The COVID-19 outbreak caused a worldwide shutdown of businesses and organizations. The strict isolation and social lockdown measures have hit small businesses particularly hard in the last year. According to research, 41 percent of businesses had to be shut down temporarily and 60 percent shut their doors with no intention of opening again due to financial constraints.
A year later, businesses are still struggling. But in March 2021, President Joe Biden signed into law the Paycheck Protection Program (PPP) Extension Act of 2021. The program is meant to keep Americans employed and paid in response to the economic challenges of the virus. Thanks to an extension, the deadline to apply was moved to May 2021.
What Is A Paycheck Protection Program (PPP) Loan?
Small businesses can access the Paycheck Protection Program Loan to help them keep their employees on payroll during the pandemic. It pays up to eight weeks of full salary, including benefits, interest on mortgages, rent, and other utilities. Additionally, no personal guarantees are required for this loan. Neither the lenders nor the government will charge any additional fees.
Small businesses that have a workforce of fewer than 500 employees are eligible, including non-profit organizations and self-employed individuals. Businesses with a workforce of more than 500 people are eligible in a few industries.
How Do You Apply For A PPP Loan?
To apply for a PPP loan, businesses have to submit applications on the SBA platform to connect with SBA-approved private lenders or Fintech companies. It is better to have a conversation with a lender and check whether they are part of the PPP program.
If you do not have a lending relationship with anyone, apply for a loan via a Fintech company. There are also companies, such as Lendio, that help businesses connect with a PPP lender.
To complete your application, you will need:
- An identification card of all owners who have a share of more than 20% in the business
- Proof showing that the business was up and running before Feb 15, 2020
- Applicable tax documents
- For businesses with W2 employees, a statement of proof showing your business’s payroll costs
The first-draw of PPP loans was approved in December 2020. Applications for community-based lenders opened in January 2021 and applications for the second-draw PPP loans are open until all funding has been exhausted.
What Is Different About The Second-Draw PPP Loan?
For the second round of PPP loans, a few significant changes have been made to how they’ll be taxed and the eligibility criteria for businesses.
For starters, the second-draw loans are more targeted than in the first-draw. Compared to the size of the first-time PPP loan, which were equal to $10 million, second-draw PPP loans are funded at $2 million.
The eligibility criteria are as follows:
- Businesses who have previously received a PPP loan and used the total amount for authorized purposes
- Businesses that experienced a decrease of 25% in their gross receipts during at least one quarter of 2020
- Businesses with a workforce of fewer than 300 people
At this point, it is not clear if the second-draw of PPP loans will be as successful as the first round and whether funding will run out as quickly as it did the first time. Businesses should submit their new applications for the second draw program (if needed) through the same financial institution they received their first PPP loan.
Conclusion
If you are a small business owner, wondering if applying for PPP is a good idea for you, consider how necessary the loan is for you. Even if you keep employees on payroll for eight weeks, how will your business sustain itself afterward?
If not, then the loan might not be a good option for you since it will only be forgiven if you show that you re-hire your employees.
Additionally, PPP loans aren’t available for financial companies, businesses selling cannabis products, or household employees. If you plan to use your employee retention credit, taking out this loan might not be a good idea.
For more information about PPP loans and applications, visit the SBA page.