The Paycheck Protection Program (PPP) Explained for Small Businesses

As we all endure the disruption and crisis caused by the COVID-19 pandemic, many small business owners have called for action from our governments to help keep our doors open and support our employees. 

Consequently, when the U.S. government announced they were offering a special program for small businesses, administered by the Small Business Administration (SBA), many restaurant operators rushed to take advantage of it. The loan program is called the Paycheck Protection Act and it was included in the CARES Act that was passed by Congress in late March.

Unfortunately, many found the money that was originally appropriated by congress had run out. But there is good news, because the program has been given an additional $310 billion in funding (as of April 27, 2020) to ensure more small business operators can get a lifeline.

I publish a daily newsletter that goes to thousands of restaurant professionals daily and our business is not viable if restaurants aren’t operating. This is precisely why I am so interested in the actions taken by our government to help support small businesses like my own.

In this article, I’ll review some key points about the CARES Act relief package just passed by Congress and signed into law. 

The CARES Act at a glance

Let’s start with a brief overview of what the CARES Act provides and then some specifics surrounding the program that is most likely to help everyone, from independent restaurant operators to major multi-location business owners.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to address the economic fallout of the 2020 coronavirus pandemic in the United States. The highlights of the bill include $208 billion for businesses including help for the Airline and the Healthcare Industries, as well as $500 billion for payments of $1,200 directly to all Americans.

Also included was a loan program for small businesses specifically called the Paycheck Protection Program (PPP). These programs and a few other aimed at major corporations, make up a $2 trillion bailout package provided by the Federal government.

The Paycheck Protection Program explained

The most relevant aspect of the CARES Act for independent business owners is the PPP. This part of the act sets aside almost $350 billion in funds to encourage small to medium-sized businesses to retain or rehire their employees while weathering the pandemic. 

It promised a streamlined application process administered by the SBA and using their already approved list of lending institutions…but it doesn’t appear to have worked out exactly as they planned. There have been widespread reports of mounting frustration by both the banks and borrowers, although there are signs the situation is improving.

When to apply for the Paycheck Protection Program

The most pressing issue small business owners should consider is whether you should apply for the program now or wait until you are ready to reopen. As we previously discussed, the program was originally limited to the $350 billion initially set aside to fund it, and by waiting, many of you might have missed your chance. However, have an additional opportunity because of the recent increase in that funding that was approved by Congress and signed on Friday, April 24.

Given how quickly the money was distributed, If you believe you can revive your restaurant, now is the time to make this application. You don’t want to repeat the mistake of being left out by waiting.

What the Paycheck Protection Program Provides

There are other aspects of the PPP that are further reinforcement you should get a move on with your application. The terms of the SBA loans being offered are very good. They include a 1% APR and six months of deferred payment, although interest does accrue during the unpaid period. 

What makes this program unique is that if you use the money to retain or rehire employees, the entire loan is forgiven. That’s right — rehire or retain staff during the pandemic and, no matter how much you borrow for payroll (well, less than $10 million anyway), it will be forgiven.

If you are wondering whether the amount you borrow is limited to payroll, the answer is no! However, non-payroll items may not be forgiven and a maximum of 25% of your loan amount can be used for things like rent or other operating expenses.

To calculate your potential payroll support, determine your average monthly labor cost, benefits expenses, and even vacation accrual and multiply by 2.5. That is your loan value. Any other loan uses must be approved by your lender and documentation for payroll and all other claimed expenses must be provided.

Is the PPP the right option for you?

Full disclosure — I applied for one of these loans for my restaurant business as well. The application was easy, my local bank was eager to help and the process (so far) has been pleasant. The underwriter approved my loan and I am awaiting SBA approval to finalize it. It took less than a week to get here. So, the real question becomes…Is it right for you?

Only you can know what your prospects are when we emerge from this unprecedented disruption. Many small businesses aren’t even open at this point so, why even consider it? Well, these loans are particularly useful for some businesses because you can use them to rehire employees as late as June 30th, 2020. If you believe that your business will reopen in some form before June 30th, then having 2.5 months of payroll, from prior to the shutdown, to rehire employees would be an excellent way to jump-start your business.

Final thoughts

For me personally, the PPP is a lifeline for just that reason. I do believe, if small businesses are open by June 30th, I will be able to rehire my team at my restaurant and restart my business as well. 

The best news is that if you don’t use the money because you decide to close, you can return it without penalty. Frankly, I’m using it as a hedge to ensure that if things do return to some form of normal, I’ll have the resources to respond. Each business operator has to make this decision based on their personal circumstances, but the Paycheck Protection Program might at least give you some room to breathe while making it.

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