Understanding the Paycheck Protection Program

April 15, 2020

In The News

By Director of Analytics David Hartman and Project Executive Michael Seminara, IFIC Surety

The United States Small Business Administration (SBA) recently announced a new Paycheck Protection Program (PPP), helping businesses keep their workforce employed during the COVID-19 crisis. Since the announcement, there has been a lot of noise surrounding the roll-out – not to mention confusion. We’re here to help you understand the key takeaways.

So, what is the PPP?

It’s functionally designed to be a stimulus payment. It’s also not your traditional SBA program, but rather a part of the stimulus plan (CARES Act) being administered by SBA through the nation’s banks.

PPP Highlights

  • Funding is equal to 2.5 times monthly payroll with a cap of $10 million
  • There is no collateral required and no personal guarantee
  • For any small business with less than 500 employees 1
    • Excluding businesses engaged in illegal activities, lobbying, gambling, or adult entertainment; businesses with owners more than 60 days delinquent on child support obligations; and household employers1
  • Has a maturity of 2 years and an interest rate of 1%1   
  • Will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities1
    • Forgiveness will be reduced if full-time employee headcount is reduced. In other words, a company cannot receive PPP funding based on a historical monthly payroll cost, then terminate employees and expect to keep the money

For more key facts and frequently asked questions, click here.

Get in Touch with Bankers

It’s first come, first served. In order to get a place in line for the $349 billion available funding, companies must get in touch with their bankers as soon as possible. To reinforce the importance of acting quickly, note that Bank of America reported receiving 177,000 applications totaling $32.6 billion (almost 10% of allocated funding) as of Monday, April 6. 

In reaction to feedback from SBA participating banks, and to lessen their concerns in making and servicing these loans, the Federal Reserve released the following statement on April 6:

“To facilitate lending to small businesses via the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve will establish a facility to provide term financing backed by PPP loans. Additional details will be announced...” 

Application Process

This is not your traditional SBA loan application or process. The application is simple and more condensed. It begins with basic information about the business including:

  1. A calculation of 2.5 times monthly payroll
  2. The number of employees
  3. A listing of owners with more than 20% ownership

It’s then followed by eight Yes / No questions about former bankruptcy, previous SBA loans, and criminal history.

The application concludes with eight certifications from the borrower including:

  1. “Current economic uncertainty makes this loan request necessary to support the ongoing operations.”
  2. “Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.”
             i.e. at least 75% of the funds must be used for payroll, and the rest for specific allowable items to be forgiven.

Access the Borrower Application here.

1 https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp