PPP Loans: A U.S. News Guide

For many small business owners, the Paycheck Protection Program has been a lifeline during the coronavirus pandemic. But since its inception, the initiative has undergone several changes, as well as two separate rounds of disbursements.

The next deadline to submit an application for funding is May 31. Here's what you need to know about the program, who qualifies and whether or not you need to repay the loan.

What Is the Paycheck Protection Program and How Does it Work?

The Coronavirus Aid, Relief and Economic Security Act, which passed in March 2020, created the Paycheck Protection Program. The PPP was designed to help small business owners keep employees on their payroll during the pandemic.

The program originally provided $350 billion in cash flow assistance, primarily to cover payroll, but also utilities, rent or mortgage payments and other operating expenses. In April 2020, the program received an additional $310 billion in funding. It received another $285 billion boost in December 2020.

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Many of the program's details have changed.

"We've had changes in who qualifies, we've had changes in how you can use the money, the timeline and the application deadline, so pretty much everything has shifted," says Hannah Smolinski, founder and CEO of Clara CFO Group. Smolinski runs a newsletter and YouTube channel to provide business owners with regular updates about PPP loans.

Business owners who received a loan last year -- now called a first-draw loan because there are two phases of the program -- can apply for a second-draw loan by the May 31 deadline. If you haven't already applied for a PPP loan, you can submit an application for a first-draw loan. Here's the most up-to-date information small business owners should know.

-- For most businesses, the maximum loan amount is 2.5 times the average total monthly payment for payroll costs. If you own a business in the accommodations and food services sector and are applying for a second-draw loan, you can borrow up to 3.5 times your average monthly payroll costs.

-- First-draw loans are capped at $10 million, and second-draw loans max out at $2 million.

-- The interest rate on all loans is 1%.

-- Maturity on loans issued before June 5, 2020, is two years; loans issued later mature in five years.

-- Loans require no collateral or personal guarantees.

-- Small businesses can have their loans forgiven if they use the funds for eligible expenses.

One Change Gives Bigger Loans to Businesses Without a Formal Payroll

One new development that hasn't been ironed out yet offers the potential for sole proprietors and independent contractors to receive higher loan amounts. Because they typically don't have payroll, lenders used gross revenue to calculate their loan amounts.

"It allows the business owner, even if they experienced an overall loss in their business, to be able to use the gross income that they did make," says Talibah Bayles, founder and CEO of TMB Tax and Financial Services. This is an approach the Small Business Administration already uses for farms, providing for more appropriate loan amounts.

However, the SBA has not yet provided guidance for eligible borrowers who have already received a second-draw loan. "That's the million-dollar question," adds Bayles.

Who Qualifies for a PPP Loan?

Qualifications for PPP loans are different for first-draw and second-draw loans. While the criteria were broader when the program first began, they've been tightened up for small businesses who need a second loan in 2021.

First-draw loans. All small businesses that meet the SBA's size standards are eligible for a first-draw PPP loan.

That includes businesses, nonprofit organizations, veterans organizations and tribal business concerns with 500 employees or fewer. In some circumstances, businesses with more than 500 employees still qualify.

It also includes sole proprietors, independent contractors and other self-employed individuals, as well as businesses in accommodations and food services with more than one location and fewer than 500 employees at each location.

Second-draw loans. You may be able to get a second-draw PPP loan if you have no more than 300 employees, you've previously received a first-draw loan and have already used it or plan to use it for authorized purposes, and you can demonstrate a 25% decrease in revenue between comparable quarters in 2019 and 2020.

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How Long Does the Paycheck Protection Program Last?

The program initially stopped accepting new applications on Aug. 8, 2020, but the program reopened on Jan. 11, 2021, for first-draw loans.

For small businesses that had already received a PPP loan, second-draw loans became available starting Jan. 15. The deadline for both first- and second-draw loan applications is May 31, 2021. It was originally March 31, but the two-month extension passed with strong bipartisan support, and President Joe Biden signed it into law on March 30.

For a short period ending March 9, the SBA limited applications to small businesses and nonprofit organizations with fewer than 20 employees.

This exclusivity period was created to address disparities from the first run of the program. While 98% of small businesses in the U.S. employ fewer than 20 people, they only received 45% of PPP funding. However, now all eligible businesses will be able to apply again until the May 31 deadline.

Do PPP Loans Have to Be Repaid?

All PPP loans have terms for repayment. However, the SBA offers forgiveness to small businesses that use their funds for eligible expenses.

More specifically, you can receive forgiveness if you meet the following requirements during the eight- to 24-week period following disbursement of your loan:

-- Employee and compensation levels are maintained.

-- Loan proceeds are used to cover payroll costs and other eligible expenses.

-- At least 60% of the funds are used on payroll expenses.

Eligible nonpayroll expenses for first-draw loans include:

-- Mortgage interest

-- Rent

-- Utilities

To qualify, the mortgage loan or lease agreement must have been in effect before Feb. 15, and the utility services must have begun before that date. Second-draw loans include the above expenses plus:

-- Worker protection costs related to COVID-19

-- Uninsured property damage costs caused by looting or vandalism in 2020

-- Certain supplier costs and operating expenses

Some limitations with each of these may apply. For example, you must maintain at least 75% of each employee's total salary. If you don't, the amount of your forgiveness may be reduced by the difference between the employee's current pay and 75% of the original salary. Your forgiveness may also be reduced if you cut the number of employees and don't rehire them.

[Read: Best Unsecured Business Loans.]

To make sure you qualify for forgiveness, Bayles stresses the importance of documenting your expenses. "I always lead with software like QuickBooks or Wave or other software companies that allow for small business owners to have an accounting system in an affordable way," she says. "But I've also trained folks on how to simply create a ledger using a Google sheet."

Smolinski adds that if you borrowed less than $150,000 on your second-draw loan, the SBA won't require documentation, but you're still required to have it on hand. "The SBA can come back within six years later and still review the files. If the money was not used correctly, it needs to be paid back," she says.

When Should You Apply for a PPP Loan?

The deadline for the Paycheck Protection Program is May 31, 2021, but eligible small business owners who need the money should apply as quickly as possible. The program has a finite amount of funds, and the process between application and funding can take several days.

An additional change to the program included in the recent extension is the Small Business Administration has until June 30 to authorize loans. This means that business owners who apply close to the May 31 deadline can still have their applications processed and receive money.

Out of the $285 billion reserved for this second round of the program, $211.8 billion had been distributed by March 28. The American Rescue Plan Act of 2021 provided $7.25 billion more in PPP funding. The two-month extension will allow the program to exhaust its funds.

If you want to apply, you can use the SBA's lender locator to find one in your area.

Also, because the Paycheck Protection Program has changed several times over the last year and comes with certain quirks and limitations, it's a good idea to review the PPP page on the SBA website to get the latest information.

If a PPP loan isn't enough to cover your expenses, you may also consider some PPP alternatives to bridge the gap.