New PPP Guidelines for March 2021:
In early March, the U.S. Small Business Administration rolled out changes that directly impact Paycheck Protection Program loans for sole proprietors, independent contractors, freelancers, gig workers, and other self-employed individuals—more specifically, by changing the loan forgiveness calculation.
Self-employed individuals generally don’t have the traditional payroll structure—so, prior to the changes, they were asked to use the net profits from line 31 of their Schedule C when calculating their maximum PPP loan amount. But because deductions, which include the costs of operating the business, can dramatically reduce (or even eliminate) profits, using net profit to determine eligibility or loan amount led many self-employed individuals ineligible for PPP loans—or only eligible for an extremely small amount. Under the new guidelines, self-employed individuals can use gross income to calculate their maximum loan amount—which should provide loans more proportionate to the borrower’s actual income.
In addition, the SBA removed certain eligibility restrictions, including restrictions that blocked businesses with owners who are in default or delinquent on their Federal student loans OR had non-financial fraud felony convictions in the past year; under the new guidelines, those businesses are now eligible to apply for—and may receive—funding through the Paycheck Protection Program.
For more details on the changes to the Paycheck Protection Program, make sure to read the SBA’s Interim Final Rule.
What is the Paycheck Protection Program?
The Paycheck Protection Program was passed as part of the CARES Act. The program initially oversaw nearly $350 billion in funding. But the demand for PPP loans was so high, the funds were depleted in less than two weeks—which led to Congress passing legislation in April 2020 to replenish the Paycheck Protection Program with an additional $310 billion.
As the COVID-19 pandemic (and related restrictions) continued through 2020, it became clear that businesses would need additional financial support to keep their doors open. As such, on December 27, 2020, Congress passed the Economic Aid Act, which replenished the Paycheck Protection Program with another $284 billion. And while first-time borrowers continue to be eligible for PPP loans, this legislation also opened the door for past borrowers in need of additional funding to apply for a second PPP loan. As of early March 2021, the current deadline for PPP applications is March 31—although many small business organizations are pushing for that deadline to be extended.
In order to keep up with the continued demand, a wide network of lenders not traditionally authorized to make SBA-guaranteed loans have been authorized to process applications and service loans through the Paycheck Protection Program.
(Need a lender? Search for eligible lenders in your area with the SBA’s eligible lender tool).
How does the Paycheck Protection Program work?
The Paycheck Protection Program provides federally insured loans to businesses with 500 or fewer employees, including any eligible nonprofit organization, Veterans organization, Tribal organization, sole proprietorship, self-employed individual, and independent contractor as described in the Small Business Act. (According to the Small Business Administration, certain companies may have more than 500 employees, if they’re in an industry that has a higher SBA size standard.)
Eligible businesses can borrow up to 250 percent of their average monthly payroll costs over the prior 12 months, which include wages, employee salaries, healthcare costs (including group health care benefits and insurance premiums), retirement contributions, and other expenses), up to a maximum loan amount of $10 million dollars. Under the Economic Aid Act, restaurants and hotels—two of the industries hardest hit by the pandemic—are now eligible to increase that number to 350 percent of their average monthly payroll costs.
The loans are designed to cover short-term operating expenses and help small businesses keep their doors open and their employees (both full-time and part-time) on payroll. As a way to incentivize businesses to maintain their headcount and avoid layoffs, SBA will forgive portions of the loan used for payroll, rent, mortgage interest, or utility payments during the eight-week period following loan origination—up to 100% of the total loan amount.
While the Paycheck Protection Program does offer loan forgiveness (essentially turning the loans into small business grants), there are requirements to qualify. Employers must maintain their pre-coronavirus levels of full-time employees. If they don’t, the amount of forgiveness will be reduced in proportion to the loss of employees unless they were rehired prior to December 2020.
There are, however, exceptions to these loan forgiveness reductions. Under the Paycheck Protection Program Flexibility Act, businesses will still qualify for full loan forgiveness—even if they reduce their employee headcount—if they are unable to rehire former employees or are unable to find qualified workers to fill their open positions OR they can document, in good faith, that the business has been unable to return to their standard level of business due to COVID-19-related safety protocols (for example, restaurants not being able to open at full capacity).
PPP2 Loan Eligibility
As mentioned, businesses that previously received a PPP loan are now eligible to apply for a second loan. But the SBA wants to make sure that funds are going to the businesses that need it the most—and, as such, there are different eligibility requirements for businesses applying for a second Paycheck Protection Loan.
In order to qualify for a PPP2 loan (also known as “second draw loans”), businesses must have 300 or fewer employees, have exhausted the funds from their first PPP funds, and be able to show a year-over-year revenue decrease of at least 25 percent for at least one quarter in 2020. Second draw loans are also capped at $2 million.
What are the benefits of applying for a loan through the Paycheck Protection Program?
Loans through the Paycheck Protection Program aren’t like traditional loans—and they offer some serious, unprecedented benefits to small business owners.
Some of the major benefits of a Paycheck Protection Program loan include:
- Low barrier to entry. There’s no need to prove economic hardship due to COVID-19 or put up collateral or a personal guarantee; the SBA is purposefully making the barrier to entry low to make it easier for small businesses to get the assistance they need.
- No fees. There are no participation or prepayment fees associated with securing a loan through the Paycheck Protection Program.
- Deferred payments. If a small business applies for loan forgiveness, payments will be deferred until the SBA remits the forgiveness amount to the lender. If the business doesn’t apply for forgiveness, payments are automatically deferred for 10 months after the end of the covered period.
- Low interest rates. Interest rates for PPP loans are set at 1%—which is significantly lower than other types of small business loans.
- Loan forgiveness. As mentioned, all portions of your loan to cover payroll expenses, rent, mortgage interest, and/or utility payments in the covered period following your loan origination (which can range from eight to 24 weeks)—up to 100%—will be fully forgiven. That means, if you use the funds for the aforementioned expenses, you won’t increase your business’ debt obligation.
Clearly, PPP loans offer a number of benefits to small business owners. Arguably the largest benefit of securing a loan through the Payment Protection Program? It gets you the capital you need to retain your employees, avoid layoffs, and continue operations in the midst of the COVID-19 crisis.
Is my small business eligible—and how do I apply?
While the barrier to entry for PPP loans is low, there are certain eligibility requirements, including:
- Businesses must have less than 500 employees (or meet the applicable industry size standard per the SBA), or;
- Less than 300 employees (when applying for a second draw loan), or;
- Be a sole proprietor, independent contractor, or self-employed individual; and
- Businesses must have been in operation on February 15, 2020
As mentioned, PPP loans will be processed through individual banks, credit unions, and other lenders—and eligible small businesses will be able to apply for a Paycheck Protection Loan through March 31, 2021.
In order to apply, fill out the SBA’s sample application and submit your completed paperwork to an SBA-approved lender. (Contact your bank to see if they’re working with the SBA on the Paycheck Protection Program; if not, they should be able to refer you to another approved lender that can process your application.)
In addition to your application, you’ll also need to supply the following documentation to your lender:
- Articles of incorporation and by-laws or operating agreement for each borrowing entity
- Copies of each owner’s driver’s license
- Payroll expense verification documents (including IRS Forms 940 and 941, payroll summary reports, and corresponding bank statements)
- Breakdown of payroll benefits (including retirement benefits, healthcare benefits, and PTO)
- 1099s (only applicable for independent contractors)
- Certification that all employees live in the United States
- A detailed list of any employees living abroad/outside the United States with corresponding salaries
- Most recent mortgage or rent statement
- Additional proof of expenses (including most recent utility bills and interest payments on debts)
- Trailing 12-month profit and loss statement (as of date of application)
While the Paycheck Protection Program will be available through March 31, 2021, a huge number of applications are expected—so the sooner you can complete your application and submit the required documentation, the better.
Paycheck Protection Program Q+A
Is my business eligible for the Paycheck Protection Program?
If you’re a small business with under 500 employees (or, in industries with a higher SBA size standard, under the applicable number of employees), sole proprietor, independent contractor, or self-employed individual, you should qualify to participate in the Paycheck Protection Program.
What costs will my PPP loan cover?
Technically, you can use your PPP loan as you choose. But if you want the loan to be forgiven, you need to use the funds to cover specific operating expenses, including:
- Salary, wages, commissions, and/or tips (capped at $100,000 per year per employee)
- Employee benefits (including health insurance, retirement plans, and paid vacation time)
- Mortgage interest payments
- Rent and lease payments
- Utility payments
- Worker protection expenditures (like Personal Protective Equipment or changes made to your business property to comply with COVID-related guidelines)
- Property damage incurred during a public disturbance during 2020 and NOT covered by insurance
- Essential Supplier costs incurred prior to receiving a PPP loan
- Operation expenditures
What terms do I need to follow in order for my PPP loan to be forgiven?
In order to qualify for loan forgiveness, you’ll need to spend 60 percent of your loan on payroll costs (the remaining 40 percent can be spent on eligible non-payroll costs). If you keep to that ratio and maintain (or exceed) your average number of full-time employees over the past year, your loan is 100% eligible for forgiveness.
If you decrease your number of employees or wages, the amount of the loan eligible for forgiveness will decrease proportionately.
How can I find an eligible lender for the Paycheck Protection Program?
The SBA recently launched a tool that allows you to search for eligible lenders in your area; just enter your location, and the tool will pull information on all eligible lenders nearby (including location, distance, and contact information).
If my PPP loan isn’t forgiven, how long do I have before I have to start paying it back?
You don’t need to start making payments on PPP loans for six months. If you need more time, you can extend that deferment period to a full year.
Additional Paycheck Protection Program and COVID-19 Resources
- Paycheck Protection Program Loan Application Form, US Treasury
- SBA’s Paycheck Protection Program homepage
- Payment Protection Program Fact Sheet, US Treasury
- Paycheck Protection Program Overview, US Treasury
- Hourly Q+A: How To Navigate Employee Layoffs and Terminations In California During The Coronavirus Pandemic
Keep in mind this situation is evolving—and may continue to evolve
While this information is current at the time of writing, the Paycheck Protection Program is a new initiative that’s continuing to evolve by the day. We’ll continue to update this post as new information is released to ensure you have the most up-to-date information on PPP loans, eligibility, and how to apply.