The CARES Act Paycheck Protection Program: What You Need to Know

On Friday, March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became US law. The largest stimulus bill in American history, the CARES act put into motion a momentous effort to provide financial relief for millions of Americans who have been economically impacted by the coronavirus pandemic—in particular, the 3.3 million Americans who’ve filed for unemployment since March 14, and the small businesses who employ so many of them.

Though the CARES Act is packed with provisions for small businesses (including emergency government grants and existing loan payment coverage), the $350 billion Paycheck Protection Program (PPP) might be the most promising portion of the legislation. With its low interest rate and forgiveness potential, the Paycheck Protection Program aims to sustain small businesses through this pandemic without burdening them with significant debt to pay off when the crisis has passed—and, in the process, its goal is to keep people in their jobs and stem the tide of unemployment nationwide.

The Federal government is still ironing out the logistics—more details are being released daily if not hourly. But if you think you may need to make use of this resource, you won’t want to wait to start evaluating if a PPP loan is right for your business. There’s no indication that any business types or industries are prioritized in terms of accessing the loans first; it’s likely first come, first serve, so potential applicants will want to be ready to apply as soon as the loan application itself opens.

Let’s dive into what information we have right now so that you can be ready to get the ball rolling for your business if and when the time comes.

Please note: We are not legal experts. If you have specific questions about your business or loan application, please speak with your attorney and/or bank for clarification.

What is the Paycheck Protection Program?

The Paycheck Protection Program is a Small Business Association (SBA) loan program specifically designed to help small businesses continue to make payroll at their staff’s current pay rate, as well as cover key expenses that keep the lights on (think rent and utilities). Any loan funds used for these express purposes during the loan’s eight-week period will be eligible to be forgiven: in other words, if a small business uses the loan as it’s intended, they will likely not have to pay back a penny.

By driving cash into threatened small businesses, the Paycheck Protection Program directly addresses what 70% of small businesses cite as their primary business challenge: cash flow management (Forbes). About half of small businesses don’t have enough cash on-hand to survive more than 27 days without incoming revenue, and about 25% can only make it 13 days or less with no revenue (JP Morgan). With a PPP loan to cover about two months’ worth of most costly expenses (payroll and rent), small businesses will be able to stretch out their existing cash reserves much longer. Hopefully long enough for this crisis to end and for businesses to re-open.

In the meantime, with this loan, small businesses should be able to hold onto their existing team, preserve their retail or office space, and maintain their current utilities providers. This can provide small business owners and employees the opportunity to collaborate to find a way to pivot the business to find alternate revenue sources during COVID-19; and once the crisis ends, small business will still have their fully-trained team on-hand to ramp back up to their usual business model and capacity.

If laying off all your employees is like taking the wheels off a bike so it can no longer run, think of the PPP as enabling small businesses to put on training wheels. You can keep going, though perhaps not as quickly. If you hit a bump, you might not fall totally over. But the most important thing is that you keep moving.

How can the Paycheck Protection Program help your small business?

Now that we’ve covered the goals and potential impact of this program, let’s take a closer look at the details. I’ll answer common questions that small business owners likely have about the PPP, including how to determine if you’re eligible, how to apply, how the PPP compares to SBA’s EIDL loans, and more.

How do I know if I’m eligible?

You should be eligible to apply if:

• You’re a small business, 501(c)(3) nonprofit, or a 501(c)(19) Veterans Organization based in the United States.
• You have fewer than 500 employees.
• You’re self-employed or a sole priorietor.
• Your business has been adversely impacted by COVID-19, and the current uncertainty makes it difficult to run your business.
• You need this loan to keep your business afloat.
• Your business was fully operational on February 15, 2020, with employees on payroll.

How much can I borrow through PPP?

• If you’re a small business: You can receive a loan for up to 2.5x your average monthly payroll costs for the previous 12 months (up to $10 million total).
• If you’re a sole proprietor or are self-employed (e.g., you run your own one-person marketing agency): Although you don’t have payroll costs in the same way, the loan amount you’re eligible for is still calculated based on your payroll costs for the past 12 months; you full loan amount may be up to $100,000. See Page 4 of this US Chamber of Commerce document for more details on how your payroll amount is calculated. Note: This information is up to date as of 4/1/20. We will update this section as more details for sole proprietors and self-employed individuals are clarified. If you have questions, we recommend speaking to an attorney.

What is the loan period?

The loan period lasts for eight weeks from the date of origination (the date the borrower officially receives the loan). At the end of the eight weeks, the loan is technically “due,” but payments will be deferred for  six to 12 months. 

What can I use the loan money for?

The loan is designed to help keep businesses running and people employed, so potential borrowers should plan to use the funds for:

• Paying staff: If you’ve had to lay people off, their pay will not be included in the calculation of the loan amount. But if you hire them back after submitting your application, we believe you can use your loan monies to pay them.
• Rent, or interest on your mortgage principal. (You can’t use this for a principal payment.)
• Utilities payments

According to the US Chamber of Commerce, you will be “eligible for loan forgiveness equal to the amount” you spent on these items during the eight-week loan period. Stick to these expenses, and you should be good. Note: If you lay off additional employees after applying for the loan, your amount of loan forgiveness will be impacted. See the Page 5 of this US Chamber of Commerce document for more details.

Is this different from the SBA’s Economic Disaster Injury Loan (EIDL)?

The PPP builds on the existing framework of the SBA’s 7(a) loan program for small businesses. The Paycheck Protection Program loans will co-exist with the SBA’s Economic Disaster Injury Loans, so you’ll want to evaluate both programs to select which option, if either, is better suited for your business.

If you’ve already taken out an EIDL due to COVID-19 related challenges this last month, you may be able to refinance your existing loan as a PPP loan (Foley).

How can I apply?

The government is still working out the details, but you will need to go through an SBA-approved institution, ideally your business’ existing bank. If you’re interested in potentially applying for this loan, reach out to your bank right away to get the process moving. They will likely have more details to enable you to get started.

When can I apply for a Paycheck Protection Plan loan?

We don’t know yet when applications will open. Although further stimulus packages are likely on their way, you will want to start preparing to apply right away if you need this type of assistance. A process and timeline may be in place by the end of this week (Inc.).

When will I get my Paycheck Protection Plan loan amount, if my application is approved?

We don’t know yet. We’ll update this as we find more information.

Where can I get more information?

You can find the full text of the CARES Act here, and we’ve found this document from the US Chamber of Commerce to be clear and informative. Here are more resources:

What if I have more questions?

More details about this program are being released by the minute, so we may not have answered all your questions! We will be updating this article with updates as we see them, but please be sure to be on the lookout for relevant updates as well. If you have questions specific to your business or your loan application, do speak to your attorney and/or bank.

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