Editorial · April 14, 2020
Paycheck Protection Program: How the Loan Works
The paycheck protection program is a new federal loan for small businesses that want to keep paying their workers. Congress created it in the CARES Act, which the President signed on March 27, 2020. Lending began on April 3. This guide explains who can apply, how the loan amount is set and what the terms are.
The short version: the loan has a fixed 1.00% rate, needs no collateral and can be forgiven if you spend it the right way. The rest of this page walks through the details.
Who can apply
Most small employers can apply. That includes nonprofits, veterans organizations, Tribal business concerns, sole proprietors, self-employed people and independent contractors. The general rule is 500 or fewer employees. Some industries may have more than 500 workers if they meet the SBA size standard for that industry.
The SBA waived its usual affiliation rules for hotel and food service businesses, for franchises listed in the SBA Franchise Directory and for firms funded by licensed small business investment companies.
Timing differs by type of applicant. Small businesses and sole proprietorships could apply starting April 3. Independent contractors and self-employed people could apply starting April 10.
How the loan amount is set
Your loan can be up to two months of your average monthly payroll costs from the last year, plus 25% of that amount. In plain terms, that is 2.5 months of payroll. The top limit is $10 million.
Here is an example. Say your average monthly payroll is $20,000. Two months is $40,000. Add 25%, or $10,000, and the loan can reach $50,000.
Pay for each worker counts only up to $100,000 a year. Seasonal and new businesses use different time periods for the math. Payroll costs include salary, wages, tips and commissions. They also include leave, health care and retirement benefits, and state and local taxes on pay. For a sole proprietor, they include net earnings from self-employment.
The terms at launch
The terms are the same for every borrower. Here they are in one place.
- The interest rate is fixed at 1.00%.
- The loan is due in two years.
- Payments are deferred for six months, but interest still builds during that time.
- No collateral is needed, and no personal guarantee is required.
- There is no penalty for paying early.
- The usual SBA rule to look for other credit first does not apply.
- Each business may take only one loan.
The statute set aside $349 billion for the program. Treasury said the funding has a cap, so it urged applicants to move quickly. The program is open until June 30, 2020.
How forgiveness works
The loan is meant to be forgiven if you use it well. You should spend it over the eight weeks after you get the money. Allowed uses are payroll costs, mortgage interest, rent and utilities. The mortgage, lease and utility terms must date from before February 15, 2020.
Treasury said it expected that no more than 25% of the forgiven amount could go to costs other than payroll. If you spend the money on anything else, you will owe it back.
Staffing matters too. Forgiveness shrinks if you cut full-time headcount. It also shrinks if you cut pay by more than 25% for any worker who earned under $100,000 a year in 2019. Workers cut between February 15 and April 26 can be brought back by June 30, 2020 to restore that amount.
How to apply
You apply through a lender, not directly to the SBA. Any existing SBA lender can take applications. So can federally insured banks, credit unions and Farm Credit System institutions that take part. Ask your own lender whether it is in the program, because other lenders are still being approved and enrolled.
You will fill out the program loan application and give your lender payroll papers. You must certify in good faith that the loan is needed because of current economic uncertainty. You must also certify that you will use the money to keep workers and pay allowed costs, and that you have not taken and will not take another loan under the program.
Be careful with these statements. Knowingly making a false statement to get the loan is punishable by law. If the money is used for fraud, the government said it will pursue criminal charges.
Sources
- U.S. Department of the Treasury, Paycheck Protection Program (PPP) Information Sheet: Borrowers, home.treasury.gov, last modified April 3, 2020.
- Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security Act, approved March 27, 2020, govinfo.gov.