Running a small business during the coronavirus outbreak comes with unprecedented challenges. To assist small businesses during this time, the federal government has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes multiple initiatives to provide financial assistance to small businesses and their employees.
One program created under the CARES Act is a Small Business Administration (SBA) loan program known as the Paycheck Protection Program (PPP). SBA PPP loans will provide low-interest loans, with a possibility for loan forgiveness, to small businesses affected by COVID-19. Keep reading to learn more about how the PPP works, what businesses are eligible, and how to apply.
What is the CARES Act?
The CARES Act provides approximately $2 trillion in support for individuals and businesses affected by COVID-19. One of the ways it provides support to small businesses is through two Small Business Administration (SBA) programs:
- The newly created Paycheck Protection Program (PPP)
- Expanded funds to the existing SBA Economic Injury Disaster Loan (EIDL) program. To learn more about the EIDL program, check out our guide.
In addition to the CARES Act, many cities and states have created assistance programs for small businesses. Check out our guide to see what programs may be available to your business.
Businesses are eligible to apply for multiple CARES Act assistance programs – like both the EIDL and the PPP – though there are some restrictions.
What is the Paycheck Protection Program?
SBA PPP loans provide small businesses who have been impacted by COVID-19 with payroll assistance. These loans are backed by a federal loan guarantee. The federal government allocated approximately $650 billion to this program.
SBA PPP loans are designed to get funds to small businesses as quickly as possible. Because of this, the application process for an SBA PPP loan will be different than the application process for other existing SBA loan programs.
One of the goals of the PPP is to incentivize small businesses to keep employees on their payrolls. Because of this, borrowers are eligible to have most or all of their loans forgiven if they meet certain requirements – learn more about how PPP loan forgiveness works in our guide.
What businesses are eligible to apply?
Businesses that have been impacted by COVID-19 and meet the following requirements are eligible to apply:
- Businesses employing less than 500 employees (this includes all employees – full-time, part-time, or any other status)
- Businesses that otherwise meet the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- Individuals who are sole proprietors, independent contractors, or are otherwise self-employed
- Tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
How do SBA PPP loans work?
Amount and Terms
Loans of up to $2 million are available to businesses. The amount your business is eligible for is based upon 8 weeks of average payroll, plus an additional 25% of that amount. Term lengths are at least 5 years, though loans are eligible for partial or full forgiveness if your business meets certain criteria. For PPP loans made prior to June 5, 2020, the term length is 24 months.
Interest Rates, Fees, and Repayment
Interest rates are 1%. There is no fee to apply for these loans. PPP loan payments are deferred until after you have applied for forgiveness and your forgiveness amount is approved by the SBA, but interest will continue to accrue during this time. Your payment deferral period may vary if you elect not to apply to loan forgiveness.
There is no collateral or personal guarantee requirement to secure these loans.
What is the Loan Forgiveness program?
A key part of SBA PPP loans is they are eligible for loan forgiveness. Businesses that meet certain criteria are eligible to have a portion of their loans forgiven if the funds were used for payroll costs, interest on mortgages, rent payments, and utility payments made in the 24 weeks following loan origination. If you received your loan prior to June 5, 2020, your forgiveness period is 8 weeks rather than 24 weeks, though you can elect to switch to the 24-week period instead. 60% of the funds must have been used to cover eligible payroll expenses.
The amount borrowers are eligible to have forgiven will be reduced if:
- The business does not maintain full-time employee headcount, or does not rehire by December 31, 2020
- There is a reduction in employee wages of more than 25%
The recently passed Paycheck Protection Program (PPP) Flexibility Act has loosened some restrictions around PPP loan forgiveness – check out our guide to the PPP Flexibility Act for more details.
How do I apply for an SBA PPP Loan?
SBA-approved lenders – and some other financing providers – are now accepting applications for SBA PPP loans. Learn more about on the SBA website.
OnDeck is here to support small businesses – check out our COVID-19 Resource Hub for more helpful information for small businesses impacted by COVID-19.
*This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for health, tax, legal or accounting advice. You should consult your own health professionals or tax, legal and accounting advisors before implementing any business changes.