The temporary shutdown of businesses as part of the lockdown program enforced by governments to stop the spread of the coronavirus infection has left most small businesses struggling financially. The federal government has stepped in to mitigate the damage by pumping in millions of dollars through loans that can convert to grants, provided business use the money to retain employees. The Paycheck Protection Program or PPP is the primary stimulus for small businesses in the Cares Act, signed in late March, that has allocated $349 billion towards the program, points out Bradley J Beman. The program received an additional $310 billion in April to create the fund for $659 billion, giving hope to reviving small businesses post COVID19.
The loan is meant for smaller businesses, with fewer than 500 employees. The money is available for paying workers’ salaries, sick leave, health-care benefits, and other vital expenses like rent and utilities. Those that are self-employed or working as independent contractors or can also avail the loan. According to Brad Beman, small business owners can now apply for PPP loans through the extended deadline August 8, 2020, previously declared June 30. The funds should help small business owners plan for a much-needed recovery and rebuilding.
Facility for the conversion of the loan to grant is unique for the PPP loan, says Bradley Beman
Although SBA, which has received additional funding through a recent coronavirus law, administers both PPP loans and Disaster Relief Loans, the former is distinctly different from the latter and even more so unique. Loans from the PPP are different because they can convert into grants, leaving the business owner free from debt, provided they meet certain conditions. The PPP loan is available to all small business owners above the Disaster Relief Loan for the coronavirus pandemic that might have availed, or previously taken similar loans.
The working modality of Paycheck Protection Program
Small businesses that meet the SBA’s definition of small business can avail the loan for up to $10 million or 2.5 times the payroll cost, whichever is lower. To qualify for the loan, you must show that the financial crisis has affected your business due to COVID19, and your workforce does not exceed 500. Businesses of all kind that meet these criteria can apply for PPP loans. The utilization of the loan amount must also happen 24 weeks after the origination of the loan.
To qualify to waiver the loan by converting it into a grant, the business must retain their workers and use the money to pay salaries, interest on the mortgage, rent, transportation costs, electricity, gas, water, internet, and/or telephone payments. The amount of loan conversion or loan forgiveness can be less if the borrower cuts the employees’ wages by more than 25% or reduces the total number of employees.
Only SBA approved lenders can offer PPP loans.
The working method of PPP loan forgiveness
The purpose of the Paycheck Protection Program is to encourage small businesses to retain the workforce, allowing them to operate at full capacity, helping to reopen the business on firm footing. Accordingly, the conditions attached to the loan focuses on employment, by supporting small businesses financially to help maintain the workforce. The entire loan received under PPP could be forgiven, provided you have full-time equivalent employees on payroll or hire them again within December 31, 2020, or 24 weeks of receiving the loan, whichever comes first. However, the payroll cost must be 60% or more of the forgiven amount. This means that only 40% of the loan is usable for other, non-payroll expenses.
Loan forgiveness reduction calculation
To qualify for forgiveness of a loan, small business owners must retain the employees they had to lay off due to the sudden impact of the crisis that crippled multiple small businesses financially. However, it may happen that despite offering a job, some laid-off workers may prefer not to return because of the attractive payment of $600 a week that they receive towards unemployment insurance. To protect business owners from an unfair reduction in loan forgiveness, the SBA and Treasury introduced a new rule for excluding laid-off workers by calculating the reduction, provided the borrower had offered to re-hire employees for the same working hours and same salaries/ wages which they refused to accept.
Further exceptions added to the law allow borrowers to achieve full forgiveness despite not restoring the entire workforce, only if they are unable to find qualified employees or cannot restore operations to the same level as before the pandemic, as on February 15, 2020.
The Paycheck Protection Program will surely help 30 million small business owners and their employees so they can continue to be the staple of economic progress.