds that you spend on payroll, mortgage interest, rent, and utilities during the eight-weeks may be eligible for forgiveness. 

If you spent all the money on these expenses, up to the full amount of the loan may be forgiven. Any forgiven amount also won’t be considered taxable income. However, your forgiven amount can be reduced if you have fewer employees or reduced employees’ pay. 

• If you have fewer employees: Multiply the payroll expenses by the average number of full-time equivalent employees during the eight-week period. Divide this by the average number of full-time equivalent employees from either 2/15/19 to 6/30/19 or 1/1/2020 to 2/29/2020. For seasonal employees, you must use the 2/15/19 to 6/30/19 period. Reduce 
• If you reduced wages: Subtract the amount of any wage reductions that are greater than 25% of an employee’s wages compared to their most recent full quarter. This equation only applies to employees who were paid less than the equivalent of $100,000 during any pay period in 2019.

If you let go of employees or reduced wages already, you can regain the forgivable portion by hiring employees and increasing wages by June 30, 2020. 

To receive loan forgiveness, you’ll need to apply with your lender and include documentation to confirm how you spent the money, number of qualified employees, and their pay rates. 

Repayment

You’ll need to repay any amount that wasn’t forgivable. The loan will have a two-year term, which begins when you apply for the loan. It will have a low-interest rate (the maximum allowed is 1%), and there’s no prepayment penalty. 

How to Apply for a Paycheck Protection Program Loan

The PPP application is reasonably straightforward as the program aims to get money into the hands of small businesses quickly. A few important Paycheck Protection Program deadlines and dates are:

• April 3, 2020: Applications open for small businesses and non-profits.
• April 10, 2020: Applications open for sole proprietors, self-employed individuals, and independent contractors.
• June 30, 2020: The application period closes, although funds may run out before that point. 

*subject to SBA approval, Funding Circle and our partners will start processing these applications on April 10.

In addition to filling out the application, you will be required to share or upload relevant tax and financial documents—such as your payroll records from the previous 12 months. The rough estimation is that it will take about eight minutes to complete the application, including gathering all the information you need. 

Frequently Asked Questions

Can I Apply for PPP Multiple Times for My Business?

No, each business entity is only allowed to take out one COVID-19 relief loan through the PPP. 

Can I Apply for PPP Multiple Times if I Own Multiple Businesses?

Yes, each business may be eligible for a loan through the PPP if it meets all the requirements.

Can I Apply for PPP and an Economic Injury Disaster Loan (EIDL)?

You can apply for both the Paycheck Protection Program and an EIDL from the SBA, but you can’t use the loan proceeds for the same expenses. 

If you previously applied for an EIDL, you may also be able to roll that loan amount into your PPP loan, which could make it eligible for forgiveness. Otherwise, EIDLs generally aren’t forgivable, although up to $10,000 may be given as a grant rather than a loan if you use the money for payroll and operating expenses. 

What If I’m The Only Employee?

You may still be eligible for the PPP. If you pay yourself a salary, you could use that amount to determine your average monthly payroll. If not, you may need to use your net earnings to determine your average monthly payroll costs and apply as a self-employed person starting April 10. 

What If My Business Doesn’t Have Payroll Expenses? 

The Paycheck Protection Program might not be a good fit for your business. The SBA offers other disaster assistance and loan programs that may be able to help.

What If My Business Wasn’t Affected by the Coronavirus?

The program and money is available to help businesses and their employees. Business owners must certify that due to current economic conditions, they need a COVID-19 relief loan to continue ongoing operations.

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