Due to the unprecedented time we are living in, the US Government recently authorized the Paycheck Protection Program or PPP. The first round of forgivable loans has closed, and approximately $349 billion was distributed to small businesses across the country. A second round is expected by weeks end, but for now, they are no longer taking applications. 

If you were one of the small businesses that applied and were approved before the program reached its limit, you might be wondering exactly how to use the money and be eligible for loan forgiveness in the future. It is essential to know and understand the precise rules attached to the loan. These rules are put in place to ensure the money is being used as intended, to help the economy and keep small businesses afloat during this pandemic and time of uncertainty. 

How to Use the Money

Payroll costs, including benefits – Payroll costs are defined as any salary, wages, commissions, or similar compensation; cash tips or the equivalent and does include withheld Federal taxes for the employee but not for the employer. Benefits include any “leave” generally granted to employees, such as vacation, parental leave, family, medical, or sick leave. Benefits also include payment of insurance premiums and retirement payments. This portion must be at least 75% of the uses of the PPP funds

Interest on mortgage obligations – This one can easily be misunderstood, so let’s be very clear. You may use this loan to pay the interest only on any loans your business incurred before February 15, 2020. It does not include any prepayments or principal payments. 

Rent or Lease Payments – Be aware your lease agreement had to be in force before February 15, 2020, to be eligible. 

Utility Payments – Just like your rent, utility service had to begin before February 15, 2020.

The Loan Small Print 

*The PPP loan will be due in 2 years and carries a fixed interest rate of 1.00%. 

*Loan money used for anything other than payroll costs, mortgage interest, rent, and utility payments cannot be forgiven and will be due at the end of the loan period.  

*Business must have less than 500 employees. 

*There is no prepayment penalty. 

*First loan payment will be due six months after loan approval, but interest will accrue during those six months. 

*Only one loan per business.

*You may apply for loan forgiveness after June 30, 2020. Your lender then has 60 days to make the decision and get back to you. 

Be aware of three essential rules for your loan to be forgiven;

1. You can only use this money to cover the costs mentioned above over the eight weeks after the loan is dispersed.

2. Not more than 25% of the forgiven amount may be for non-payroll expenses. (i.e., rent, utilities, and interest payments)

3. A portion of the loan will not be forgiven if you do not maintain your staff and payroll.

This article is only covering the basics of the PPP program and breaking it down into more layman terms. For more detailed information and any updates to the loan program, speak with your lender or head here.