How to Apply for the CARES Act Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) to provide crucial financial support to small businesses impacted by the COVID-19 emergency. This program, administered by the U.S. Small Business Administration (SBA), offered forgivable loans to help businesses maintain payroll and cover certain operating expenses. Understanding how to apply for this program is essential for eligible businesses seeking financial relief. This guide will outline the steps and key information you need to know to navigate the application process effectively.

Understanding the Paycheck Protection Program (PPP)

Before diving into the application process, it’s crucial to understand the core objectives and features of the PPP. The program was designed to provide direct incentives for small businesses to keep their workers on the payroll. Loans obtained through the PPP could be fully forgiven if used for specific eligible expenses, primarily payroll costs.

Key Features of the PPP:

• 100% SBA-Guaranteed Loans: Loans were fully guaranteed by the SBA, minimizing risk for lenders.
• Loan Forgiveness: The principal amount of the loan could be forgiven if used for eligible expenses like payroll, rent, utilities, and mortgage interest. A significant portion (at least 75% based on initial guidance) had to be used for payroll costs to qualify for full forgiveness.
• Low Interest Rate: The interest rate was set at 1%, offering very affordable financing.
• Deferred Payments: Loan payments were deferred for six months from the date of disbursement.
• No Collateral or Personal Guarantees: Neither collateral nor personal guarantees were required, making it more accessible for small businesses.

Eligibility Requirements: Is Your Business Eligible for a PPP Loan?

Determining your eligibility is the first step in the application process. The PPP had specific criteria that businesses needed to meet to qualify for a loan.

Basic Eligibility Criteria:

To be eligible, your business generally needed to meet the following criteria:

1. Size Standards:

   • Generally, businesses with 500 or fewer employees whose principal place of residence is in the United States were eligible.
   • Businesses operating in certain industries could be eligible if they met the SBA’s size standards for that specific industry, even if exceeding 500 employees.
   • This included small business concerns as defined by section 3 of the Small Business Act, tax-exempt nonprofit organizations (501(c)(3)), tax-exempt veterans organizations (501(c)(19)), Tribal business concerns, sole proprietorships, independent contractors, and self-employed individuals.

2. Operational Status:

   • You must have been in operation on February 15, 2020.
   • You needed to have had employees for whom you paid salaries and payroll taxes, or paid independent contractors (as reported on Form 1099-MISC). Sole proprietors, independent contractors, and self-employed individuals also needed to be in operation on February 15, 2020.

3. Not Ineligible Business Activities:

   • Your business could not be engaged in any illegal activity under federal, state, or local law.
   • Household employers (individuals employing nannies or housekeepers) were ineligible.
   • Businesses where an owner with 20% or more equity was incarcerated, on probation, parole, or facing criminal charges, or convicted of a felony within the last five years were generally ineligible.
   • Businesses with owners who had defaulted on or were currently delinquent on other federal loans within the last seven years causing a loss to the government might be ineligible.

It is important to note that specific eligibility rules and interpretations may have evolved during the program’s active period. Always refer to the latest official SBA guidelines and lender requirements.

Gathering Necessary Documents for Your PPP Application

Once you’ve confirmed your eligibility, the next critical step is to gather all the required documentation. Having your documents prepared in advance will streamline the application process and ensure a smoother experience with your lender.

Essential Documents Typically Required:

1. Paycheck Protection Program Application Form (SBA Form 2483): This form is crucial and needs to be filled out accurately. It requires information about your business, loan request, and certifications.

2. Payroll Documentation: You needed to provide documentation to substantiate your payroll costs. Acceptable documents often included:

   • Payroll Processor Records: Reports from your payroll processing company.
   • Payroll Tax Filings (e.g., Form 941): IRS forms used to report payroll taxes.
   • Form 1099-MISC: If you paid independent contractors, these forms could be required.
   • For Sole Proprietors/Self-Employed: Income and expense documentation, such as Schedule C from Form 1040.
   • Bank Records: If other documentation wasn’t available, bank records demonstrating qualifying payroll amounts could be used.

3. Documentation of Operation on February 15, 2020: You might need to provide documents to prove your business was operational on this date. This could include:

   • Bank statements from February 2020.
   • Invoices or customer contracts dated on or before February 15, 2020.
   • Business licenses or permits.

4. Identification Documents: You will need to provide identification for business owners and authorized signatories.

   • Driver’s licenses or passports.

5. Business Legal Documents: Depending on your business structure, you might need to provide:

   • Articles of Incorporation or Organization.
   • Partnership Agreements.
   • Trust Agreements (if applicable).

It’s important to note that specific documentation requirements could vary by lender. Always confirm the exact requirements with your chosen lender.

Calculating Your Maximum PPP Loan Amount

Understanding how to calculate the maximum loan amount you are eligible for is crucial before applying. The PPP loan amount was primarily based on your average monthly payroll costs.

Standard Calculation Method:

The most common method to calculate your maximum loan amount involved these steps:

1. Aggregate Payroll Costs: Calculate your total payroll costs from the last twelve months for employees whose primary residence is in the United States.
2. Cap on Individual Compensation: For any employee earning over $100,000 annually, cap their compensation at $100,000 (pro-rated for the covered period). Similarly, limit payments to independent contractors or sole proprietors to $100,000 per year for this calculation.
3. Calculate Average Monthly Payroll: Divide the total from Step 2 by 12 to get your average monthly payroll costs.
4. Multiply by 2.5: Multiply your average monthly payroll costs by 2.5. This is generally the base loan amount.
5. Add EIDL Loan Refinancing (If Applicable): If you received an Economic Injury Disaster Loan (EIDL) between January 31, 2020, and April 3, 2020, and did not use it for payroll costs, you could add the outstanding amount (minus any EIDL advance) to your PPP loan amount. If your EIDL was used for payroll, the PPP loan was intended to refinance it.

Example Calculation:

Let’s say your business has the following annual payroll:

• Total annual payroll: $600,000
• No employee earns more than $100,000 annually.

1. Aggregate Payroll Costs: $600,000
2. Cap on Compensation: Not applicable in this example.
3. Average Monthly Payroll: $600,000 / 12 = $50,000
4. Multiply by 2.5: $50,000 x 2.5 = $125,000

In this example, the maximum PPP loan amount would be $125,000 (before considering any potential EIDL loan refinancing).

Finding a PPP Lender and Submitting Your Application

The PPP loans were provided by SBA-approved lenders, which included banks, credit unions, and other financial institutions. Choosing the right lender and submitting your application correctly were the final critical steps.

Steps to Apply:

1. Identify PPP Lenders:

   • Contact your existing bank or credit union first. They may have streamlined processes for their existing customers.
   • Explore other SBA-approved lenders. The SBA website often provided resources to find participating lenders.
   • Community banks and smaller lenders might also be good options.

2. Contact Potential Lenders:

   • Reach out to the lenders you’ve identified to inquire about their PPP loan application process.
   • Ask about their specific documentation requirements and application deadlines.
   • Understand their application submission methods (online, in-person, etc.).

3. Complete the Application (SBA Form 2483):

   • Fill out the SBA Form 2483 accurately and completely.
   • Ensure all certifications are read and understood before signing.
   • Double-check all information for errors.

4. Submit Your Application and Documentation:

   • Submit the completed application form and all required supporting documents to your chosen lender.
   • Follow the lender’s specific submission instructions.

5. Follow Up with Your Lender:

   • After submitting your application, stay in contact with your lender.
   • Respond promptly to any requests for additional information.
   • Inquire about the status of your application.

Key Considerations When Choosing a Lender:

• Existing Relationship: Starting with your current bank can often be the easiest path.
• Lender Reputation and Responsiveness: Choose a lender known for good customer service and efficient processing.
• Loan Processing Speed: Inquire about the lender’s typical processing times, although the PPP was in high demand, so processing times could vary.
• Online Application Capabilities: An online application process can be more convenient and faster.

After Your PPP Loan is Approved

Once your PPP loan application is approved, you will receive loan funds. It’s crucial to use these funds correctly and track your spending meticulously to maximize loan forgiveness.

Key Actions Post-Approval:

1. Understand Loan Terms: Review your loan documents carefully and understand the terms, interest rate, deferment period, and forgiveness guidelines.

2. Use Funds for Eligible Expenses: Ensure you use the loan proceeds for eligible expenses as defined by the PPP guidelines. Primarily, this included payroll costs, but also covered mortgage interest, rent, and utilities. Remember the requirement that a significant portion (initially guided at 75%) should be for payroll.

3. Meticulous Record-Keeping: Maintain detailed records and documentation of how you spend your PPP loan funds. This documentation will be essential when you apply for loan forgiveness. Keep invoices, receipts, bank statements, payroll records, and any other relevant documentation.

4. Prepare for Loan Forgiveness Application: After the covered period (initially 8 weeks, later extended and modified), you can apply for loan forgiveness. The forgiveness application process involves submitting documentation to your lender proving that you used the funds for eligible expenses.

5. Stay Updated on SBA Guidance: The PPP rules and guidelines were subject to updates and clarifications. Stay informed about any changes released by the SBA that might affect your loan or forgiveness process.

Conclusion

The Paycheck Protection Program was a vital lifeline for many small businesses during the COVID-19 pandemic. Understanding how to apply, gathering the right documentation, and carefully managing loan funds were critical for businesses seeking to benefit from this program. While the initial PPP application period has closed, the lessons learned and the structure of the program provide valuable insights into how small businesses can access and utilize government assistance during times of economic hardship. Always consult the official SBA website and your lender for the most up-to-date information regarding any similar future programs or resources.

Disclaimer: This guide provides general information about the Paycheck Protection Program based on publicly available information and the provided original document. The PPP was a complex program, and specific rules and guidelines may have varied and evolved. Consult with financial and legal professionals for personalized advice.