Paycheck Protection Program Loans

Summary: There's good news for small businesses struggling in the wake of the COVID-19 pandemic. Congress revived the Paycheck Protection Program (PPP) to provide much-needed funding for organizations suffering most throughout the crisis. Learn more about the key terms of the program. 

The coronavirus (COVID-19) has had a significant effect on the lives of millions of people across the United States. Small business owners are some of those hardest hit by the pandemic, as governors throughout the country shut down restaurants, bars, retail shops, hair salons and others as a means to stop the spread of the virus. While some organizations still offered online ordering, delivery and carry out options, there’s no doubt it will take some time until things are running “business as usual” again.

In late December of 2020, Congress passed  the 2021 Consolidated Appropriations Act, a $900 billion relief package, which featured not only direct stimulus payments of $600 to qualified adults and $600 per child, but also invested $284 billion into a small business stimulus package. This package includes reviving Paycheck Protection Program (PPP) loans. Since the original PPP program closed on August 8, 2020, after around 5.2 million businesses applied for and received loans, this new stimulus provides much-needed additional funding - especially for those small businesses who may have missed the first round of loans. 

The Biden administration announced a change to the most recent PPP program. On Wednesday, February 24, the program will close to larger businesses, providing small businesses with less than 20 employees an exclusive two-week window to apply for funding. Additionally, eligibility rules for self-employed, sole proprietors and independent contractors will change the first week in March, allowing them to qualify for more money. The program originally excluded these business owners. Likewise, the updated program will now also offer funding to small business owners with non-fraud related felonies, non-citizen residents with Green Cards or those in the country on visas, as well as to those delinquent on their federal student loans. As of Monday, February 22, half the funds allocated in December are still available and will be offered through March 31.

What are Paycheck Protection Program Loans?

The second small business stimulus package passed in December 2020 brought back PPP loans, originally part of the CARES Act passed in March 2020. The updated package expands eligibility to nonprofits and local media, such as newspapers, radio and TV broadcasters – industries that were not eligible for loans in the first round. The revived program provides $15 billion for performance venues, independent movie theaters and other institutions that suffered, and are still suffering, lengthy shutdowns throughout the pandemic.

PPP loans will now cover additional expenses, such as operating costs, property damage costs, supplier costs and worker protection expenditures. Borrowers can set the coverage period to be any length between eight and 24 weeks to meet their specific needs. The new bill also ensures businesses will be eligible to deduct payroll costs and other expenses covered by PPP loans. A tax credit that subsidizes wages for businesses suffering during the crisis will also be expanded.

The SBA restarted PPP loans on Monday, January 11. Lenders targeting underserved communities were given access to offer loans to new borrowers first, followed by second loans to existing borrowers. These lenders include community development financial institutions and minority depository institutions.

Other borrowers were eligible for PPP loans after these groups. It's expected that the approval process will be a bit slower this time around so the SBA can run additional automated data verification checks and do a manual review if issues are found. 

The U.S. Department of the Treasury states that PPP loans can be used to cover payroll costs, most mortgage interest, rent and utilities over the eight-week period after the loan is made, provided that employee and compensation levels are also maintained.

What Small Businesses Need to Know about PPP Loans

Let’s take a closer look at the Paycheck Protection Program, including some of the most frequently asked questions and the information small business owners need to start the application process.

Who is eligible to receive PPP loans?

To be eligible for a PPP loan, the criteria includes:

• Must be a small business, 501(c)(3) nonprofit or tribal business concern with 300 or fewer employees, 501(c)(19) veterans organization, or other select businesses that meet the applicable SBA standards
  • Independent contractors do not count as employees; however, self-employed, sole proprietors, freelance and gig workers may apply
• Principal place of residence is in the United States
• Must have been in operation on February 15, 2020 and paid employees’ salaries and payroll taxes
• Can demonstrate the business experienced losses in revenue of 25% or more in 2020 compared to 2019

What are the key terms for PPP loans?

Loans under the Paycheck Protection Program can be 2.5 times the borrower’s average monthly payroll costs. Originally, loans were capped at $10 million, but under the latest small business stimulus package, the most a business can receive is $2 million. PPP loans are first-come, first-served, and the basic terms include:

• Application for the second round of PPP loans must be made by March 31, 2021
• Interest rate: 1%
• Maturity date: Two (2) years
  • Loans issued prior to June 5 have a maturity rate of 2 years, and those issued after June 5 have a maturity of 5 years
• Interest payments will be deferred for the first six months
• At least 75% of PPP loan must be used for payroll costs
• No personal guarantee or collateral required

On June 5, the Payment Protection Program Flexibility Act was signed into law to address some of the concerns small business owners had about the initial program. The PPPFA includes:

• Changed the amount of the loan needed for payroll from 75% to 60% 
• Extended the time period to use funds from 8 to 24 weeks, allowing businesses to have until the end of 2020 to use the funds
• Pushed back the deadline to rehire workers from June 30, 2020 to December 31, 2020
• Eased rehire requirements by extending the rehire date and providing additional exceptions for a reduced headcount
• Extended the repayment term from two to five years in the event loans or portions of them are not forgiven

To qualify for a second PPP loan, applicants must show the 25% drop in revenue in at least one quarter of 2020 as compared to 2019. They cannot exceed 300 employees, and must have already depleted the funds from the first round of forgivable loans received from April through August of 2020. 

What is meant by “payroll costs?”

Here’s a closer look at what PPP loans will cover in regards to payroll costs:

• Salary, wages, commissions, or similar compensation
• Cash tips or the equivalent
• Payment for vacation, parental, family, medical, or sick leave
• Allowance for separation or dismissal; payment for group health care coverage
• Payment of state and local taxes assessed on compensation. However, the following are not considered payroll costs:
  • Compensation of an employee whose principal residence is outside the United States
  • Any compensation paid to an employee in excess of an annual salary of $100,000
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA, Railroad Retirement Act taxes and income taxes required to be withheld from employees
• Sick and family leave wages where a credit is allowed under the Families First Coronavirus Response Act

How can small businesses determine their maximum loan amount?

The maximum loan amount can be determined in five steps:

• Step 1: Aggregate payroll costs from the last 12 months for employees who are U.S. residents
• Step 2: Subtract compensation in excess of an annual salary of $100,000
• Step 3: Divide the total by 12 to determine average monthly payroll
• Step 4: Multiply the average monthly payroll by 2.5
• Step 5: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 30, 2020, less the amount of any advance under an EIDL COVID-19 loan

This can also apply for the lesser of $2 million or the amount determined in step 5.

What portion of the loan can be forgiven?

The amount of the loan that can be forgiven includes the amount up to the full principal plus any accrued interest. Expenses like payroll costs, mortgage or rent and utility payments may be eligible for loan forgiveness.

However, keep in mind the amount of loan forgiveness may be reduced if there is a reduction in the number of employees or the amount of wages paid to the company’s employees. This forgiveness reduction can be decreased or eliminated if the business restores the reduced wages or brings back any laid-off employees.

What can PPP loan proceeds be used for?

Borrowers can use their loan proceeds for:

• Payroll costs (Note that at least 75% of loan proceeds must be used for payroll costs)
• Group health care during periods of paid sick, medical, or family leave, and insurance premiums
• Mortgage interest payments (but not mortgage prepayments or principal payments)
• Rent payments
• Utility payments
• Interest payments on any other debt obligations that were incurred before February 15, 2020
• Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020

Does a PPP loan coordinate with other SBA loans?

Those who receive an SBA EIDL loan from January 31, 2020 through April 3, 2020 are not precluded from applying for a Paycheck Protection Program loan. If the EIDL loan was not used for payroll costs, it does not affect the eligibility for a PPP loan.

However, if an EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

How can a small business apply for a Paycheck Protection Program loan?

Small businesses can apply for PPP loans through any existing SBA 7(a) lender or any participating federally insured depository institution or credit union, and Farm Credit System institution. All current SBA 7(a) lenders are eligible lenders for the Paycheck Protection Program, and the U.S. Department of Treasury is in charge of approving new lenders to meet the needs of small businesses. Small business owners can contact their bank to find out if they are an SBA 7(a) lender, or view a list of active lenders here. To view a sample application, click here.

Payment Protection Program Resources

Here’s a helpful list of links for more information about PPP loans:

AmTrust: What are Paycheck Protection Program Loans?
U.S. Chamber of Commerce – Coronavirus Emergency Loans
U.S. Department of Treasury – PPP Loans Fact Sheet
U.S. Senate Committee on Small Business & Entrepreneurship: Small Business Owner’s Guide to the CARES Act

AmTrust Supports Small Businesses

AmTrust’s support to our small business policyholders and our appointed agents has never wavered throughout the pandemic. We’ve created a library of resources regarding the coronavirus to help you stay informed, safe and healthy. For more information about our small business insurance solutions, please contact us today.

This material is for informational purposes only and is not legal, tax or business advice. Neither AmTrust Financial Services, Inc. nor any of its subsidiaries or affiliates represents or warrants that the information contained herein is accurate, appropriate or suitable for any specific business, tax or legal purpose. Readers seeking resolution of specific questions should consult their business, tax and/or legal advisors. Coverages may vary by location. Contact your local RSM for more information.