Payroll Protection Program: Why you need to talk to your bank immediately

With the federal coronavirus (COVID-19) stimulus bill's passage on Friday, March 27, 2020, many rumors and guesses have made the rounds on social media and elsewhere about what it includes, fueling speculation about free money and loan forgiveness.

Here is a true summary of what's in the bill and how it will impact your business. 

About the Payroll Protection Program

The centerpiece of the bill’s SMB assistance is a $350 billion forgivable loan program designed to keep employers from laying off their workers. 

This fund is known as the Payroll Protection Program.

This guide from the U.S. Chamber of Commerce can help you calculate how much you could be entitled to.

As long as these loans are used to meet payroll demands and all rules are followed, the principal of the loan will be forgiven; only the interest will need to be repaid. 

Does your business qualify?

To qualify, your business needs to have been impacted by COVID-19. This can include staffing challenges, revenue challenges, supply chain challenges, or the closing of an office.

This is defined very broadly and has no limitation as to whether you are or are or are not still profitable — or even now making more money — only that you are impacted by the pandemic.

🔎 Related: View all of our coronavirus resources for SMBs 

You will, however, have to make a “good faith self certification” that the coronavirus uncertainty makes the loan necessary to support operations, and that the funds will be used for payroll, lease payments, utility payments, or mortgage payments. 

You cannot use the funds for any other purposes.

What does the Payroll Protection Program loan cover?

Within the new legislation are loans to be given out to small businesses (under 500 employees) that have the ability to be forgiven if certain criteria are met. 
 
The amount of the loan will be based on “payroll costs,” which include wages up to $100,000 per employee (annualized), health insurance costs, employer covered 401k costs, and even some subcontractor costs.

Owners that are paid W2 wages are included in this calculation (but capped at $100,000, just like all others).

Note: Employees must reside within the United States.

Payroll Protection Program loan details

The fund can provide loans of up to $10 million, with a maximum loan equal to 250% of your average monthly payroll costs (companies with seasonal workforces can apply as well, with slightly different stipulations).

The terms of the loans are supposed to be 10 years at a maximum 4% annual interest rate, with no principal payments required for six months.

There will be no personal guarantees and no collateral required, and also no origination fees.
 
Payroll Protection Program loans will be forgiven if:

1. You use all the funds for “qualified uses” for the next eight weeks from the date the loan is taken. (Qualified uses include payroll, mortgage interest, rent, and utilities.)
2. Your number of full-time equivalent employees is not reduced. (The reduction calculation compares the number of full-time employees during the eight-week period with a similar timeframe from 2019.)

As many of you know, loan forgiveness is typically taxable income. However, there is a special provision that this loan is forgiven will also not be taxable income to the company.
 
If a portion of the loan is not forgiven, it is then going to exist as a 10 year 4% loan (or whatever terms that are agreed to). 

What do you do next? 

The PPP is all being administered by local banks that are SBA lenders.

The first step is to reach out to your banker as soon as possible!

Some application guidelines are still forthcoming from the SBA, but tell your banker that you want the application as soon as it is available.

Banks are likely to start accepting applications by the end of next week (around April 3rd) or early the week after (around April 6th). 
 
In the mean time, you should be preparing your financial paperwork in order to be ready for the loan application.

In addition to tax returns and internal financial statements, you should collect payroll data.

PPP loans are based on payroll costs and do not follow the typical underwriting process.

I recommend beginning a spreadsheet with payroll and backup documentation, noting wages, health insurance, employer covered 401k, and subcontractor costs for this past year.

This way, as soon as applications begin, you are ready. 

What do you do when you receive the funds?

Remember that you will eventually will need to prove the funds were used for the “qualified purposes” set forth above in order to get the loans forgiven.

So, how do you know payroll was paid from these funds and not from current profits of the company or from old cash reserves?

There is no specific guidance on this yet. You could set these funds in a separate checking account and use that checking account only for qualified expenses.

This will make sure the use of funds are traceable to the allowed costs.

As the stimulus bill was only passed on Friday afternoon, some details of its roll-out are still forthcoming. While the allotted resources are vast, they will likely not cover the full cost of the coronavirus (COVID-19) pandemic and its effect on the U.S. economy. 

Therefore, businesses should get in line immediately to make sure they get access to the limited funds.