I believe the Paycheck Protection Program (PPP) is the best economic stimulus package the government has ever created. It will save hundreds of thousands of small businesses and protect millions of jobs. After all, small businesses account for 99%+ of all businesses and employ roughly 47% of all working Americans!
There is a lot of confusion about the PPP and how it works. Therefore, I thought I'd provide a PPP example to help you understand how powerful the PPP is.
If you have a small business and are on the fence applying, apply ASAP. It is essentially free money if you keep your payroll the same for at least 8 weeks after your application is approved!
Paycheck Protection Program (PPP) Loan Example
The PPP is great because it will lend out and forgive $349 billion to small businesses with under 500 employees if these small businesses keep their payroll.
If you want to learn all the nitty gritty about the PPP, here is the PPP factsheet from the Treasury's website. Once you understand all the basics, you will have a better understanding of this PPP loan example.
Here's a basic way to calculate how much you can borrow from the Paycheck Protection Program. However, you should have a payroll provider or your accountant calculate your numbers for you. Then you can easily submit the documentation to your bank.
- Get the payroll amount for the last 12 months, including salaries and benefits
- Deduct the payroll taxes
- Divide the number by 12
- Multiply the number by 2.5
The final figure is the amount you can submit for the Paycheck Protection Program. There is some confusion about the maximum amount of PPP per employee as well as the guidance that at most 25% of PPP goes towards non-payroll expense. Based on my calculations, I think the maximum PPP benefit is about $11,000 per employee X 2.5 = $27,500.
However, don’t get hung up with trying to get the perfect maximum amount. Get your application in the system. It's also better to apply for a little too much than too little because you have two years to pay back the loan at only a 1% interest rate. In trying times, you want to have as much cash as possible.
Preschool Business PPP Example
Our nonprofit preschool is eligible for the Paycheck Protection Plan. It closed down a week into March and is closed for all of April. Parents have been asked to pay for all of April, but not May and onward if the school is still closed. Parents can donate money instead.
Thanks to the PPP, our preschool is eligible to have 2.5X of its monthly payroll and other expenses covered. As a result, our preschool can afford to stay closed for 2.5 months after the loan is approved before running into financial difficulty again. This means the preschool can stay closed all of May, June, and half of July since April tuition is already paid. This also means the preschool can do its part to flatten the damn coronavirus curve, which is what we all want!
Below is a Paychecks Protection Program loan example I created for my preschool. I estimate there are 10 employees who average $75,000 a year in salary. They all get subsidized health insurance and some 401(k) matching.
The preschool owners can apply for the PPP and get $172,917 from the federal government. If they leave their payroll exactly as it is for at least 8 weeks after the loan is granted, the preschool can submit proof of documentation to its lender to have the entire $172,917 forgiven.
Put yourself in the preschool owner's shoes. Given they own a nonprofit, most of the income it receives in the form of tuition is paid out in the form of salaries and benefits. The preschool's mission is to provide educational guidance for children, not to make the most amount of money possible.
The PPP is a big unexpected gift, just like being forced to shut down is a big unexpected turd.
More PPP Business Loan Examples
In addition to the preschool PPP loan example that will save the school, here are more PPP loan examples that will help other businesses.
Restaurant business: The restaurant business is people intensive. As a result, it is a low operating profit margin businesses. But they are the type of business that can benefit the most because the PPP covers the majority of operating expenses. However, the restaurant business with low operating margins are also most at risk of shutting down.
A restaurant business can apply for the PPP, hire back all its employees before the June deadline, keep them on the payroll for at least 8 weeks, and have their entire loan forgiven. In the meantime, the restaurant can try and earn some money through take out and delivery.
Software business: A software business has high operating margins. If the business also pays their employees up to $100,000 with great benefits, high operating margin businesses will also greatly benefit. Such businesses can stay operational for a very long time and the PPP is like an unexpected gift. However, due to a high operating profit margin, a discretionary software business might see a lot of whiplash with their revenue.
Individual S-Corp business: The business owner that perhaps benefits the least from the PPP is an S-Corp that underpays himself to save on payroll taxes. For 2020, the maximum taxable income for payroll taxes is $137,700. It was $132,900 for 2019. A common strategy for an S-Corp owner is to pay himself the lowest amount of salary possible to avoid paying as much Social Security + Medicare tax equal to 15.4%. The rest of the income is paid in FICA tax-free distributions.
If you don't own a small business and were laid off, I encourage you to ask your boss to apply for the PPP and have him or her hire you back for 8+ weeks at your full previous salary by the deadline.
Even if the dental practice is closed and seeing no revenue, there is a lot of work you can do in preparation for the eventual opening of the economy. For example, you can work on the dental practice's social media page, do content marketing, do community outreach, create videos profiles about your owners and the employees. There's so much to do!
Please don't let any confusion on the PPP prevent you from applying. Contact your business bank if you haven't received a call or e-mail yet. Get your application in the system and prepare to wait for 2-3 weeks before getting any funds, if approved.
Good luck all small business owners! And if you would like to start a small business, I think the best business to start is an online business like a blog. It's easy to scale, costs little to operate, and will never be shut down so long as there's internet access!
Recommendation While You Wait For PPP
Given it will take several weeks to get your funding, I suggest doing a deep dive on your finances. You can do so by signing up with Personal Capital, the best free wealth management tool today. I've used them since 2013 to management my net worth, track my cash flow, x-ray my investments for excessive fees, and plan for my retirement.
Money is too important to be left up to pontification! There's no better time than a recession to become a master of your finances.
