What Businesses Are a Good Fit for the PPP Loan?
The federal Paycheck Protection Program (PPP) is an initiative designed to help small businesses cover their payroll and adapt to hardships caused by COVID-19. Depending on your business’s specifics, you may be eligible for a PPP loan with a low, 1% interest rate. And, if you follow federal guidelines for spending, this loan could be forgiven—essentially becoming a grant for your business.
While the first $349 billion of PPP funding was spent in just 13 days, a second round of funding began on April 26, and this money is still available due to lower levels of demand.
Is your business a good fit for a PPP loan? Can you meet the guidelines to turn it into a grant?
This is your guide to finding the right resources to support your small business as COVID-19 continues to impact your long-term plans.
PPP Explained
The Paycheck Protection Program was originally created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. PPP loans incentivized businesses to keep employees on their payroll (at their normal salaries) during the height of the COVID-19 pandemic.
In its original form, PPP funding was available to businesses planning to retain their employees on payroll and at their full salaries for eight consecutive weeks. If granted a loan, businesses were expected to spend it only on the following expenses:
- Payroll costs
- Employee wages, up to $100,000 per employee
- Paid leave
- Group health insurance premiums
- Rent
- Mortgage interest
- Interest on other debt
- Utility costs
According to the CARES Act, 75% of spending had to be on payroll functions for the loan to be forgiven. However, if you partially met the guidelines, you could still receive partial forgiveness. Any portion of the loan that was not forgiven would mature after two years.
Small business owners were hesitant to apply for these loans for several reasons:
- To apply, you have to affirm that the loan is “necessary,” and some small business owners worried about the legal consequences of making this claim.
- The process seems complicated.
- Some business owners were not sure they’d be able to rehire their employees after eight weeks. Due to the terms of the agreement, these owners’ loans may not have been converted into grants.
When the initial round of funding benefited large businesses more than small ones, companies like Shake Shack were shamed into returning their loans. This freed up more funding for small businesses, and led Congress to pass a new bill changing PPP spending requirements.
Changes as of June 5, 2020
To encourage small businesses, including single-member businesses, to take out PPP loans, Congress has passed a new bill, called the Paycheck Protection Program Flexibility Act of 2020. It makes the following changes:
- Flexible spending – Now, only 60% of the loan must be spent on payroll costs for it to be treated as a grant. 40% can be spent on rent, utilities, taxes, and other eligible expenses.
- Longer timeline – While the original loan was meant to cover costs for just eight weeks, new loans can be used for up to 24 weeks. However, the funds must be used before the cut off date of December 31, 2020. Loans given after July 16th won’t be able to use the full 24-week period.
- Loan term extended – Loans that are not converted to grants will now have a minimum five-year maturation period. Banks that granted loans before June may choose to extend the maturity period on those loans, too.
- Easier loan forgiveness – Borrowers will no longer be penalized for reducing their number of employees. If they’re not able to open at full capacity or their former employees are no longer available, the loans may still be forgiven.
With more funding available, small businesses are no longer competing with multinational corporations. In addition, it’s easier than ever before to receive forgiveness on your PPP loan.
Is Your Business a Good Fit For PPP?
After reading this far through our PPP guide, you still may not be sure whether your business is a good fit for a PPP loan. The first step is determining whether you’re eligible for PPP.
There are three broad requirements for PPP eligibility. You must have:
- Been in operation before February 15, 2020
- Fewer than 500 W-2 employees
- Been impacted by COVID-19
It’s important to note some additional exceptions if you have defaulted on a previous federal loan or have been found guilty of a crime in the last 5 years.
There are just a few industries that cannot apply for PPP loans at all:
- Financial services companies
- Businesses that sell cannabis
- Household employers (i.e. people who hire nannies or housekeepers)
Whether you’re still closed as your state continues phased reopening, or you’re now open and operating at a lowered capacity, a PPP loan could help with your business’s recovery. But even if you’re eligible based on the above, you may not be sure if the loan is a good fit for you.
Next, we’ll take a look at who should consider a PPP loan.
Small Local Businesses That Are Currently Closed
If you own a fitness studio, restaurant, bar, or personal services business (salon, spa, etc.), you may still be closed to in-person business in accordance with your state and city’s reopening guidelines.
In this case, the PPP loan may be a good fit for you.
- It can help you to get your employees back on your payroll—even if they’re currently on unemployment. As soon as you’re approved, you can rehire them, and begin using your PPP funds to cover their salaries and even their lost tips.
- Likewise, you can use the loan to help cover your rent, utilities, and interest payments.
Do you live in an expensive area where rent and utilities are usually more than 40% of your operating costs? Consider giving your employees bonuses or raises to make sure 60% of your spending is on payroll.
Small Businesses That Have Reopened
Even once you’ve reopened, your business is likely still experiencing the effects of COVID-19. You may be operating at just 25% capacity, with most of your staff still at home.
You don’t even need to experience a loss of revenue to apply for a loan. On the PPP application form, you’re able to cite the following reason for your application: "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
As long as you can spend 60% of your loan on payroll, it should still be forgiven.
Self-Employed Individuals and Independent Contractors
Are you self-employed? Freelancers, single member business owners, and independent contractors are also eligible for PPP loans. Just like larger businesses, you’re experiencing a reduction in income and work.
You can calculate your payroll costs based on your Schedule C from 2019. Forbes has a helpful guide to filling out the application.
Will My Loan Really be Forgiven?
One of your main concerns as a small business owner is whether or not your loan will really be forgiven. After all, you’re applying for a loan to make things easier—not to incur new debt.
Shifting rules and regulations have made it even trickier to understand who is forgiven.
The new PPP Flexibility Act makes it easier for small businesses that spend at least 60% of their loans on paycheck protection to receive reimbursement. In addition, you should receive partial forgiveness even if you made the following changes:
- Cut employee wages more than 25%
- Spent more than 40% on non-payroll expenses
- Reduced your number of employees
You can apply to your bank for forgiveness. Then, any remainder would be payable with 1% interest.
However, banks are currently calling for unconditional forgiveness of all loans under $150,000. With powerful banks rallying to the side of small businesses, there’s a good chance any additional legislation will help out small businesses even more.
Who Isn’t a Good Fit?
If you don’t plan to use the loan to cover any payroll expenses, the PPP program may not be a good fit for your business.
Perhaps you’re a restaurant pivoting to become a store and you won’t be rehiring the majority of your staff. While you could use the loan to pay for remodeling, you’d likely have it to pay it back.
In addition, if you plan to use the Employee Retention Credit on your 2020 taxes, you should not take out this loan.
Connect With Your Community to Help Your Business Thrive
Are you looking for other ways to sustain your business? COVID-19 has reminded neighborhoods around the country about the importance of local businesses. With Nextdoor, connecting with customers who are passionate about supporting small businesses is easier than ever.
According to internal surveys, 98% of Nextdoor users believe that local businesses play a vital role in their communities. If you haven’t already, create a free Business Page to connect with them. All you have to do is:
- Sign up and customize your page
- Add your unique story, photos, and a link to your website
- Post to the neighborhood newsfeed for free to engage with neighbors 1:1 using Business Posts
- Run promotions, like BOGO deals or special hours for neighbors using Local Deals
After your business receives one recommendation from a neighbor, you’ll show up in local search results. What’s more, you don’t even need to “build a following” to be able to connect with neighbors; your Business Posts will immediately reach neighbors who live in proximity to your business.
Keep Track of PPP Guidance
Although initial stay-at-home orders were lifted in all 50 states by June, surging case numbers in the U.S. and around the world make the future uncertain. Guidelines around PPP loans and other forms of small business assistance will continue to change and shift along with public health guidelines.
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Additional sources:
Investopedia. Paycheck protection program. https://www.investopedia.com/your-guide-to-the-paycheck-protection-program-ppp-and-how-to-apply-4802195
NPR. Why The Small Business Rescue Program Has Slowed Way Down. https://www.npr.org/2020/05/28/863387203/why-the-small-business-rescue-program-has-slowed-way-down
CNN. Shake Shack returns $10 million emergency loan to the US government. https://www.cnn.com/2020/04/20/business/shake-shack-ppp-loan-sba/index.html
SBA. Paycheck protection program. https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program
U.S. Congress. H.R.7010 - Paycheck Protection Program Flexibility Act of 2020. https://www.congress.gov/bill/116th-congress/house-bill/7010
Gusto. Should I Apply for a PPP Loan? https://gusto.com/blog/business-finance/should-i-apply-ppp
American Banker. Big banks call for blanket forgiveness of PPP loans under $150,000. https://www.americanbanker.com/news/big-banks-call-for-blanket-forgiveness-of-ppp-loans-under-150-000
LivePlan. 6 Reasons You Might Not Want to Apply for a PPP or SBA Loan. https://www.liveplan.com/blog/reasons-not-to-apply-for-a-loan/
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