Overview of the Paycheck Protection Program (PPP)

March 31, 2020

Due to COVID-19, many contractors are exploring ways to support their small businesses through this challenging time. To assist these efforts, Renew Financial has put together a brief overview of the recently enacted Paycheck Protection Program, a forgivable federal loan to help small businesses, like contractors, navigate this economic situation and avoid future layoffs.

What is the Paycheck Protection Program?

On March 27, Congress passed “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which included the “Paycheck Protection Program” (PPP) for small businesses. As a $367B-funded federal loan program, the PPP provides short-term financial assistance to small businesses to help soften the immediate economic impact of the COVID-19 pandemic. In short, the PPP offers eligible small businesses a low-interest rate loan (0.5%) that is forgivable, if used to cover allowable payroll costs and avoid future layoffs or reductions in employee salaries. The PPP loan application can be downloaded here. 

What Small Businesses are Eligible?

The PPP is available to small businesses (businesses that are independently owned and operated, organized for profit, and are not dominant in their field) with less than 500 employees (full and part-time), or alternatively not more than the applicable size standard for their industry, as provided by the SBA. For most home contractors, the 500 employee cap should pose no issue.

Eligible small businesses also include sole-proprietors, independent contractors, or other self- employed individuals, such as “gig economy” workers.

Loan Terms

The maximum size of a PPP loan is 250% of your average monthly payroll costs over the last 12 months, or $10 million (whichever amount is less). For most contractors, that means you should add up your average monthly payroll costs, including rent and utilities, and multiply that amount by 2.5 to get your max eligible loan amount. 

How are monthly “payroll costs” specifically defined? Under the PPP, the term “payroll costs” includes the following eligible expenses: (I) payroll costs; (II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (III) employee salaries, commissions, or similar compensations; (IV) payments of interests on any mortgage obligations; (V) rent (including rent under a lease agreement); (VI) utilities; and (VII) interest on any other debt obligations that were incurred before the covered period.

One important limitation is that eligible payroll costs only include annual employee salaries up to $100,000 (or $8333, prorated on a monthly basis). Meaning, a small business owner cannot include monthly payroll costs for employees above the annual salary rate of $100K in their calculation of monthly payroll costs. For more information on this point, we recommend you reach out to the bank or financial institution you use to apply for this loan (see details below). 

If approved, PPP loans have a fixed interest rate of 0.5%. No collateral or personal guarantees are required by the small business owner. There are also no loan application fees of any kind. 

Loan Forgiveness

The PPP loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities. At least 75% of the forgiven amount must have been used for payroll.

Loan payments will also be deferred for the first six months. After June 1, 2020, small businesses will be able to apply to have their loan forgiven. While there are still limited details available at this point (i.e., more details to come), loan forgiveness is generally based on the employer maintaining or quickly rehiring employees and maintaining salary levels. The precise amount of forgiveness will be reduced if full-time (FTE) employee headcount is decreased, or if salaries and wages decrease. The public purpose of the PPP is to help small businesses avoid layoffs or salary reductions, hence loan forgiveness is therefore contingent on these conditions being met.

Next Steps - How to Apply

All PPP loans will be made by private banks and lenders certified by the Small Business Administration (SBA) and guaranteed by the federal government. To make this loan application process as efficient as possible, over 800 financial institutions across the country will participate, including most of the country’s largest banks (e.g., Wells Fargo, US Bank, Bank of America, etc.).

Since the Paycheck Protection Program was only enacted into law last week, PPP loan applications are expected to begin being accepted on Friday, April 3, 2020 or sometime soon afterward. It’s important to note that this program has limited funding ($367B), which sounds like an awful lot but is far less than the anticipated demand. For these reasons, Renew Financial recommends interested contractors immediately take the following next steps:

  1. Check your eligibility for the Paycheck Protection Program. If you are uncertain, we recommend you reach out to your preferred bank or attorney for assistance.
  2. Download the PPP loan application. All approved banks and financial institutions (7(a) lenders) will use the same standard form provided by the Small Business Administration (SBA). If eligible, it’s important you fill this out soon and gather the required documents.
  3. Contact your preferred lender/bank to confirm they will participate in this loan program. If needed, contact your POC at RF and we’ll help point you in the right direction.

As a final note of caution, Renew Financial has attempted to describe the Paycheck Protection Program as clearly as possible. Many details have been left out. It’s therefore incumbent on all small business owners to carefully review all the program rules and confirm their eligibility with their preferred bank/lender before proceeding. Renew Financial does not guarantee or take any financial responsibility for the decisions undertaken by contractors or other third-parties. 

Lastly, if you found this blog helpful, we encourage you to check back next week for a follow-up post on how to properly use your PPP loan funds to maximize your eligible forgiveness amount.