The Paycheck Protection Program was created by the Trump administration in Spring 2020 to help small business owners affected by the COVID-19 pandemic.
Before getting into PPP loan facts, let’s talk about what is a PPP loan and how does it work?
PPP loan was a part of the CAREs Act administered by the Small Business Administration (SBA) 7(a) Loan Program and comprised two rounds of funding of over $300 billion each.
The primary goal of the PPP loan was to use it for payroll and help recover the lost business costs.
PPP loans are forgivable loans for a single business owner, and to be eligible for them, the applicant must have an excellent record of how they will spend the loan funds.
The business owner has only two years to pay back the loan with an interest rate of just 1%. A single owner can be paid later for six months, but the interest rate will still be added.
The House and Senate passed a revised bill for the law applicable to PPP loans.
President Trump expectedly will sign the proposed bill into law soon. Let’s look at some interesting PPP loan facts you must know:
1. You Must Be U.S Citizen To Apply For A PPP Loan
The first PPP loan fact on our list is that if you want to apply for a PPP loan, you must be a U.S citizen or permanent residing legally in the U.S with a valid green card.
The business owners who own a business in the U.S but currently residing in another country can also apply for the PPP loan program.
2. Specific Categories Of Businesses Are Eligible
Another surprising PPP loan fact is that not every business is eligible for a PPP loan.
Only sole proprietorships, independent individuals, self-employed individuals, and non-profit organizations with less than 300 employees are eligible.
Individuals employed on full-time or part-time are qualified for the covered loan purposes, and the businesses that are not eligible for the PPP loans are recognized in the SBA standard operating procedure.
3. Your Body Of Credit Is More Important Than Your Score
One of the least known PPP loan facts is that your body of credit is more important than your score.
Although SBA has not published any specific credit scores that may affect your chances of being approved for PPP loans, having any issues on your credit reports, such as federal tax lien against the property, default on a student loan, or delinquency on child support, it may affect your trustworthiness to get loan approval.
4. Documentation Is Required To Support Your Application
Before applying for the PPP loan, the applicant must prove that the uncertainty of the current economic conditions makes the loan essential to support the applicant’s ongoing expenses and that the loan funds will be used to maintain the payroll, and pay utilities, mortgage, rent, and other inevitable expenses.
The documents you’ll need to submit to support your claim include payroll processor records, payroll tax filings, income, and expenses from a sole proprietorship, MISC, or Form 1099.
If you don’t have these documents, you can also submit your bank statements to validate the qualifying payroll amount.
5. No Collateral Is Required For The PPP Loans
There is no need to put your house or business as collateral for PPP loans, but it is necessary for EIDL if you are applying for an amount of more than $25,000. Business owners can get up to $2 million from a disaster loan.
6. You Can Apply Through More Than One Lender
One of the best PPP loan facts we want to share with you all is that you can apply through multiple lenders, and whoever manages to process your application first will receive an SBA approval number called a PLP for your business if you qualify.
The SBA only issues PLP once for each PLP Tax ID to eliminate the chance of being approved for your PPP loans by more than one lender.
7. Your Laon Amount Depends On Your Payroll History
Typically, the maximum amount of a PPP loan is less than $10 million, or your monthly average payroll costs incurred in 2019 or 2020 or the one year multiplied by 2.5.
If you have a food or accommodation business, you are eligible to receive 3.5 times your average payroll costs, with a maximum of $2 million.
For seasonal employers, the monthly average cost will be calculated differently using any 12 weeks between February 15, 2019, to February 15, 2020.
8. You Can Apply For PPP Loan Only Once
For all the first-timers, the PPP loan fact you must be aware of is that you can only apply for the PPP loan once. So, consider applying for the maximum amount.
The maturity of the loan is one year, and the interest rate will be 1%. If your business did not qualify for a PPP loan, your application window has likely been closed.
If you are applying for your second draw of the loan, you must already use up all the funds from your first draw PPP loan.
9. Your Coverage Period Starts On The Day You Receive Your Loan
As we have mentioned earlier that you must spend the PPP loan money during the 8-week coverage period you agreed to in your loan terms, many people get confused about the coverage period.
Your coverage period starts on the day you receive your loan, not the day you sign the loan agreement.
10. Loans Are Available On A ‘first come, First Served Basis
Another lesser-known PPP Loan fact is that loans are available on a first-come, first-served basis, so SBA encourages all applicants to access the application online.
Plan in advance where you want to apply and inform your lender that you wish to apply for the PPP loan.
It is also advised to the borrowers to check whether their existing bank is an approved SBA lender, as the lender banks are instructed to give the existing clients priority over the new clients based on the volume of applications. Besides, your lender must submit the SBA form 2484.
11. PPP Loans Has A $100,000 Salary Cap
The payroll costs under the PPP program include the salary, tips, wages, commissions, bonuses, and hazard pay capped at $100,000 annually for each employee.
For example, if you have an employee who earns over $150,000, you can only claim $100,000.
If you are a sole proprietorship or independent contractor who is not on the payroll and your net profit exceeded $100,000 in 2019 or 2020, it will also be capped at $100,000.
12. Illegal Usage Of PPP Loans May Lead To Severe Penalties
While the PPP loan fact may not be surprising for most in the obvious sense, it is still a crucial one to be aware of.
You have eight weeks after the issuance of the loan to be used within the committed classification.
But if you do not use the PPP loan for legal purposes such as payroll or operating expenses with forgivable loans, you’ll be charged for fraud, and SBA will direct you to repay the loan, or you can be charged for the fraud for the misuse of the funds.
13. PPP Loans Are Tax-Free
The second stimulus bill makes it clear that PPP loans have no impact on your tax obligations because these loans are government grants and hence cannot be considered a taxable income. You have no obligation to report your forgivable loan portion as a taxable income.
14. PPP Loan Can Be Used To Cover Other Expenses
PPP loans cover more than just payroll and employee benefit costs and can be used to cover other overhead expenses such as rent and lease payments, utilities, mortgage interest payments, payments for family, sick leave or vacations, insurance premiums, payments for retirement benefits, property damage costs not covered by insurance, worker protection expenditures, or any debt interest payments incurred before February 15, 2020.
15. PPP Loans Can Be Forgiven If The Funds Are Used Appropriately
Another amazing fact PPP loan fact you must know is that if the borrower spends less than 60% of the PPP loan on payroll costs, there is no forgiveness for any portion of the PPP loan.
To be eligible for the forgiveness, at least 75% of the loan must be used to fund payroll within eight weeks following the receipt of the funds.
Up to 40% of the loan proceeds can be forgiven if used to pay interest, lease, rent, mortgage, or utilities.
The funds for the loans must be spent within 24 weeks from the issued date of the loan to ensure that the PPP funds were spent in the categories deemed forgivable.
16. A Reduction In Salaries Of More Than 25% Will Decrease The Loan Forgiveness
The main objective of the PPP loans is to maximize employee retention at or near the complete compensation.
You can lose a dollar of loan forgiveness for each dollar of improper salary reduction.
If you reduce the salary by more than 25% of any employee who has made $100,000 annually in 2019, then there will be a reduction in your loan forgiveness too.
Similarly, if you decrease the number of your full-time employee so, your loan forgiveness is also reduced.
17. The Turn-Around Time For The Loan Is 2-3 Weeks
The goal of the SBA is to process and issue a determination on each loan application within 2-3 weeks and make an initial disbursement within a 5-days of receiving the required loan closing documents.
Considering the massive number of applicants, SBA recommended applying as soon as possible.
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Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.