what is a ppp loan and how does it work : Undoubtedly, one of the unfortunate consequences of the COVID-19 pandemic has been the loss of employment and economic difficulties. The impact has been massive, especially for small businesses and freelancers. To offer assistance, the US government recently resumed the Payment Protection Program (PPP), whose enrollment deadline is March 31, 2021. Read on to learn more about the program. PPP, and if you are eligible, get ready to apply for your loan!
What is the PPP program?
PPP loans are offered through the Federal Small Business Agency (SBA ) as part of the Coronavirus Relief, Relief, and Safety Act (CARES). In effect since March 2020, the goal of this payment protection program is to help fund the expenses of freelancers, small businesses, and nonprofits who have struggled financially from the COVID-19 pandemic. A first round of PPP loans took place in 2020 during the first months of the health crisis. However, on January 11, 2021, the SBA resumed the program, setting March 31, 2021 as the deadline to apply for your PPP loan.
What is the PPP program for?
The government recognizes that the pandemic has generated significant economic difficulties, and has launched this PPP program to help you cover your company or business expenses. For example: if you need help paying your employees’ payroll, this is what the PPP program is for. Or if you need to pay your business rent or mortgage, you can also use this loan for that. If you’ve had to offer additional measures to your workers so they can take care of COVID-19, those expenses count too.
Who is eligible for PPP loans?
PPP loans are intended to assist specific individuals (self-employed) and businesses. Eligible individuals meet the requirements below.
Requirements for the PPP Program: Freelancers
- Sole proprietors, also called a sole proprietorship , that is, it has only one owner and it is he himself who attends the business, which may belong to different branches of work, such as accounting, gardening or medical assistance.
- Independent contractors , such as doctors, dentists, veterinarians, or lawyers; that is, those that provide services that cannot be directed and controlled by the person who hires it.
- Self employed people, also called freelancers, such as graphic designers, architects or writers who do not belong to any company and can temporarily work on various projects.
- Workers gig economy , ie independent workers who receive payments for work the very short term, such as delivering food or provide shuttle service.
Requirements for the PPP program: Companies
- Small businesses that meet SBA size standards.
- Tribal businesses, nonprofits, veteran organizations, or tribal businesses (Native American-owned businesses) with fewer than 500 employees. If any of them have more than 500 employees, they may still be eligible if they meet the SBA’s size guidelines.
- Service and accommodation companies that have more than one physical location and have fewer than 500 employees per location.
How do PPP loans work?
PPP loans have significant advantages over other types of personal and business loans, such as a lower-than-normal interest rate, a five-year maturity, or waiver of fees from lenders.
PPP loans work as follows:
- They have an interest rate of 1%, something very positive compared to other types of loans , which usually have an annual interest rate above 4%.
- Payment Protection Program loans made after June 5, 2020 have a five-year maturity.
- It is not necessary to present endorsements or personal guarantees.
- Neither the government nor the lenders will charge you any fees.
- Loan payments will be deferred for those applying for forgiveness until the SBA remits the loan amount to be forgiven.
- If a borrower does not request loan forgiveness, payments will be deferred to ten months after the end of the covered time period for loan forgiveness, either 8 or 24 weeks.
How much can you borrow with the PPP program?
Borrowers will be able to request up to 2.5 times their monthly payroll expenses, based on their 2019 or 2020 tax information, with $ 10 million being the maximum amount they can request.
The way to calculate the PPP loan amount varies depending on the type of borrower. However, we can summarize the types of expenses that you may include as part of your payroll.
Types of expenses for the PPP program: Self-Employed
- Net income
Types of expenses for the PPP program: Companies
- Salaries, commissions and tips of your employees;
- Subsidies for dismissal or separation;
- Retirement payments;
- Vacation, maternity or sick pay;
- Local or state taxes assessed on employee compensation.
For detailed information on how to calculate your loan amount, we recommend that you consult the following SBA document .
What expenses are considered authorized?
Most PPP loans should be used to cover payroll financing expenses, but they can also be used for the following expenses:
- Mortgage, rent, utilities;
- Protection of workers related to COVID-19;
- From uninsured property damage caused by looting or vandalism during the year 2020;
- From suppliers for operations.
How does a PPP loan forgiveness work?
Borrowers may be eligible for the forgiveness of their PPP loan if they meet the following requirements within 8-24 weeks of receiving their loan:
- It manages to maintain the levels of employment and compensation;
- 60% of the profits are used to cover payroll costs;
- The proceeds of the loan are used to cover payroll costs and other eligible expenses, such as mortgage, rent and utilities for the business.
How can you apply for a PPP loan?
If you or your company is eligible to receive a PPP loan, you must submit your application before March 31, 2021. To do so, you must choose a lender and submit the required documentation, as we explain below.
Choose an authorized loan service
PPP loans will be made by SBA-authorized lenders, including a wide variety of banks and credit unions. Find out which are the closest lenders to your locality to apply for financing. One option to contact them is Lender Match , which the SBA makes available to you.
What documents do you need?
Some of the Documents that you are likely to be asked for when applying for your PPP loan are listed below.
Documents for the PPP Program: Freelancers
- Proof that your business has been operating since before February 15, 2020, the start date of the pandemic;
- 2019 tax return;
- Bank account statement.
Documents for the PPP program: Companies
- IRS Form 940 (from 2019 and 2020);
- IRS Form 941 (from 2019 and 2020);
- 2019 Business Taxes;
- Payroll payment reports;
- Company formation documents;
- Bank statements 2019 and 2020.
Second PPP loans
As the PPP program resumes in 2021, there is the possibility that eligible borrowers who received a first loan in 2020 can apply for a second PPP loan under the same general terms as their first loan.
The maximum amount of a second PPP loan is 2.5 times the average monthly payroll costs of 2019 or 2020, only this time the maximum amount is $ 2 million. For borrowers in the Food and Lodging Services sector, the maximum amount of your second loan can be 3.5 times the average monthly payroll costs of 2019 or 2020, without going over $ 2 million.
To be eligible for a second PPP loan, the borrower must meet different requirements than the first loan:
- Have received a first PPP loan and will use it, or have used it, only for authorized expenses;
- You must not have more than 300 employees;
- You must show at least a 25% reduction in your gross income.
We hope this guide has been helpful in finding out your eligibility and applying for a PPP loan.