In this article:
An overview of PPP loans
The Paycheck Protection Program (PPP) is a loan program backed by the U.S. Small Business Administration in response to the COVID-19 pandemic. The program was intended to help small business owners survive the economic downfall by giving them the funding they needed to continue paying their employees throughout business disruptions resulting from the Coronavirus pandemic.
As the cornerstone of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), PPP loans were offered as one form of financial aid to small businesses. The provision was launched by the federal government to help businesses with fewer than 500 staff members cover payroll expenses and other essential operating expenses, like rent, utilities, mortgage payments, and employee benefits. The initial round of PPP loans initiated by the CARES Act allocated $349 billion of government-backed loans for eligible businesses.
Funds were made available on a first-come-first-serve base for approved applicants of first draw PPP loans. The loans were made available to sole proprietors, independent contractors, self-employed individuals, as well as traditional businesses that met the SBA’s definition of ‘small.’ In addition to for profit businesses, PPP loans were also made available to the following nonprofits:
- 501(c)3 nonprofit organizations
- 501(c)19 veterans organizations
First-draw, or first-time PPP loan recipients were eligible to receive up to $10 million once approved for funding. Loan amounts were calculated at 2.5 times the business’s monthly payroll, where the payroll was averaged on an annual basis. Payroll figures not considered in the total loan amounts included:
- Payments to independent contractors
- Workers’ compensation fees
- Fringe benefits
- Sick pay and family leave compensation
- Wages for employees that have exceeded $100,000 in annual salary
- Employees with a permanent residence outside of the United States
- Federal employment taxes paid or withheld between February 15, 2020 and June 30, 2020
The PPP Flexibility Act of 2020 was passed into law on June 5th, 2020, modifying the guidelines around PPP loans and allocating an additional funding of $310 billion for PPP loans. Under the revised PPP guidelines, PPP loan forgiveness was addressed in further detail and the maturity dates of PPP loans were extended and a defined deferral period was added.
Second round of PPP
Second draw PPP loans up to $2 million were made available to borrowers that had exhausted their funding during the first round of PPP loans. The loan terms for the second draws were required to remain the same as the borrower’s first loan. PPP borrowers that had received and fully used proceeds from the first draw, had 300 or fewer employees, and could prove decreasing gross receipts between 2019 and 2020 were eligible for the second draw PPP loans.
Both first-draw and second-draw PPP loans are provided by banks and other SBA-approved lenders. Backed by the SBA and Treasury and considered completely forgivable, these loans offer small businesses financial aid if the money is spent on payroll and eligible non-payroll expenses. The application deadline for the first two rounds of PPP loans was August 8th, 2020.
What is the third round of PPP?
Once all of the allocated funding for the first two rounds of PPP loans was depleted, the Consolidated Appropriations Act (CAA) of 2021 was signed into law by President Joe Biden on December 27, 2020. The CAA provided several updates and changes to the paycheck protection program stemming from the CARES Act, which included allocating an additional $284 billion in funding for PPP loans. The Consolidated Appropriations Act also was intended to make loan forgiveness more accessible for borrowers and set-aside funds for certain lending institutions, including:
- $15 billion of guaranteed funds for loans made by community development financial institutions (CDFI) and minority depository institutions
- $15 billion of guaranteed funds for institutions that have assets valued under $10 billion
The third round of PPP loans, implemented by the CAA, allowed for both first and second-draw loans so that entrepreneurs could apply if they’d already taken a first PPP loan or as a first-time applicant. The third round of PPP loans issued funds that were also fully guaranteed by the federal government, through the SBA. The loans did not require any collateral or personal guarantee and had a fixed interest rate of 1% with five-year repayment terms.
The additional loan funds made available in the third round of funding were depleted and the program closed on May 31, 2021.
PPP loan forgiveness
PPP loans are 100% forgivable if guidelines are met. To get a PPP loan forgiven, borrowers need to comply with the following terms and take the recommended steps to complete the application process. The IRS reviews the forgiveness allowance on PPP loans and considers any forgiveness issued on misrepresented data as taxable income.
First draw forgiveness terms
In order for a borrower to get a first draw PPP loan forgiven, the small business must meet the following eligibility requirements during the 8-to-24-week covered period following disbursement:
- Maintain a consistent number of employees and wage rates
- 60% of the loan proceeds were used to cover payroll expenses
- The entire loan proceeds were used to support entrepreneurship via payroll costs or other qualifying business costs
Second draw forgiveness terms
For second draw applicants, that received up to an additional $2 million in funding, loan forgiveness is possible if the business adheres to the same terms as required for first draw applicants.
How to get loan forgiveness
PPP loan recipients that are eligible for forgiveness must take the following steps to apply for PPP loan forgiveness:
- Contact the lender that issued the PPP loan – Some lenders participate in direct forgiveness, which means that the borrower must apply through the SBA portal. If your lender does not participate in direct forgiveness, then you must complete the loan application process with your lender.
- Gather documents – As part of the approval process for loan forgiveness the SBA may request documentation that shows how the average payroll calculations were totaled as well as bank statements, receipts, or other documentation of paid payroll expenses and any other qualifying operating expenses, like mortgage payments and utility costs.
- Return all forms and applications – Once you’ve prepared your supporting documents, submit all the completed forms requested by your lender or the SBA portal. If you need help check with your lender or one of the small business development centers in your area.
- Monitor the application – If more documentation is needed, you will be notified by your lender. Your lender will also let you know when there is a decision on your forgiveness request.
Will there be a new PPP loan in 2023?
While it’s impossible to predict with any certainty the future plans of the federal government, it is unlikely that there will be an additional paycheck protection program in 2023.
According to the PPP data shared on the SBA.gov website, there were 11.4 million PPP loans issued to small businesses and self-employed entrepreneurs throughout 2020 and 2021. 9.4 million borrowers applied for forgiveness. Of the $790 billion disbursed via the PPP loan program, forgiveness was requested in the amount of $680 billion.
The long tail of the Covid-19 pandemic is still affecting business owners and the self-employed, so it is still possible that there will be another push for an additional allocation of funds. If news is released that additional funding is available for PPP loans, the Covid-19 Resource Hub from Biz2Credit will continue to share up-to-date information and resources.
What other financing options are available for small business owners?
Since new PPP loans are not an option for most small business owners as of today, you may be wondering if you’re too late to find financial assistance to keep your business thriving. The good news is that whether your financial uncertainty was caused by the pandemic, inflation, or any other reason there is a financing option that can work for your business.
Continue reading to learn more about small business lending options.
SBA loan programs
SBA loans are backed by the U.S. Small Business Administration, like PPP loans. The funds are issued by an SBA-approved lender, but the government guarantee makes these loans lower risk for the lender. Some SBA loan programs determine the permitted use of the funds as well as the repayment terms and interest rates. Small business owners that can get approved for SBA loans prefer this type of financing because SBA loans have lower interest rates, smaller down payments, and more flexible eligibility requirements.
The SBA 7(a) loan program is the most common SBA business funding program. SBA 7(a) loan funds can be used for working capital to cover business expenditures, refinancing older business debts or business credit cards, or to make large purchases, like equipment and furniture. Borrowers can be approved for up to $5 million in loan fees if they meet the following eligibility requirements:
- Run a for-profit business
- Have fewer than 500 employees
- Have a reasonable invested equity in the business
- Be current on any other government-supported financing obligations
The SBA microloan program is a financing option for small businesses and some nonprofit childcare centers. The maximum loan amount is $50,000 and funds can be used for any business needs, including working capital, inventory expenses, startup and expansion costs, and equipment purchases.
The SBA 504 loan program is also called the CDC loan program because the funds are made available through certified development companies (CDCs). The purpose of the program is to provide long-term financing options for small business owners to promote economic development and create jobs in underserved communities. CDC/504 loans can be issued to approved borrowers for up to $5 million per project, with a maximum allowance of three projects, or $16.5 million in funds.
The SBA Economic Injury Disaster Loan (EIDL loan) funding programs were created to support small business owners who experienced lost revenues due to the pandemic. The EIDL program is no longer accepting new applications.
Merchant Cash Advance (MCA)
A merchant cash advance (MCA) works by using the borrower’s receivables as collateral for a cash advance. An MCA is not a loan, but an agreement between a business owner and a lender where the business owner sells their future credit card sales or other business receipts to the lender in exchange for a lump sum payment upfront. MCAs provide a fast-funding solution for any business that expects future credit card or debit card revenues.
A term loan is a traditional type of business loan where the borrower receives a lump sum of cash upfront and then pays the loan back over a predetermined amount of time. Term loans are right for borrowers that need up to $500,000 and are looking for predictable repayment terms. Interest rates for term loans are either variable, which fluctuate according to the market rate, or fixed, which remain the same over the life of the loan. Term loans can be used for working capital, expansion, repairs, or large purchases and may require a down payment or personal guarantee from the borrower.
The paycheck protection program provided economic relief to billions of small business owners that were impacted by the pandemic. Many of those borrowers were able to have their PPP loans completely forgiven. Currently, the SBA is not accepting new applications for PPP loans, and it is impossible to say if we will see another round of funding made available. However, whether you received a PPP loan or not, there are several business financing options available through Biz2Credit, like the term loan or merchant cash advance.
Check out the Biz2Credit website today to learn more about loan options you may qualify for or read Yousaf Razzak’s inspiring story of how Biz2Credit helped him achieve his business expansion goals.