Finances and Taxes

Should I Apply for a PPP Loan? Common Employer Questions, Answered

Andi Smiles Small business financial consultant 
Should I Apply for a PPP Loan_ Common Employer Questions, Answered - Gusto

Update as of August 11, 1:00pm, ET: The PPP Application has closed and Congress is currently negotiating the next financial relief package. In meantime, the president has signed two executive memos that may affect you and your team.

Read Gusto’s analysis:

As new developments unfold, we’ll keep you updated.

If the Paycheck Protection Program (PPP) was a TV show, it would be Tiger King. There’s a lot of media buzz, and everywhere you turn someone’s talking about it.

But, for most small business owners, even an episode of Tiger King is easier to follow than the rules and regulations of PPP. And while the government has released more information about PPP in the past weeks, business owners still have unanswered questions—and concerns.

Is applying for PPP still a good idea since funds ran out?

Will the loan work for me if I’ve already laid off employees?

What if my business is closed, should I still apply?

Is PPP really my best option?

We get it. Applying for any loan is a major decision, and all of these concerns are valid. But we also believe that the benefits of PPP outweigh the potential drawbacks, and with more clarity about the program, we think you’ll agree.

That’s why we’ve answered your most pressing questions about the PPP and why it’s still a good idea to apply for a loan now that funding has been replenished.

Benefits of the Paycheck Protection Program

Loan forgiveness

By far, one of the greatest benefits of a PPP loan is that you could have all or part of the loan forgiven.

Here’s how the loan forgiveness works: If you spend at least 75% of the loan on eligible payroll costs for eight weeks after your first loan disbursement, then your PPP loan will be forgiven. Payroll costs include:

  • Employee wages (capped at $100,000 per employee)
  • Paid sick or medical leave
  • Group health insurance premiums

In addition to payroll costs, you can also use the funds for mortgage interest (if entered into before February 15, 2020), rent payments, utility payments, and interest on other debts entered into before February 15, 2020.

As long as you spend 75% of the loan on eligible payroll costs, the other 25% of the loan spent on eligible business costs is also forgiven. This means that the portion of the loan that you spend on rent or utility payments also has the potential for loan forgiveness.

Payment deferral 

The truth is, even if you receive a PPP loan, your business won’t be up and running overnight. Luckily, lenders are required to defer PPP loan payments for at least six months, which should give your business time to stabilize.

Need more than six months before you can start making payments? Under the program, you can request that your payments are deferred for up to one year. To request payment deferment, contact your lender.

Low-interest rates and fees

One of the reasons Small Business Administration (SBA) loans are so attractive is that the interest rates are lower than if you took out a traditional business loan. PPP loans have a fixed interest rate of 1%.

In addition to low-interest rates, PPP lenders aren’t allowed to charge annual loan fees, a guarantee fee, or a prepayment penalty.

Easy to qualify

Under the PPP, the SBA has relaxed its qualification criteria. You no longer need to prove that you’re unable to obtain credit elsewhere, sign a personal guarantee, or put up collateral (like your house) for the loan.

The eligibility requirements for PPP are relatively simple:

  • You must have less than 500 employees (or meet the SBA’s definition of a small business)
  • Been in operation on or before February 15, 2020
  • Be able to demonstrate that you’ve been impacted by COVID-19

You can also be a sole proprietor, independent contractor, or self-employed and still qualify for funding. Note that there are a few other eligibility requirements, such as not having defaulted on a prior government loan. 

6 concerns small business owners have about PPP

Over the past month, we’ve received a lot of questions about PPP in our Facebook group and online. Here are the answers to small business owners’ most common PPP questions. 

1. Hasn’t the government already run out of money?

On April 16, 2020, the PPP funds were exhausted—but lawmakers quickly acted to allocate more funding to the program. An additional $320 billion has been provided for PPP loans, and the SBA began accepting applications again as of Monday, April 27.

Even though funds can be depleted, it’s still a good idea to apply for a PPP loan. Applying as soon as possible means that when the program receives additional funding, your application will already be in the queue. As the PPP gets more funding, you want your application to be at the front of the line.

2. Will my loan actually be forgiven?

Provided that you follow the loan forgiveness guidelines, yes. As a reminder, to qualify for loan forgiveness, you must spend at least 75% of the loan on payroll-related expenses in the eight weeks following your first loan disbursement.

But what happens if you can’t meet that threshold? Even if you can’t maintain all of your employees or need to decrease wages, you’ll still have a portion of the loan forgiven. The amount forgiven will be proportionally reduced based on your payroll or headcount reductions.

What all this means is that the PPP loan forgiveness isn’t an all or nothing scenario. Partial loan forgiveness is an option.

3. What if I’ve already laid off my employees?

You can rehire them after your loan is approved. Previously laying off or furloughing employees doesn’t impact your ability to qualify for the loan.

While we have not received much guidance from the government just yet, the CARES Act allows for a “re-hiring” clause when calculating forgiveness. Once your loan is approved, you should rehire your employees (or replace them) so you can use the loan funds to pay their wages and then qualify for the loan forgiveness.

Then, for the next eight weeks, you should maintain your full-time equivalent employee headcount. The CARES Act does have an allowance for employers who rehire before June 30, 2020 to still qualify for full forgiveness, but we’re waiting for more details on how that’s supposed to work.

Translation: You shouldn’t lay off employees or reduce their hours during the eight-week loan term.

When rehiring employees, keep in mind that the eight-week forgiveness window begins after you receive your first loan disbursement. Lenders estimate that you’ll receive your first disbursement within 10 days of your loan approval.

After your loan is approved, it’s a good idea to let your employees know that you’ll be rehiring them. Start the rehiring process immediately so that everyone is back on payroll when your loan is disbursed.

4. Isn’t unemployment better for my employees anyway?

On average, unemployment only covers about half of your employee’s full-time wages, so for most people, being employed is a far better option than unemployment. Also, with the number of unemployment claims at an all-time high, state unemployment offices are unable to keep up with the demand.

That means that claims are taking longer to process, and there’s a delay in receiving funds.

And then there’s health insurance. Even if your employees qualify for COBRA, they still have to pay for their entire health insurance premium themselves. This additional cost, paired with receiving less than their regular wages, could put even more financial strain on your employees.

5. What if my business is closed right now?

If your business is closed because of shelter-in-place orders, you (and your employees) can still benefit from a PPP loan. To qualify for loan forgiveness, you just need to keep employees on payroll. There’s no stipulation that your business should be open or that your employees must perform specific tasks.

Even if you can’t open your business, a PPP loan enables you to continue paying your employees—and for free (under the loan forgiveness provision). The portion of the loan that doesn’t go towards payroll (up to 25% of the funds) can be used to pay your other fixed obligations, like rent and utility payments.

That part of the loan is also forgivable, which means that a PPP loan is still a good idea because it:

  1. Keeps your employees paid (and retained for when you reopen).
  2. Ensures that you can hold onto your physical location. 
  3. Keeps more of your own money in your cash reserves, which can be used later when you reopen. 

6. Isn’t it hard to find a lender who’s accepting applications?

Many big banks have indeed been inundated with PPP applications. But many business owners are having good luck applying for PPP through smaller community banks.

We’ve partnered with lenders available to help any small business apply for funds and get back on track.

Potential PPP drawbacks

While a PPP loan has a lot of advantages, that doesn’t mean that it’s a magic cure-all for all businesses. There are some scenarios in which you may want to look elsewhere for funding.

Funding cannot be delayed.

Currently, there’s no way to automatically delay the funding. While it’s possible to speak with your lender and see if they can delay your loan disbursement date, this would be approved on a case-by-case basis. If you’re not ready to rehire before your first loan disbursement, you may not be eligible for total loan forgiveness.

If you’re unable to take advantage of the eight-week loan forgiveness period right away, then it may be better to look for immediate funding elsewhere. Later, when you can take advantage of the forgiveness window, you can apply for the PPP.

The amount you can borrow is based on your payroll costs.

The PPP is designed to help keep people employed, which is why the amount that you can borrow is based on your payroll costs. The maximum you can borrow is 2.5 times your average monthly payroll costs.

What if you need more than that? Or you need money for expenses that aren’t eligible for PPP funding? Then you’ll need to look elsewhere for funding to cover those expenses. A few options from the SBA are an Economic Injury Disaster Loan, Express Loan, or Express Bridge Loan.

Employee wages are capped at $100,000 per year.

If you have a lot of high-earning employees, PPP won’t cover all of their wages. Each employee’s salary is capped at $100,000 per year or $8,333 per month. This cap impacts how much you can borrow.

For example, if you have an employee who earns $12,000 per month, only $8,333 of their monthly wages will count towards the PPP monthly average payroll calculation. That means $3,667 of their monthly wages won’t be included in the total. As a reminder, this directly affects how much you can borrow.

What does this mean for employees who make more than $100,000 per year? Well, you’ll either need to temporarily reduce their salaries to less than $100,000 or cover the deficit out of your own pocket.

Some businesses are ineligible.

In general, most businesses (including sole proprietors) with under 500 employees qualify for a PPP loan. But, according to the SBA, some businesses may not be eligible for funding. These include:

  • Financial service businesses and lenders
  • Businesses that have defaulted on an SBA or government loan in the past
  • Businesses whose owners have been indicted or convicted of a criminal charge in the past five years
  • Businesses that sell cannabis
  • Household employers (think nannies or housekeepers)

Now that you have all the deets on PPP, we hope you have more clarity on whether it’s the right option for you. For most people, applying for a PPP loan is still a good idea, and it could benefit both you and your employees in the coming months. 

Get the support you need. Apply for a PPP loan through one of our partners.

Updated: August 12, 2020

Andi Smiles
Andi Smiles Andi is a small business financial consultant and coach who teaches business owners to take control of their finances. She’s helped hundreds of self-employed folx organize and understand their business finances, while also uncovering their emotional relationship with money.

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