In response to the economic crisis created by COVID-19, the US Government passed a stimulus bill—known as the CARES Act—to provide much needed assistance for citizens and businesses across the country. The stimulus package delivered over $2 trillion to the U.S. economy, in the form of checks to individual citizens, increased funding for medical and welfare organizations, and loans for small businesses.
Small businesses—especially those in entertainment, restaurants, and retail—have been particularly hard hit by quarantine and shelter-in-place orders. The CARES act set aside nearly $350 billion for the Small Business Administration to fund a new program—Paycheck Protection Loans.
Unfortunately, the funds allotted to the PPP were exhausted in less than two weeks. On April 24, 2020, the Federal government passed an additional relief package providing $310 billion to replenish depleted PPP funds (another $60 billion would go to SBA Emergency loans).
We’re sharing all the details that you need to know about this program for your small business, and how you can submit your application through Divvy.
The CARES Act
“This isn’t even a stimulus package. It is emergency relief.” – Senate Majority Leader Mitch McConnell
The CARES Act is expansive, providing over $377 billion in relief specific to small businesses. Some of the loan program funds are prescribed for specific government programs and uses, such as funding for hospitals or the Paycheck Protection Program. Other funds usage will be more flexible and dynamic as the crisis continues, like the expansion of unemployment as layoffs create need.
The relief package signed into effect on April 24, 2020, allocated $310 billion to the PPP on top of CARES Act funding.
What is the SBA Paycheck Protection Program?
The Small Business Administration created the Paycheck Protection Program to help small businesses and sole proprietorships continue to cover their payroll despite global economic decline. The SBA Paycheck Protection Program is a temporary solution to get small businesses employers and employees through the COVID-19 disaster, minimizing layoffs and encouraging normal business operations.
The SBA Paycheck Protection Loans are brand new and unique to this economic crisis, and can be eligible for 100% forgiveness if qualifications for usage and employment numbers are met. Current details about the Paycheck Protection Program and disaster loans are listed for quick reference in this table, with expanded information following.
|Paycheck Protection Program|
|Max borrowing amount||
The lesser of:
|Term lengths||2 years|
|Forgiveness||Up to 100%*|
|Deferred payments||6 months (though interest still accrues)|
|Availability||Through Jun 30, 2020|
*Forgiveness may be reduced dependent on reduction of number of employees or reduction in salaries.
Who is eligible?
The Paycheck Protection Program is executed by the Small Business Administration, and therefore targets small businesses, organizations, sole proprietorships, and nonprofits. The main eligibility requirement is that the business or organization has fewer than 500 employees. Sole proprietors, freelancers, veterans organizations, and self-employed individuals can also qualify for the Paycheck Protection Program.
In order to apply, businesses or individuals must demonstrate negative impact on their income due to COVID-19. The business must have been in existence before February 15, 2020, There are no requirements specifying credit scores or collateral for the loans.
Loan borrowing amounts and terms
Small businesses hurting from the coronavirus impacts can apply to receive up to 2.5x their average monthly payroll costs—essentially guaranteeing over two months of payroll to maintain employment. The loans top out at $10 million.
For most businesses, the calculation will be straightforward, but the Small Business Administration will help seasonal and brand new businesses determine their accurate estimates.
What counts as payroll? Salaries, health care benefits, bonuses, retirement, and other benefits provided to employees. Under the Paycheck Protection Program salaries are only covered up to $100k.
Paycheck Protection Loans are for two years and include 1% fixed interest rate. Payments will be deferred for six months following the initiation of the loan.
You an use our CARES Act SBA Loan Calculator to help estimate what you would get from an SBA loan.
Paycheck Protection Loan forgiveness
The most significant draw for the Paycheck Protection Program is the opportunity for 100% loan forgiveness. Loan forgiveness is contingent upon the use of funds, number of employees, and employee salaries over the life of the loan. Meeting these directions can qualify borrowers for 100% loan forgiveness, meaning you would not have to pay back the principal of the loan.
Use of funds: funds must be used for payroll, mortgage interest, rent, utilities, payroll tax, or employee benefits
Employment numbers: any reduction in employees will need to be reversed by June 30th, 2020 in order to qualify for 100% loan forgiveness
Employee salaries: Decreasing any below-$100k salaries by 25% or more will disqualify your business for 100% loan forgiveness, unless replaced by June 30th, 2020
Forgiveness will be determined on a case-by-case basis after completing and submitting a loan forgiveness application, which will include a detailed documentation of the use of Paycheck Protection Loan funds.
Divvy makes it easy to track each and every transaction, syncing seamlessly with your accounting software and locking budgets to help you navigate the COVID-19 crisis and use your Paycheck Protection Loan wisely.
The first round of applications for the Paycheck Protection Program opened on Monday, April 6th. However, the applications closed less than two weeks after this date, when on April 16th, the SBA announced a “lapse in appropriations.”
The announcement of additional funding marks a second round of PPP applications, beginning on April 27th. These loans are said to be available until Tuesday, June 30th—though the funds are expected to go quickly, as over 1.6 million small businesses have already attempted to apply.
PPP loans are awarded on a first-come, first-served basis. In order to expedite these funds, the Small Business Administration does not require official SBA approval of each and every loan, so funds can be made available within days of a completed application.
SBA Paycheck Protection Loans are available through any approved SBA 7(a) lender (many banks and credit unions qualify). Find an SBA office in your state to check for approved lenders.
How can businesses use Paycheck Protection Loans?
Unlike regular loans which are used at your discretion, Paycheck Protection Loans need to be carefully used and documented to qualify for 100% loan forgiveness–the goal of many businesses during this chaotic time. So how exactly can a Paycheck Protection Loan be used?
- Payroll costs
- Salaries, commission, wages, tips (up to $100,000/year)
- Employee benefits: vacation, family/medical/parental/sick leave, insurance premiums, retirement
- State & local compensation taxes (payroll tax)
- Sole Proprietors & Independent contractors: income and net earnings (also capped at $100,000/year)
- Interest on mortgage before February 15, 2020
- Rent for leases existing before February 15, 2020
- Utility services that started before February 15, 2020
The Paycheck Protection Loans are designed to keep businesses running and allow employees to keep their jobs during the short-term economic crisis. Paycheck Protection Loans cannot be used for purchasing new property or equipment, inventory, repairs, paying off other loans or financial obligations, or any other expenditures not directly related to payroll and day-to-day operations of your business.
Paycheck Protection Loans vs. Economic Injury Disaster Loans
Another SBA lifeline for small businesses during the COVID-19 disaster is an Economic Injury Disaster Loan. While similar to Paycheck Protection Loans, Economic Injury Disaster Loans (EIDL) are different in terms of size, scope, and who can qualify.
What is an SBA Disaster Loan? Download our SBA Disaster Loan Guide.
As described above, the Paycheck Protection Program is designed for short-term relief to allow businesses to keep their employees on the payroll during the peak of the COVID-19 crisis. In contrast, an Economic Injury Disaster Loan provides for more long-term support and can be used with wider discretion. For example, you could apply for an EIDL to adapt your business with new equipment or resources to survive the coronavirus slowdown, such as a drive-through, online access, or delivery service.
|Economic Injury Disaster loans||Paycheck Protection Program loans|
|Administered by||SBA approved lenders|
|Eligible businesses||Small businesses with 500 or fewer employees, nonprofits, sole proprietors, and independent contractors|
|Max borrowing amount||$2 million||
The lesser of:
|Availability||Through Dec 31, 2020||Through Jun 30, 2020|
|Term lengths||Up to 30 years||2 years|
|Interest rates||3.75% (2.75% for nonprofits)||0.5%|
|Deferred payments||6 months (under current SBA debt relief plan)||6 months (though interest still accrues)|
|Forgiveness||N/A||Up to 100%|
Since disaster loans and PPP loans are different, small businesses can actually apply for both as long as they are used for different purposes—PPP for payroll and EIDL for debts, as an example. It’s worth your time to apply for both.
In addition, when you apply for an EIDL loan, you can request a $10,000 emergency cash grant (also funded through the CARES Act). Small businesses can qualify for these grants even if they do not qualify for EIDL or PPP loans—plus, the funds do not need to be repaid.
Learn more about applying for an SBA Disaster Loan here.
Alternative lending sources
Economic Injury Disaster Loans require you to exhaust all other options before qualifying, and the Paycheck Protection Loans is in high demand among American small businesses. It is in your businesses best interest to research alternative lending sources in this time of economic emergency.
Start with your bank to assess small business loans they offer. Often banks and private lenders such as Lendio or Fundera will provide an emergency loan for your small business with a rapid online application and immediate disbursement, though the disadvantage may be found in the terms and interest rates being less favorable.
How to apply
Payment Protection Loans can be applied for through any SBA-approved institution. Currently there are over 1800 such institutions, but as the SBA has relaxed requirements to encourage more institutions to participate the number will grow and access to the loans will increase.
Divvy has partnered with Cross River Bank to rapidly launch completely online SBA loan applications, giving you the fastest route to receiving funds for your business or sole proprietorship. Our Divvy Account Managers stand ready to help you through the process to answer questions and get your loan serviced as soon as possible.
Not a Divvy customer? Don’t worry. We can still help with your SBA loan application.
To submit an application for a Payment Protection Loan, contact any SBA 7(a) lender to begin the application process. You can prepare for faster application by assembling the following materials and documentation.
- Payroll: Tax Forms 940 and/or 941 from January 1, 2019 to the most current filing.
- Articles of organization and W9: Include these documents for the business entity that will be borrowing or that has paid payroll.
- Existing lender waiver: A waiver or email from your existing lender(s) confirming that you can take on additional, unsecured financing.
Frequently Asked Questions
Can I get a PPP loan if I have bad credit?
Yes. Unlike other SBA loans, the Paycheck Protection Program does not require a credit check in order to qualify for the loan.
Can I apply for a PPP loan if I am my only employee?
Yes — the Paycheck Protection Program is designed to include sole proprietors and independent contractors who are their only employee.
What would disqualify me from a PPP loan?
The following conditions will disqualify an individual or small business from a PPP loan:
- Illegal activity
- Household employer, i.e. your employees are housekeepers, nannies, etc.
- An owner with 20% or more equity in the company is facing criminal charges, or is incarcerated or on probation.
- An owner with 20% or more equity in the company has committed a felony within the last 5 years
- You are delinquent or have defaulted on a federal loan, including an SBA loan
Can I apply for a PPP loan if I have a felony?
You can apply for a PPP loan only if your felony charge is not within the last 5 years.
Divvy is sympathetic to the needs of our customers and all small businesses. We are ready and waiting to answer your questions and provide free information and resources for surviving COVID-19, no matter how it is affecting your business.