What You Need to Know About the Paycheck Protection Program

April 27, 2020

Given the changing economic, social, and political environment due to the pandemic, this article has been updated since it was first published to reflect the most up-to-date information.

SBA, in consultation with the U.S. Treasury Department, reopened the Paycheck Protection Program (PPP) for First Draw Loans the week of January 11, 2021.

As COVID-19 has made its way around the globe, countless self-employed, independent contractors, and small business owners are facing unprecedented challenges and forced to deal with irregular income budgets.

We want to see you make it through this trying time and succeed. One way the federal government and lenders have stepped up to help is through the Paycheck Protection Program or “PPP.” Offered through the U.S. Small Business Administration (SBA), the PPP has already approved more than $520 billion in loans (as of 8/5/20) to help small businesses maintain payroll and critical expenses during the COVID-19 pandemic.

Launched as part of the larger Coronavirus Aid, Relief and Economic Security Act (CARES Act), the Payment Protection Program is a forgivable loan program—meaning that if followed properly, you may not need to repay all, or a portion of, your loan. All small businesses and self-employed individuals should understand their options, as this is an opportunity for much needed financial assistance.

Here’s a breakdown of how the PPP works, including answers to how it applies to small-business owners with employees, independent contractors, and the self-employed who are experiencing poor financial health.

What Is the Paycheck Protection Program?

The Paycheck Protection Program is a forgivable loan program designed to help small businesses keep employees on payroll for a period of up to eight weeks. Loan amounts are based on payroll expenses, with a limit of $10 million.

The PPP is called a loan forgiveness program because while the funds are technically borrowed, some portion or all of the PPP loan can be forgiven (in other words making it a free direct payment) when certain requirements are met. If requirements are not met, funds received are repaid in the form of a 1% low-interest loan with no collateral requirements or fees.

While we always recommend evaluating general financial advice for your own individual situation, we want to note the Paycheck Protection Program is by nature designed to be business-friendly to help stressed businesses during an unprecedented global shutdown. As such the program has much less downside or financial burden than a traditional private loan.

Who Is Eligible for the Paycheck Protection Program?

According to the SBA, all small businesses—sole proprietorships, self-employed individuals, independent contractors, nonprofits, veterans organizations, or tribal business concerns—with 500 or fewer employees may apply for assistance. Certain industries are allowed exceptions for businesses with over 500 employees, notably those in “Accommodations and Food Services”. The SBA’s Size Standards can help you determine whether or not your business qualifies as small.

Most importantly, funds should only go to businesses who absolutely need it. As part of your application, you will need to certify that “current economic uncertainty makes the loan necessary to support your ongoing operations.” You will also need to certify that the funds will be used to retain workers and maintain payroll, or to make most mortgage interest obligations, rent, and utility payments.

Details of the Paycheck Protection Program

The PPP is designed to cover eight weeks of payroll, which begins on the date the lender makes the first disbursement of the PPP loan to the borrower. This must be no later than 10 calendar days from the date of loan approval. The new, extended deadline to apply for a PPP loan is August 8, 2020.

Paycheck Protection Program details include the following:

  • An interest rate of 1%;
  • A loan maturity of two years;
  • No prepayment penalties or fees;
  • No collateral or personal guarantees required;
  • First loan payment is deferred for the first six months;
  • Neither the government nor lenders will charge small businesses any fees; and
  • Funds received can be equivalent to two months of your average monthly payroll costs from the last year (plus an additional 25% of that amount), up to $10 million.

While you will need to provide payroll documentation, the SBA is waiving its usual requirement that you try to obtain some or all of the loan funds from other sources.

How Are Loan Amounts Determined?

The loan is designed to cover eight weeks (or two months) of average payroll costs from last year—plus an additional 25%. The total amount is capped at $10 million. According to the SBA’s PPP approvals report (through 4/16/2020), 1.7 million loans have been approved with an average loan amount of $206,000.

While salary amounts are capped at $100,000, payroll costs—meaning insurance premiums, taxes and investing in retirement plans—are not. Calculating your total expenses means you can have a maximum of $100,000 salary or wage per employee, in addition to the cost of benefits.

It is up to the borrower to calculate payroll and provide documentation. In evaluating payroll calculations for a business with seasonal operations, a lender may consider whether a seasonal borrower was in operation on February 15, 2020, or for an eight-week period between February 15, 2019 and June 30 2019.

How Can I Qualify for Loan Forgiveness?

One of the most rewarding aspects of the PPP is that the loan is completely forgiven—no money is due and no income tax is paid on the loan—as long as certain conditions are met.

Qualifying for loan forgiveness under the Paycheck Protection Program requires the following:

  • Employers must maintain or quickly rehire employees at the same salary levels before the crisis (up to a $100,000 cap per employee);
  • The money is used exclusively for the specific purposes of meeting payroll costs (including health benefits), rent or mortgage interest obligation, utility payments, or interest on debt taken out before February 15;
  • No more than 25% of the forgiven loan can be used for non-payroll expenses, and;
  • Interest on mortgage obligations, rent under lease agreements, and utilities must be for agreements before February 15, 2020.

If salaries or headcount is reduced during this time period, the amount forgiven will be reduced as well. The exception is that salaries exceeding $100,000 can be reduced, as the loan only covers salaries up to that threshold. The $100,000 cap applies only to cash compensation, and does not extend to insurance, retirement plans, or local taxes assessed on compensation of employees.

Can I Use PPP Funds to Pay an Independent Contractor?

No. According to the SBA, “Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs.” This is due to the fact that independent contractors are themselves eligible to apply for funds under the Paycheck Protection Program.

What If I Am Self-Employed or an Independent Contractor?

Sole proprietors, independent contractors and self-employed individuals are eligible for funds under the PPP. In these cases, wages, commissions, income, or net earnings from self-employment can be applied for, and is capped at $100,000.

Self-employed individuals are in a unique situation as they are eligible for both extended COVID unemployment benefits as well as PPP funds. However, applying for both will likely result in a conflict. In evaluating which is right for you, start by comparing the amount you will receive under both:

  • Pandemic unemployment benefits are paid weekly for a maximum benefit of $17,166 over 39 weeks. This is generally the same for all income levels.
  • The Paycheck Protection Program is paid for an eight-week period with a maximum benefit of $20,833 based on a $100,000 cap.

It’s also worth noting that the CARES Act specifies that forgiven PPP loans are not counted as gross income for tax purposes. However, your unemployment benefits are considered taxable income and will be included with your other income on your tax return.

What Is the Approval and Funding Process?

We understand there are many questions about the approval and funding process for PPP loans which is why it is important that you work with a lender who has experience working with the SBA.

Since this is a unique program, unlike many other types of small business loans, PPP loans will not vary from lender to lender as the rate, term and requirements are set by the SBA and apply to all borrowers in the same way. If you have an existing relationship with your local bank branch and they have experience processing PPP loans through the SBA, they may be able to provide better service. Smaller banks and online lenders may also be able to provide more tailored, helpful support.

How Do I Apply for the Paycheck Protection Program?

You can apply for the Paycheck Protection Program through any existing SBA 7(a) lender, federally insured depository institution, federally insured credit union, or farm credit system institution that is participating. View the SBA Payment Protection Program Application Form.

Applications must be submitted with the required documentation to an available, approved lender by August 8, 2020, however, we strongly encourage you to apply as quickly as you can because funds are limited and lenders need time to process your loan.

LendingClub has partnered with Funding Circle, an approved Small Business Administration lender, who can answer your questions and help you submit your application to the SBA. To get help with your PPP loan application, apply now through Funding Circle.*

If you need more help, or have specific questions or concerns not covered by this article, you can also contact one of the SBA’s 68 local district offices through the local search portal.

Interested in learning more? Check out these related blog posts:

LendingClub is referring Paycheck Protection Program (“Program”) loan applicants to Funding Circle, an approved U.S. Small Business Association (“SBA”) lender, for help with their application and submission to the SBA. Any loans made under the Program must also be approved by the SBA. Program funds are limited. LendingClub does not guarantee that applications will be processed and submitted before Program funding is exhausted. There is no cost to you to apply for a Program loan. Applying through LendingClub or its partner Funding Circle does not prohibit you from applying with other lenders and/or Platforms. As of 4/16/2020, funding for Paycheck Protection Program loans is not currently available. While LendingClub or its partners cannot guarantee additional funding will be authorized, notice will be provided by Funding Circle as to Program status.

*LendingClub may receive compensation from Funding Circle for applications referred through LendingClub.

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