Paycheck Protection Program: Who Can Get It, And How It Works

With the latest COVID-19 relief package including $284 billion for small business loans under the Paycheck Protection Program (PPP), KHTS has compiled a breakdown of who can apply for these loans, and how they work.

As part of the most recent COVID-19 relief package signed at the end of December, $284 billion was allocated for PPP loans, providing much-needed relief to struggling small businesses across the country.

Under the PPP, small business owners apply for the loan with a bank, which then either approves or denies that loan. The U.S. Treasury Department is then set to essentially forgive the debt, allocating billions of dollars to pay the banks back the loaned out money.

The first round of PPP loans came at the beginning of the second fiscal quarter of last year, when Congress authorized $350 billion for businesses to file for loans that lent up to 250 percent of their average monthly payroll costs.

However, issues did arise during that first round of loans, ranging from larger businesses taking funds that could have been used for smaller businesses, to the actual system used to process loan applications crashing.

“It meant that a lot of small businesses that truly needed it didn’t get it,” said Tamara Gurney, CEO and president of Mission Valley Bank, one of the only small local banks to opt-in to the program.

In this new round of PPP loans, several changes have been made to help prevent similar issues from arising this time around.

“A lot of it is the same, but what they’ve tried to do is hone in on the industries that have been the most hard-hit,” Gurney said. 

Here are some of the key differences for this round of PPP loans:

Second-Time PPP Loans: Previously, each business could only apply for one PPP loan, meaning that after they were approved and got the money from their loan, they could not apply for another one regardless of their financial standing.

Now, borrowers that received a PPP loan during the first round can apply for another loan (classified as a “Second Draw Loan”), albeit with some restrictions. These include:

• All funds from their first loan must have been spent before receiving a Second Draw Loan. This does not mean that they have to have had their initial loan forgiven before receiving a second one, but rather that no proceeds from the first loan can remain.
• The business, along with any applicable affiliates, cannot have any more than 300 total employees.
• The business has to be able to demonstrate that they experienced a reduction in gross revenue of at least 25% between comparable quarters in 2019 and 2020. Essentially, this means that a business needs to show a 25% drop in all of the money they took in (before taxes) between the same fiscal quarters in 2019 and 2020. For example, if a business reported $100,000 in gross revenue during Q2 of 2019, they would need to have only brought in a maximum of $75,000 in Q2 of 2020 to qualify for the loan. Businesses may choose which quarter to use, but it must be an actual fiscal quarter, and it must be the same quarter for both years (Q1 of 2019 to Q1 of 2020, Q2 of 2019 to Q2 of 2020, etc.)
• Second Draw PPP Loans cannot exceed $2 million.

“They’ve done a reasonably good job cleaning it up and pushing it down to more harmed businesses that really need it,” Gurney said. 

Additionally, the Small Business Administration (SBA) has created a new portal for lenders to use as they process loan applications in an effort to prevent their system from crashing.

“It’s going to make that a lot more efficient and less error-prone,” Gurney said.

The SBA is scheduled to begin accepting applications for Second Draw PPP Loans on Wednesday, Jan. 13. More information on such loans can be found here.

First-Time PPP Borrowers: Businesses that did not receive a PPP loan during the second quarter of 2020 can now apply for one in the newest round of PPP loans. These loans are referred to as “First Draw Loans,” and come with the following requirements and restrictions:

• The business, along with any applicable affiliates, cannot have any more than 500 total employees.
• First Draw Loans cannot exceed $10 million.
• Certain new organizations are now specifically eligible for First and Second Draw Loans, including housing cooperatives, eligible 501(c)(6) organizations, and eligible destination marketing organizations.

The SBA began accepting applications for Second Draw PPP Loans on Monday, Jan. 11. More information on such loans can be found here.

Loan Forgiveness Requirements: Changes have also been made in the requirements for loans to be forgiven in an effort to give businesses more flexibility in how they can spend the funds.

“The allowable expenses have really broadened,” Gurney said. “That’s going to help a lot of people.”

Previously, a minimum of 75% of a PPP loan had to have been spent on payroll-related costs, which included employee wages and benefits, while only up to 25% of the loan could be spent on a specific list of non-payroll-related costs, which included rent and utility payments.

However, those percentages have been changed to be eligible for loan forgiveness. For both First and Second Draw loans in this round of the PPP, a minimum of 60% must be spent on payroll-related costs, while up to 40% can be spent on other qualified costs. 

These new non-payroll-related costs now include:

• Operations Expenditures: This category essentially contains any expenses related to supporting remote working, which include payments for any business software or cloud computing services that facilitates:
  • Business operations
  • Product or service delivery 
  • The processing, payment, or tracking of payroll expenses 
  • Human resources
  • Sales and billing functions
  • Accounting or tracking of supplies, inventory, records and expenses.
• Property Damage Expenses: This category includes any costs incurred due to property damage and vandalism or looting in connection with public disturbances that occurred during 2020 that were not covered by insurance.
• Worker Protection Expenditures: This category includes any costs incurred in order to comply with requirements established by governmental orders with respect to COVID-19. This means that loan funds can be used for things such as personal protective equipment (PPE), or other adjustments such as partitions mandate to help prevent the spread of COVID-19 in the workplace.

Additionally, borrowers are specifically prohibited from spending PPP funds on any political lobbying activities or expenditures.

Borrowers can also now choose the length of the covered period that determines their forgiveness eligibility, ranging from eight weeks to 24 weeks.

On top of that, SBA officials say that PPP loans of $150,000 or less will be able to use a one-page forgiveness application form that includes things such as the number of employees the business retained as a result of the loan, and an estimate of how much of the loan was spent on payroll and the total loan amount.

The SBA estimates that roughly 87% of PPP loans made during the first round were of $150,000 or less.

Specific Business Allowances/Restrictions: In an effort to ensure that PPP funds go to businesses that need it, two main changes have been made to the program.

The first change allows for businesses in the restaurant and hospitality sectors to apply for larger loans than other businesses, a move meant to help businesses officials believe have been most impacted by the pandemic.

While most borrowers may apply for a loan equal to 2.5 times their average monthly payroll expenses, or 250%, as they did during the first round of loans, restaurants and hospitality businesses can apply for loans equal to 3.5 times monthly payrolls, or 350%. 

However, loans still may not exceed the caps outlined above, dependent on whether it is a First Draw or Second Draw Loan.

The second change prohibits any publicly-traded company from receiving a PPP loan.

“They are trying to weed out big companies that really don’t need this,” Gurney said.

A more in-depth breakdown of the PPP loans can be found here.

For more information regarding PPP loans, contact Mission Valley Bank by clicking here.

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