2020 was a turbulent year for business throughout the United States. From shutdowns to consumers ordering products and services online from big-box retailers, small businesses took the brunt of the negative economic impact caused by this economic downturn. As the primary small business provision that was written into the CARES Act, Congress added the Paycheck Protection Program (PPP) to support small businesses financially with forgivable loans. Several pieces of legislation have followed the PPP loan provision of the CARES Act. This includes moving the deadline and providing more money when the original funding ran out.
What Is the Paycheck Protection Program?
Created on March 27, 2020, the Paycheck Protection Program provides small businesses with the financial resources to maintain payroll during the economic crisis. The original $349 billion in funding quickly disappeared, which led Congress to approve a bill that added $310 billion more in financial relief for small businesses
What Types of Businesses Qualify for a PPP Loan?
Any business that operates with 500 or fewer employees qualifies for a PPP loan. This includes:
- Small businesses;
- S corporations;
- C Corporations LLCs;
- Private non-profits;
- Faith-based groups, and;
- Veterans groups.
Self-employed individuals, such as independent contractors and sole proprietors, also qualify for PPP loans.
Terms Associated with PPP Loans
Because of the severity of the economic crisis, the federal government allows borrowers to receive up to two and half times their average monthly payroll costs for the 12 months leading up to when the federal government approves a PPP loan. For instance, a small business with payroll costs of $40,000 for the 12 months leading up to the approval of a PPP loan is eligible to receive $10,000.
The maximum amount a small business could receive for a PPP loan in 2020 was $10 million.
What Is a Second Draw PPP Loan?
By the end of 2020, the federal government had approved PPP loans for more than five million small businesses. For small businesses that need more help, they have the opportunity to apply for a second draw PPP loan.
The terms and restrictions for a second draw PPP loan are not the same as they were for the initial PPP loans. For example, the federal government has capped the amount of money approved for a second draw PPP loan at $2 million. Small businesses that need additional financial relief because of the continued economic crisis have until May 31, 2021 to apply for a second draw PPP loan.
Eligibility Requirements for a Second Draw PPP Loan
The main goal of the second draw PPP loan program is to help businesses that have been hit hard by the economic downturn. Second draw PPP loans are much more targeted. To qualify for a second draw PPP loan, the small business must:
- Have received a first PPP loan and used all the funds;
- Have fewer than 300 employees, and;
- Demonstrate at least a 25 percent reduction in gross sales during at least one quarter in 2020 versus the same quarter in 2019.
How to Spend the Funds
For a second draw PPP loan, small businesses must spend at least 60 percent of the money on payroll. The other 40 percent can go towards other operating costs, such as:
- Rent or mortgage payments;
- Utilities;
- Computer expenses;
- Supplies, and;
- Worker protection.
How to Apply for a PPP Loan
When a small business applies for a PPP loan, the Small Business Administration (SBA) redirects the application to its partner. A small business owner submits the application with the partner. From here, the partner submits the application to one of the lenders in the partner’s approved PPP lender marketplace.
If you saved your application for completion at a later date, you access your application by resetting your password using the email address you submitted when you started the application. Log in with a new password and hit the “Edit Application” to continue with your PPP loan application.
The key steps for submitting a PPP loan application are:
- Adding or verifying business information;
- Adding new requirements for business information;
- Confirming ownership;
- Entering additional information about the owner, and;
- Uploading verification documents.
After submitting your PPP loan application, monitor your email for additional instructions from the SBA partner and/or lender.
After the SBA certifies your application with its partner, the partner moves the application into the lender marketplace. If the lender selected to review your application approves you for a PPP loan, you receive a confirmation email. It is essential that you read the confirmation email carefully to ensure you follow all the instructions.
If you receive approval for a PPP loan, you must send a copy of a voided check to the lender that designates where the lender should send the funds. Lenders have 10 days after approving a PPP loan to provide small businesses with full loan funding.
What’s Next?
One of the most important recent events occurred just as the March 31, 2021 deadline was about to expire for submitting PPP loan applications. By a nearly unanimous vote, Congress extended the March 31, 2021 deadline to May 31, 2021.
The Biden Administration has focused on helping the smallest businesses recover from the negative impacts of this economic crisis. A 14-day window allowed the SBA to approve PPP loans for businesses that have fewer than 20 employees.
The question now is: what happens when the May 31 deadline for submitting a PPP loan application expires? Does the United States Congress need to pass another bill to help small businesses weather the economic storm or will small businesses be on their own to come back from this crisis?
Small business owners need to remain invested in getting operations steadied and ready for growth. So, make sure to search online for more information that should help you stay on top of the latest developments with the PPP loan program.