PPP Loan: Guide On How Does PPP Loan Work

PPP Loan

The Paycheck Protection Program abbreviated as PPP is a business loan program implemented by the Small Business Administration.

This was designed in form of a grant to help small businesses, including self-employed and sole proprietors, stay in business.

The loan provided comes with a low interest basically to help the borrower pay for their payroll and possibly other costs that may need financial attention.

How Does PPP Loan Work?

The PPP could be explained to mean Paycheck Protection Program.  Its establishment is to lend money to small businesses to alleviate the losses encountered amidst the pandemic.

The funds were included in the CARES Act government response to small business owners’ needs.

Being a $953-billion business loan program implemented by the Small Business Administration, PPP was set up mainly to help small businesses, including self-employed and sole proprietors to stay in business.

The Paycheck Protection Program makes available low-interest loans to pay for their payroll and other certain costs. PPP loans are calculated as equal to 2.5 times the applicant’s average monthly payroll costs.

The PPP loans can as well cover rent, interest on mortgages, and utilities.

Haven recognized as a grant, this loan may in part or whole be waved only if the owner of business sustained/maintained the staff and their wages. Today the Paycheck Protection Program has stopped receiving applications.

For more leniency hence it is a grant, the government in her wisdom has established the PPP Flexibility Act, this means borrowers of PPP funds spending is extended to cover the period of 8-24 weeks as against the initial 8-weeks. 

Before 5th June 2020 borrowers were at liberty to choose and use either the 8-week or 24-week loan forgiveness cover period.

PPP Loan Right for Your Business?

The federal government has set aside about a $953-billion business loan program which is implemented by the Small Business Administration through PPP to help small businesses.

As a sole proprietor or contractor, or one of the small business owners, take the opportunity and apply.

The SBA and lenders are always available to assist you in assessing the loan hence the application process is also simple and easy.

If the guidelines are duly followed as prescribed, your loan will be granted and you may end up not paying back hence it is a grant.

You may also like: Guide to Parent PLUS Loans: How Does it Work

Guide to a Successful PPP Loan Application

For your application to receive due attention and approval, ensure you follow the outlined guidelines.

1. Be specific on the category of loan you want: First Draw or Second Draw

Monies on the First Draw basis are meager being the first attempt while the Second Draw money implies the second time you are applying for the loan.

Note that, whichever category you are applying for, ensure your application fulfills the following conditions:

a. The business must have been in operation before February 15, 2020.

b. You have to still be open.

c. Ensure you maintain your staff strength within 500 for First Draw, while for Second Draw, you must have not more than 300 employees.

Also Applicants Eligible for a PPP Loan

  1. Sole proprietors, independent contractors, and self-employed persons
  2. Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard)
  3. Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of: 500 workers, or that meets the SBA industry size standard if more than 500
  4. Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs doesn’t employ more than 500 per location.
  5. The program was expanded to include additional business types, such as news organizations, destination marketing organizations (which promote communities), and qualifying nonprofit organizations.

First Draw PPP Loans

If you don’t currently have a Paycheck Protection Program PPP Loan

The requirements that guaranteed your loan for First Draw and Second Draw remained the same. Basic things needed include, prove of payroll costs, amount of mortgage interest or your rent amounts, copies of utility bills.

The payroll amount is determined by gross, not net. Count employer-paid payroll costs such as employee health insurance and retirement contributions. Ensure to add up all the costs when figuring the PPP loan amount, you seek.

Important Updates to Know:

  1. The loan calculation formula is revised by the Small Business Administration (SBA).
  2. Forgiveness process for loans less than $150,000 is streamlined.
  3. Due to power shift that usher in new administration, change the size standard for businesses adapted for special application for those with 20 or fewer employees.

Second Draw PPP Loans

If you have already received a PPP Loan

First Draw PPP loans are gotten once and you can’t apply for the same but the Second Draw is on the basis that the First Draw is used up.

Revenue is the basis for the calculation of the Second Draw loan and ensures you have the necessary documentation that shows a 25% loss in revenue in the last quarter of the previous year.

PPP Loans Guide

2. Find an SBA Paycheck Protection Program PPP Loan Lender

To serve the category of people who are the target of the program, the SBA and other lenders are quite resourceful and ready to assist them through the program. Both have tousled to match up with government jerks of the program, all to help to draw PPP money.

You are advised to visit your local SBA participating banks or credit unions for funds, or better still check out our list of SBA lenders. For PPP loans are offered differently to meet the needs of different categories of businesses.

Here is the list of online SBA participating lenders to aid businesses, and self-employed and contractors seeking PPP loans:

  • BlueVine: Handle first and second draw loan applications from borrowers.
  • Capital One: Must have Capital One business checking or savings.
  • Nav: They link borrowers with lenders.
  • Ready Capital: Subsidiary of Ready Cap Lending.
  • Smart Biz: Online lender.
  • Veem: Online lender.
  • Independent Bank: It is online lender.
  • Lendistry: This is an online lender.
  • Loan Source: They make use of online lenders network while also partnering with Lanterns.
  • Brex: Deal with first and second draw and also partner Womply as a loan agent.
  • Centerstone: PPP application is submitted here by borrowers can using Teamcenterstone.
  • Cross River Bank: Partners with Divvy to take loan application.
  • Fountainhead SBA: Online lender.
  • Funding Circle: Online lender.
  • Heartland: Has partnered with Lendio, which uses a network of online lenders.

Start the PPP Loan Application Process

After identifying with one of the local SBA participating banks or lenders and you submitted your documents gathered, make a formal application.

The application could be online using their website. Ensure you are in touch and ready to submit further any document that may be required of you by the lender.

What if I’m not approved?

There are many reasons your application can be turned down; it can also be rectified if discovered that certain documents are missing but can also be permanently declined on other grounds may be as affiliation rules.

This means that a business may not qualify if there are more than 500 employees and such business may operate branches in different areas. Though, this decision can be contested by SBA if time permits

Terms of the Paycheck Protection Program

PPP loans terms are favorable to accommodate the affected business operators during the Coronavirus Pandemic. The interest rate charged on PPP loans is 1%. The repayment period can be either 2 or 5 years, depending on when the funds were made available for the draw PPP loan.

In case a loan is approved but not disbursed, this payment can be deferred until the SBA remits the amount to the lender while the interest will also be backdated to reflect the exact date disbursement was made.

Check out also: Payday Loan: How does it Work, Cost and Credits

What Can a PPP Loan be Used for?

The essence of this loan is to alleviate the hardship faced by many small business operators. As such, borrowers must use not less than 60% of PPP funds for payroll expenses.

Payroll is based on gross pay, not net pay. You can add the costs of health insurance and retirement if those are paid by the employer for the employee.

Here are other costs that count:

  • Mortgage Interest and Rent Expenses
  • Expenses Used for Employees Protection and Payroll Costs
  • Specific Operations Expenses
  • Property Damage Costs Not Covered By Insurance – includes 2020 damages from looting/vandalism.
  • Utilities
  • Software – Use of Cloud computing services can qualify, as these resources were needed to support people working remotely.
  • COVID-19 Costs – if you paid employees while they took time off to get vaccinated for Covid or battled Covid symptoms, you can include those costs as worker protection expenses as part of payroll costs.
  • Essential Supplier Costs

Is the PPP loan still available?

The deadline for the application is May 31, 2021.

How The PPP Loan Is Forgiven?

The idea of loan forgiveness could be seen as one of the numerous good things that come with this PPP loan. By following these PPP forgiveness requirements, business owners can move forward without having to repay all (or at least some) of the loan.

One thing certain is that an employer must maintain payroll by paying all employees or rehire the employees that you laid off due to coronavirus-related problems.

Therefore, 60% of the expenses of the loan should go on payroll, and the rest on other qualifying expenses within 24 weeks.

Other qualifying expenses may include utilities, rent, mortgage payments, debt payments, costs of property damage, supplier costs, protection equipment, and some operation expenses like cloud computing.

This could be the only basis that could prove your loan has been forgiven in part or total.

The Bottom Line

Looking for finance to help resolve the challenges faced by your business during this corona pandemic. Taking a bold step to apply for a PPP loan today will go a long way to alleviate this suffering.

You can get started by finding federal or community banks that are still accepting applications.

If you’re unable to do so, find an online marketplace-but be sure to remember your application is forwarded to a partner bank.

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