The Paycheck Protection Program (PPP) is what I believe is the best feature that has come out of the $2 trillion CARES Act coronavirus stimulus package.
The PPP promises to lend out and forgive $359 billion to small businesses with under 500 employees if these small businesses keep their payroll.
Small businesses have really taken a hit during the 2020 coronavirus crisis due to the forced lockdowns by the majority of states. The lockdowns are necessary to prevent the coronavirus from spreading, but the economic toll and the eventual human life toll could be devastating as millions enter into bankruptcy, poverty, depression, and worse.
The main goal of the Paycheck Protection Program is to protect small businesses from going under and firing millions of employees during the estimated 2-month lockdown period.
According to JP Morgan, over 99 percent of America's 28.7 million firms are small businesses. The vast majority (88 percent) of employer firms have fewer than 20 employees, and nearly 40 percent of all enterprises have under $100k in revenue. 20 percent of small businesses are employer businesses and 80 percent are non-employer businesses.
In other words, small businesses are the heart and soul of our economy!
The Paycheck Protection Program Explained
PPP or Paycheck Protection Program is a $359 billion program launched by the federal government to protect employees of small businesses and help keep hundreds of thousands of small businesses stay afloat during the coronavirus pandemic.
Eligible small businesses can apply for the Paycheck Protection Program through most banks and get up to $10 million or $100,000 per employee for the period between February 15, 2020, and June 30, 2020.
Although described as a loan, the PPP has 100% loan forgiveness if you qualify for several basic criteria.
It is my opinion that the PPP is the best economic stimulus or rescue package ever created.
Apply to the Paycheck Protection Program:
- You can apply if you are self-employed or have a small company with less than 500 employees
- You have to experience negative effects on your business caused by COVID-19
- The maximum amount you can get is equal to 2.5 times your average monthly payroll
- It has loan forgiveness for eligible expenses, including rent, mortgage, and other expenses
- The rest of the loan has to be repaid in 2 years, with 6 months deferred
- The fixed interest rate is 1%
- 75% of the PPP loan has to go towards payroll expense
Paycheck Protection Program Eligibility
To be eligible for the Paycheck Protection Program, you must have started your company or your freelance work before February 15, 2020. You also have to show how the coronavirus has negatively impacted your business.
Th easiest way to show a negative impact is to highlight sales growth month over month or year over year. For example, Financial Samurai is a small business that has seen a 20% decline in organic traffic and a greater decline in advertisement revenue given companies have drastically cut their advertising budgets.
500 employees or less is the magic employee number. These are the type of businesses that are eligible for PPP:
- Small business with less than 500 employees
- Nonprofit organizations with less than 500 employees
- Veterans’ organizations with less than 500 employees
- Tribal businesses with less than 500 employees
What's also great about PPP is that not only do full-time employees count, so do part-time employees and freelance workers.
If you work alone and pay yourself a salary, you can apply as a small business. This is huge for all the gig work economy, many of whom are self-employed.
If you have multiple small businesses, you can apply for each of them separately.
The federal government has promised to make the PPP as easy to qualify as possible. You don't need to put up personal or business collateral to qualify for the PPP, unlike getting a mortgage (your house as collateral) or a car loan (your car as collateral).
How Much Does The Paycheck Protection Program Provide?
The reason why I believe the PPP is the greatest rescue/stimulus program ever created in modern times is because a business can get 2.5 times their average monthly payroll.
This is payroll number calculated over the period of the last 12 months unless your business is seasonal.
The payroll includes salaries and all benefits without tax. These benefits include retirement plans and healthcare benefits.
The two limitations are that the total amount cannot be larger than $10 million and the maximum income limit allowed to qualify is $100,000 per employee. There is confusion to the $100,000 limit, so let me explain with two examples:
- New employee on a $240,000 annual salary starts on September 1, 2019. This employee accounts for $100,000 of payroll, or $8,333 a month plus related expenses. This employee is NOT excluded from PPP calculations because he has a $240,000 salary.
- An employee makes $120,000 salary for the entire 2019. This employee accounts for $100,000 of payroll, or $8,333 a month plus related expenses. This employee is also NOT excluded from PPP calculations because she earned more than $100,000. The salary amounts are prorated.
Here's an easy way to calculate how much you can borrow from the Paycheck Protection Program. However, you should have a payroll provider like Gusto calculate your numbers for you. Then you can easily submit the documentation to your bank.
- Get the payroll amount for the last 12 month, including salaries and benefits
- Deduct the payroll taxes
- Divide the number by 12
- Multiply the number by 2.5
- This is the amount you can borrow through the PPP
Below is a sample of a PPP calculation.
The Loan Is Forgiven
Despite the guidance that the loan has to be paid back within two years at a fixed interest rate of 1%, the exciting part about the PPP is that the loan is 100% forgivable.
To make the loan 100% forgivable, you must incur these payroll expenses through June 30, 2020. In other words, you have to keep your employees who count towards your loan on the payroll at their same wage. If you don't, this completely defeats the spirt and purpose of the PPP loan.
If you end up laying off your employees or reducing their salaries, then there will a prorated amount which you will have to pay back the loan at a fixed interest rate of 1%.
You can absolutely be sure that some business will try and game the system by trying to get the free loan while also laying off their employees.
The qualifying expenses for PPP forgiveness include:
- Group health insurance payments
- Sick or family leave payments
- Mortgage interest payments
- Interest on debts
- Other minor expenses
Remember, 75% of the PPP loan has to go towards payroll expenses. The remaining 25% can be used for all other expenses. You need to keep track of these records in order to get your PPP loan forgiven.
Because forgiveness of the PPP loan, if granted, will be subject to strict substantiation requirement, I recommend everyone establish a separate bank account to hold and administer any PPP loan proceeds. That way they are in to clearly establish that the loan proceeds were used for a permissible purpose.
Where To Apply For The PPP
The PPP is handled by SBA, the Small Business Association. Every single big bank is a participant of the PPP. Names such as Chase, Citibank, and Bank of America are all lending. So are hundreds of smaller banks. Check out the SBA website for more info.
If you already have a business banking relationship, your bank should have proactively e-mailed you about the plan. If so, follow directions and apply ASAP because the $359 billion in funds could run out!
Once you apply, you will be placed in a queue and your banker will get back to you with more details. We bank with Chase and they proactively e-mailed us a heads up on April 3, 2020. After submitting our application, we got a confirmation e-mail like the one below.
Documents Needed To Apply For PPP
Hopefully, you have a payroll provider like Gusto spit out your payroll for the PPP application. If not, you can have your accountant do it or you can do it yourself.
- Your Employer ID Number (EIN)
- Payroll records for the last 12 months to calculate the amount you can get
- Annual profit/loss statement
Your bank should provide you a list of the required documents in order to fulfill your loan application and get the money to you.
The great thing about the PPP is that it rewards small businesses for paying their employees well. The more you pay your employees up to $100,000 and the more health and retirement benefits you provide, the more PPP loan you will get per employee.
Based on my calculations, the maximum PPP loan that is forgivable you can get per employee is roughly $11,110.
The math is simple:
$100,000 annual salary = $8,333. $8,333 / 0.75 = $11,110. In other words, if you pay your employee $100,000 and give fantastic benefits and throw in other expenses, you should be able to get $11,110 in PPP loans per employee.
Given you can get 2.5X of monthly payroll forgiven, the number is 2.5 X $11,110 = $27,775 per employee.
You should double check with your accountant and your bank on the calculations, as every person is different.
Apply For The PPP Program ASAP
Small business were allowed to apply starting on April 3, 2020. However, there will be a lot of hiccups and snafus for at least a week given this is a brand new program with new guidelines and opaque calculations for PPP benefits.
On April 10, 2020, self-employed individuals can apply. However, due to the backlog of small businesses who have applied and are awaiting, I would expect self-employed individuals will have to wait a week or so to get their application through.
Both small businesses and self-employed individuals will likely have to wait at least one week from the time their application is accepted for money to hit their business checking or savings account. To manage expectations, I would expect PPP money to take closer to four weeks to hit.
Applications are open till the end of June 30, 2020.
The Paycheck Protection Program Is Excellent
If the PPP actually successfully lends out and forgives $350+ billion to small businesses and self-employed individuals, this is the biggest win in my opinion. There's no reason why the PPP won't work, especially if government officials want to get re-elected. Too much is at stake for the program not to work.
Getting 8 weeks of payroll relief is huge. That means that a good portion of the economy can more comfortably shutdown down long enough to flatten the virus curve. Wuhan locked down for 50 days, and their economy is starting back up again.
Good luck all small business owners!