With so many businesses suffering due to the pandemic, an overwhelming amount of Paycheck Protection Program (PPP) loan requests are coming in right now. There have been many delays in getting these loans, and there is only limited funding so the application process is sure to be somewhat frustrating. But this program is a lifeline while you’re out at sea, so be persistent and patient!
What is the PPP (Paycheck Protection Program)?
It is a loan designed to create an incentive for business owners to keep their employees on payroll during this uncertain time for the economy. This loan comes from the SBA (Small Business Association) and works in both the employer and employee’s favor! There are some rules to it, but if you use this loan correctly then the SBA will forgive it completely.
A few other bonuses of this loan:
- Payments will be deferred for 6 months
- No collateral or personal guarantees are necessary
- Neither the government nor lenders will charge any fees
- Reaches maturity in 2 years, with an interest rate of only 1%In order to fully forgive the loan, a business owner must keep their employees on payroll for 8 weeks, and the money must be used for rent, mortgage interest, or utilities. If the number of employees decreases there could be a reduction in loan forgiveness. But as long as normal employee numbers and pay are restored by June 30, 2020, then the penalty will be eliminated. Due to the very high subscription rate, 75% of the loan will need to be used fully on payroll to receive forgiveness.
Tips on using your Paycheck Protection Program funding
Open a separate bank account just for the PPP funds. Since the money needs to be spent on specific things, it is best to keep it on its own. You’re going to need to substantiate the use of the loan funds, and having an isolated account for this will help keep everything more organized. This will also help prevent any commingling with other business funds.
Make sure you understand exactly what is included as permissible spending. You can only use the PPP money for mortgage interest payments, rent, utilities, and payroll. The covered expenses need to have occurred between Feb 15, 2020, and June 30, 2020.
What exactly is included as “Payroll” and what is excluded?
- Vacation, Family, Medical and Sick Leave
- Employer contributions to retirement plans
- Group healthcare coverage (including premiums)
- Cash compensation up to $100K (annualized)
- Cash compensation in excess of $100K (annualized)
- Sick and family leave wages for which a credit is allowed under FFCRA
- Employer & Employee portions of federal payroll taxes
- Income taxes require to be withheld by employers
- Payments to 1099/independent contractors
If you’re a business owner, don’t sleep on this loan’s potential! The government has been generous with its terms- especially with that interest rate. It’s hard to beat 1%! A great use of it is using the loan money to pay off some of your mortgage interest; paying it back at that low rate can really help if the budget is tight.
Remember to keep the loan money in an escrow account and make sure your CPA or bookkeeper keeps detailed, accurate records of what the funds are used for. It would be very prudent for business owners to take the opportunity to pay off higher-interest debt with some of this money. You will have to pay that money back, but a 1% interest rate is much better than what you’re paying now or any other rate you’ll find on loans.