Last December, Congress passed a stimulus bill that provides small business relief, including Paycheck Protection Program (PPP) loans. The forgiveness applications to cover the new loans are expected to be released soon, with the SBA and Treasury already having released the new PPH Forgiveness Application, which you can use to apply for the forgiveness of your PPP loan.
Read on to find out important details about PPP loans, including how and when to apply, among others.
What Is the PPP?
In a nutshell, the Paycheck Protection Program is an SBA loan program created by the CARES Act that became law last March. One month later, the President signed the PPP Flexibility Act, and then the Treasury released the new PPP Forgiveness Application and instructions. The goal is to help businesses keep their workforce during the COVID-19 pandemic by providing them with loans.
The basic PPP premise is that business owners (self-employed or not) can apply for a loan of 2 ½ times their average monthly payroll. As soon as the companies receive the loan, they need to spend the money shortly after getting it on payroll and other approved expenses. Doing so will enable them to apply to receive the full forgiven amount.
What’s the Difference Between the First Round (Draw) and Second Round of Funding?
Here are some key differences between the two rounds (also called draws) of PPP funding:
- Some businesses can receive a 2nd PPP loan – The most significant change to the second round of PPP is that some businesses that have already received a loan can get a second one as the program distinguishes between 1st and 2nd draws.
- Qualifications – The qualifications on a 2nd draw are more stringent than those of the 1st round. This is because the 2nd round targets the small businesses (public traded companies do not qualify) that have been most harmed financially from the COVID-19 pandemic. So, second round loans require that small businesses demonstrate a revenue reduction of 25% or more in one or more of their quarters. Plus, they have to employ no more than 300 employees. For the first round, it is paramount that the business is founded before February 15, 2020, and not be in a prohibited industry. Seasonal businesses that operated between February 15, 2020, and February 15, 2020 for at least 12 weeks are also eligible, provided they all have less than 500 employees.
- Funding sums – For the first round, the maximum sum you can borrow is 2 ½ times your monthly payroll, up to $10 million. The second round has the same formula for the amount you can borrow, with the difference that the loan is capped at $2 million. Also, businesses in the foodservice or accommodation industries can borrow up to 3 ½ times their average monthly payroll up to $2 million (you can use NAICS 72 to confirm).
- Loan forgiveness – To get full loan forgiveness, the small business needs to spend 60% of their PPP loan on payroll expenditures while also retaining its staff. Nevertheless, they are now able to spend the remaining 40% of their loan on more qualified expenses, such as rent, utilities, software expenditures, fixing property damage from protests, necessary supplier costs, and others. The best news is that they can do so without risking loan forgiveness. Also, Congress has already approved the simplified loan forgiveness form for businesses applying for a loan below $150,000. For 2nd round funding businesses, it is critical to prove they have lost 25% or more of their annual revenue, irrespective of using the simplified form or not.
- Tax regulations – Businesses that had received an EIDL Advance grant and a PPP loan had to deduct the sum they received in the grant from their PPP loan sum that could be forgiven. The second round of PPP funding does away with this.
- Small business priority – To address an issue that arose from very small business owners who complained about PPP favoring bigger businesses, the second PPP round has set aside funding targeting businesses with less than 10 employees, as well as loans made by community leaders and businesses owned by minority or women.
How to Apply For the PPP Program
The procedure is supposed to work in the following way:
- You receive a Paycheck Protection Program loan.
- You spend the loan within the specified period on specific items (mainly payroll).
- You apply for forgiveness, providing the necessary details and documentation. You will need to work with a lender for this one.
- The lender will respond to your forgiveness request within 60 days. If they agree, you will get the balance forgiven.
- Any not-forgiven balance becomes a loan at 1% for up to 48 months or 60 months if the loan was made after June 5, 2020.
When it comes to completing your PPP loan application, the process is slightly different, depending on which source you use to apply through. For example, for users that have submitted a PPP loan request via SBA.com’s partner, applying for a PPP loan involves the following steps:
- You access your PPP application with an SBA partner – Once you complete the application with the partner and provide all needed documentation and information, it will be finalized and submitted to an approved lender for approval.
- Add business details (or confirm) – These include the business address, business type, business tax ID, loan amount requested, and employee count.
- Add more new business information – This section needs you to fill out your business start date and industry.
- Confirm (or enter) ownership.
- Confirm (or enter) additional owner information – This applies to businesses with additional owners only (anyone owning 20% or more share in the business).
- Upload documents (or confirm) – You will be asked to provide documentation such as your driver’s license, documents that prove your payroll expenses, and business account bank statements. Self-employed or 1099 Independent Contractors also need to upload (1) income and expense reports for 2019, (2) 1099s, and (3) IRS 1040 Schedule C. Business owners must provide (1) 12 months most recent bank statements, (2) payroll register for the past 12 months, (3) 944 annual tax filings (2019), and (4) 941 quarterly tax filings (2019, 2020 Q1).
Note: If the lender accepts your application, you will receive a confirmation email with must-read details/requirements. Note that once a lender accepts your application and gets an email with your PPP number, you are instantly entering the US Small Business Administration’s loan system. This means that the only source that can make you a PPP loan is the lender that has accepted your application.
How and When to Apply For PPP Loan Forgiveness
Now, when it comes to filling out your PPP forgiveness application, things can get quite complicated. It depends on whether you have employees or not. Businesses can use Form 35008EZ. It applies to businesses that have not reduced wages or employee headcount, as well as self-employed with no employees. Or the simplified application form released last October if your business has received no more than $50,000 in PPP funds. Then, you submit the application to your lender and wait for them to process it. This may take up to 60 days.
As already mentioned, to apply for loan forgiveness, you need to fill out a 3508S PPP Loan Forgiveness Application form (if you have borrowed less than $50,000) or the PPP EZ Loan Forgiveness Application form.
Filling out the payroll sections is admittedly the most complicated part of filling out the forgiveness application. For that reason, you will probably need the services of a tax professional or accountant. Also, note that you must find a lender that takes forgiveness applications first. Here is a list of lenders you could consider (as of January 2021):
Remember that this is just a reference list. More lenders are being added with each passing week while many are already in line for more information.
If you are trying to decide when is the best time to apply for a PPP Loan Forgiveness, patience is a virtue. You can submit a loan forgiveness application within 2-5 years from loan origination. So, you have plenty of time to think about your options. And, if you are eligible for a Round 2 PPP loan, you can apply to any lender that accepts Round 2 PPP loan applications, such as Lendio, Fundera, Credibly, and BlueVine. Note, though, that if you have already done business with a lender in the first round, chances are the particular lender will not participate in the second one. Also, take into account that a PPP Round 3 is already out there, so it is worth waiting a bit before you decide when to apply for a PPP loan forgiveness.
Note that the forgiveness application will need quite a few calculations. You may download or print out the SBA PPH Loan Forgiveness Application before you go through this guide to check it out. Or you could ask your lender to provide the online version of the form. You might also have to reference the Form 3508 Instructions. If you are uncomfortable with the process, you can always seek assistance from an experienced financial advisor or accountant.