Understanding if You Are Eligible for the Paycheck Protection Program
The Paycheck Protection Program was introduced in 2020 for the purpose of helping out small businesses across the United States who were struggling financially as a result of the pandemic. The goal was to allow businesses to continue to be able to pay their employees even if they saw their revenue fall drastically.
The original Paycheck Protection Program (PPP) loans were meant to provide 8 weeks of financial support to small businesses. However, these loans are available once again and many business owners do not even realize that they could receive financial support from the government.
More PPP loans are now available and they will continue to be granted until May 31, 2021 or until the government program runs out of money, whichever is later. There is $132 billion of PPP loans which have not been granted yet, so we expect small businesses to continue to be able to receive these loans for quite some time.
What are the Eligibility Requirements?
Any business who did not apply for PPP loans last time is eligible to apply this time. This includes 501(c)(6) nonprofits, local news media organizations or housing cooperatives.
Another piece of positive news is that there will be a second draw of PPP loans. This means that any business who received a PPP loan in 2020 now has the chance to apply for another PPP loan in 2021. There are stricter eligibility criteria to receive a second draw loan and these vary on a community by community basis. In general, if you experienced a drop in revenue by 25% there is a good chance you will qualify for a second PPP loan.
The bottom line is that all businesses should be applying for a PPP loan. It does not take much time to apply and it could result in a more secure foundation for your business.
How to Use a PPP Loan?
The main rule that must be followed for PPP loans is that 60% of the PPP loan needs to be spent on employee salaries, wages or benefits. You have a lot more flexibility with respect to the remaining 40% of the loan and can use that for just about whatever your business needs.
This includes expenses such as rent, interest, utilities, raw materials, supplier costs, computer related expenses and more.
However, it is important to note that you cannot use a PPP loan for salaries or wages of employees who earn over $100,000 per year.
How Much Money Can You Business Receive?
All PPP loans are capped at $2 million, but remember that if you are eligible for a second draw this means you can get another PPP loan of $2 million which brings your total to $4 million.
The maximum loan you will receive is 2.5 times your average monthly payroll in either 2019 or 2020. So if you average monthly payroll is $75,000, you will be eligible for a PPP loan of $187,500. If your business is in the food, restaurant, hotel or accommodation industry, then you can receive up to 3.5 times your monthly payroll.
How Much Does a PPP Loan Cost?
PPP loans are meant to be affordable and support small business. The loans charge an interest rate of 1%. There are no fees, no collateral and no personal guarantees required. The best part is that these PPP loans are easily forgiven and turned into a grant. This means that it’s possible to get a PPP loan that is basically free money from the government.
Your PPP loan will be forgiven as long as you use the money on one of the following expenses:
- Payroll, salary, wages, benefits and sick leave for employees who earn under $100,000 per year
- Mortgage interest or rent
- Supplier costs for any goods or products that are required to run your business such as raw materials, COGS or similar items
- Workplace safety expenditures
It is very important to keep accurate logs and records of these expenditures. Without accurate records, your business might not be able to get PPP loan forgiveness or your business might be at a greater risk of audit.
The PPP loan program is one of the best ways for a small business to get through these difficult times. The government has made a lot of money available to support small businesses and it would be foolish not to take advantage of it. It only takes a few minutes to apply for a loan of up to $2 million which might be fully forgiven by the government.