Are Paycheck Protection Loans Guaranteed by the SBA?

SBA Guaranteed Paycheck Protection Loans

Are paycheck protection loans guaranteed by the SBA?

The quick answer is yes. Paycheck Protection Program loans are guaranteed by the Small Business Association (SBA). The Paycheck Protection Program (also referred to as “PPP” or “Program”) was established by the CARES Act (“the Act”). Over $350 billion was allocated to the PPP loan program as emergency assistance for businesses affected by the coronavirus pandemic.

However, businesses must meet certain eligibility criteria like having fewer than 500 employees.

How are Paycheck Protection Loans guaranteed?

The Act gave the Small Business Administration authority to modify existing loan programs and establish a new loan program to assist small businesses adversely impacted by COVID-19.

The Act also temporarily permits the SBA to guarantee 100% of PPP loans. It further provides loan forgiveness of up to 100% of the principal amount of qualifying, SBA-guaranteed loans under the Paycheck Protection Program.

What are the terms of a Paycheck Protection Loan?

Lenders who facilitate PPP loans must abide by the terms set out by the SBA. If you apply for a Paycheck Protection Program loan guaranteed by the SBA to help offset payroll, know that:

  • Loans must be capped at 2.5 times the borrower’s average monthly payroll costs for 2019 or the preceding twelve months, with a maximum loan amount of $10 million. (Note: Kabbage can approve PPP loans of up to $2 million)
  • No personal guarantees or collateral may be required; the SBA will guarantee 100% of the loan.
  • The interest rate will be 1%, loans will mature in two years, and there will be no prepayment penalty.
  • Interest will begin accruing immediately, but payments will not be due for the first six months of the loan.

Who can apply for a Paycheck Protection Program loan?

Most small businesses, independent contractors, and sole proprietorships can apply for a PPP loan. You can apply if you are in any of the following categories:

  • Sole proprietorships and independent contractors
  • Businesses with fewer than 500 employees including nonprofit organizations (501(c)(3)), veterans’ organizations (501(c)(19)), and tribal business concerns
  • Businesses with NAICS Code 72 with up to 500 employees per location (including restaurants, hotels, and franchises with SBA-issued codes)

For the purposes of the PPP loan, “employees” include all part-time and full-time employees—including temporary employees.

PPP loans are also available to businesses that meet the SBA’s alternative size standards as of March 27, 2020. These businesses must have a maximum tangible net worth equal to or less than $15 million and an average net income after federal income taxes equal to or less than $5 million (for each of the two fiscal years before the date of the application, excluding any carryover losses).

What documentation is required to apply for a PPP loan?

For an SBA-guaranteed Paycheck Protection Program loan, lenders will ask a borrower for the following documentation based on company structure covering the year of 2019 or the preceding twelve months.

IRS documentation needed for corporations, Professional Corporations, General Partnerships and LLCs:

  • 2019 IRS Form 940 2019 IRS Form W-3
  • 2019 IRS Form W-2 (for employees outside the US or for employees making over $100k)

IRS documentation needed for sole proprietorships, independent contractors, self-employed and single member LLCs

  • 2019 IRS Form 1040 Schedule C
  • 2019 IRS Form W-3
  • 2019 IRS Form 940
  • 2019 IRS Form W-2 (for employees making over $100k)
  • Independent contractors without employees will be asked to provide 2019 IRS Form 1099 MISC

Additional documents detailing monthly payroll expenses, organizational documents and a color copy of a government issued ID are required.

How can PPP loan funds be used?

These funds are designated to be distributed for businesses to use primarily to manage payroll costs and keep workers employed during the COVID-19 crisis. Here’s what you should know about your PPP loan funds:

  • Payroll costs include salary, employee payroll taxes, commissions, tips, vacation pay, insurance premiums, and medical, family, and paid sick leave (if not already covered under the Families First Coronavirus Response Act (FFCRA)).
  • Employees and contractors must be paid their normal working wages up to a cap of $100,000 per year. Federal tax will be withheld from payroll payments as usual.
  • PPP loan funds can also be used for non-payroll costs such as rent, utilities and mortgage interest to keep a business afloat.
  • No more than 25% of the loan total can be used to cover non-payroll costs. If non-payroll costs exceed 25% of loaned funds, the excess will not be eligible for loan forgiveness.

How does paycheck protection loan forgiveness work?

If you follow these loan forgiveness guidelines, PPP loans can be forgiven in an amount of up to 100% of the principal. For your loan to be forgiven:

  • You must spend the loan funds within the “Covered Period,” which is the eight weeks immediately after the first disbursement of loan proceeds (which must be made to you by the lender within ten days of SBA loan approval).
  • You must document the spending of your loan funds, and prove that you allocated them to payroll costs, or to mortgage obligations, rent payments, or utility payments for agreements existing before February 15, 2020.

If your non-payroll expenses account for more than 25% of the amount of the loan, the exceeding portion will not be forgiven. Loan forgiveness may also be reduced if you lowered the salary of employees making less than $100,000 annually, or if you laid-off employees and do not rehire them by June 30, 2020.

What documentation is required for PPP forgivable loans?

PPP loans are guaranteed by the Small Business Administration, which will reimburse the lender if you (borrower) qualify for loan forgiveness. The lender will determine if you are eligible. They will seek to verify:

  • The number of full-time equivalent employees on the payroll (1099 employees should not be included in this figure).
  • Pay rates based on payroll tax filings reported to the IRS as well as state income, payroll, and unemployment insurance filings
  • Payments on a covered mortgage or lease obligations and covered utility payments

Once your documentation is certified as true and correct, and any other documentation asked for by the SBA is submitted, the lender has 60 days to make a decision on loan forgiveness. Any portion not forgiven will be your responsibility to pay back under the terms of your loan.

Where should I apply for a PPP loan?

PPP loans can be obtained through an SBA approved lender. The SBA has partnered with many new lenders to make the loans more accessible. Applicants can apply directly to a lender or use an agent to apply to a lender for a PPP loan. SBA lenders and agents should not charge applicants any fees to apply for a PPP loan. Any federally insured depository institution that is not an SBA 7(a) lender may request to participate in the PPP by submitting the CARES Act Section 1102 Lender Agreement (SBA Form 3506) to the SBA. If your bank isn’t an SBA lender or eligible, Kabbage offers an application for Paycheck Protection Program loans even if you are not an existing Kabbage customer.

Are you ready to apply for an SBA-guaranteed Paycheck Protection loan? Start your PPP loan application by applying now.

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