Banks Begin Accepting Small Business Loan Applications Under Payroll Protection Program

Small businesses facing steep declines due to COVID-19 can begin applying for relief loans under the Paycheck Protection Program (PPP) starting today.

The program, which was passed by Congress and signed into law by the President under the CARES Act, provides up to $349 billion in federally-backed loans to small businesses hit hard by the spread of the coronavirus. The loans are intended to help businesses maintain their payroll even as many face work stoppages across the country.

A key feature of the loans under the Paycheck Protection Program is their ability to be forgiven outright if employers use at least 75% of the funds to pay employees at their normal salaries for eight weeks.

Demand for the loans are high as many small businesses across the country are struggling to stay afloat as public health measures to combat the coronavirus have disproportionately hit smaller-sized businesses.

But many banks were confused as to the terms of the loans, how to originate them, and even who was qualified to participate.

The US Treasury Department and the Small Business Administration (SBA) outlined additional details for the program on April 2.

Who is eligible for the Paycheck Protection Program loans?

Broadly speaking, the program is intended for small businesses with fewer than 500 employees that are suffering losses due to the COVID-19 pandemic. But there are exceptions to that rule.

The SBA and Treasury Department laid out who was eligible to receive loans yesterday to include the following:

• All businesses, nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors with fewer than 500 employees
• Businesses with more than 500 employees who fit the SBA’s definition for small within their industry (details here)
• Businesses within the hotel and food services industries
• Businesses that are franchises in the SBA’s Franchise Directory
• that receive financial assistance from small business investment companies licensed by the SBA

Which banks are lending under the Paycheck Protection Program?

Many banks, especially smaller and regional banks, have expressed concern about getting access to details for the program. The Treasury Department and the SBA defined the following as eligible lenders to begin lending on April 3.

• All existing SBA-certified lenders
• All federally insured depository institutions
• All federally insured credit unions
• All Farm Credit System institutions

While the loans are 100% backed by the SBA, small businesses must apply through an eligible lender to secure the loan. Even if a loan is forgiven at the end of the eight-week term, the banks will still make money through processing fees. But the banks cannot collect any fee from the actual small business receiving the loan.

The Treasury Department and SBA set the fee amounts that banks can receive based on the following amounts:

• 5% for loans $350,000 and under
• 3% for loans greater than $350,000 to $2 million
• 1% for loans greater than $2 million

Loans are capped at $10 million per business and not exceed $100,000 in annual salary for any employee covered by the loan.

Interest rates set for PPP

The Treasury Department and the SBA set the interest rates for the loans at 1%. Loans are due in two year, though borrowers can have the loan forgiven if they use at least 75% of the funds to cover their payroll through an eight-week period.

The SBA provided examples on how much could be borrowed based on the payroll of a business.

Small Business With No Employee Salaries Above $100,000 Per Year

Annual payroll = $120,000 ÷ 12 months * 2.5 = $25,000

In this example, the maximum amount of the loan would be $25,000.

Small Business With Some Employee Salaries Above $100,000 Per Year

In the case of a business with an employee or multiple employees making more than $100,000 a year, the formula is a little more complex. Essentially, the business needs to subtract any compensation exceeding $100,000 per year before dividing the annual total employee payroll by month and multiplying by 2.5.

In the example where the small business’s total payroll is $1,500,000 but $300,000 of that comes from salaries exceeding the $100,000 per year cap, the business owner should deduct that from the total. That would bring the total covered payroll down to $1,200,000. The formula would then be: $1,200,000 ÷ 12 months * 2.5 = $250,000.

In this example, the maximum amount of the loan would be $250,000.

Combining with SBA Coronavirus Relief Loans

Under an already existing $50 billion program, the SBA was able to lend out as much as $2 million in disaster relief loans.

Based on the guidance provided by the Treasury Department and the SBA, small businesses who applied and received these funds can also apply for the PPP loans.

In fact, businesses that receive loans through the PPP can use some of those funds to refinance their previous loan through the coronavirus relief loans. However, if any of the previous loan was used to meet payroll, the amount used will be dedicated from the portions of the loan that can be forgiven.

More details on the differences between the Paycheck Protection Program and the SBA Coronavirus Relief Loans here. 

Deadline for Paycheck Protection Program

Businesses can begin applying for loans through local lenders on April 3, 2020. The deadline for applications is June 30, 2020.

Editor’s Note: Neither Workest nor Zenefits is affiliated with the Small Business Administration (SBA) or a lending organization. This article is intended for informational purposes only.