Understanding the Paycheck Protection Program for Small Businesses

Last week I wrote some thoughts about how the federal government should address the economic crisis caused by the COVID-19 pandemic, with a focus on rescuing small businesses. At the time the CARES act, the third and almost certainly not final federal stimulus package, was still being finalized. Now the details of the small business rescue component of the bill, called the Paycheck Protection Program (PPP), have become public. Two of my colleagues in the Economics department at MSU, Carly Urban and Christiana Stoddard, have written a helpful primer on navigating the PPP for eligible small business owners. This will likely appear in Montana newspapers soon, but they have given me permission to post it on ageconmt.com, which I have done below.

Also, this link provides a list of SBA participating lenders where Montana business owners may apply for a PPP loan.

Please let us know in the comments or on twitter if you still have any unanswered questions about the PPP!

Understanding the Paycheck Protection Program for Small Businesses, by Carly Urban and Christiana Stoddard.

Small business are unquestionably hurting right now, as are many of their laid-off employees. In Montana, the week ending in March 21, 2020 saw 14,704 unemployment claims. For perspective, the highest weekly total during the Great Recession was 3,837. To try to help small businesses and their employees, Congress passed the Paycheck Protection Program (PPP) as part of the big Coronavirus relief bill (the CARES Act).

In a nutshell, businesses and non-profits with less than 500 employees can take out federal loans to cover 8 weeks of expenses.  These loans will then be forgiven as long as the business retains employees (or restores employees fired after February 15) during the covered 8-week period.   This makes the loan essentially a non-taxable grant to help during this time of tremendous economic upheaval.

But with all of the changes in unemployment insurance and other policies, what should a small business do right now?  What’s the best way to keep a business viable and protect employees?  Here is a quick primer to help business owners with some of the most pressing questions about this program.

(Note that this is a general overview and is NOT intended as a substitute for advice from a qualified accountant.  The ultimate arbitrator appears to be the bank from which you took out your loan.)

First, how much can I borrow?

Take the year prior to the date on which the loan is made.  What was the average monthly expenditure on payroll (with individual compensation capped at $100,000)?  Multiply that by 2.5.  You can borrow that amount up to $10,000,000 to use during the “covered period”—the 8 weeks after the loan origination date.

How much of that loan will be forgiven?

Potentially, all of the principal of the loan. To reach that level of forgiveness, there are 2 big conditions: use the funds for permitted expenses and don’t cut payroll.

What’s a permitted expense? Payroll (including commissions, vacation and leave payments, and insurance premiums), mortgage interest payments, rent or lease payments, and utilities.    Payroll is also more than employee wages and benefits—it also includes the income of sole proprietors and independent contractors.

The point of this program is “paycheck protection.” Forgiveness amounts will be reduced in proportion to the fall in the average number of employees during the covered period or if wages fall by more than 25%.  There are some variations on how to calculate the comparison period in determining whether or not employment fell (e.g., compare to the prior year, January and Febuary 2020, seasonal employers can use the relevant 12-week period from the previous year).

If the loan isn’t forgiven, the interest rate is a mere 0.5% with a maturity of 2 years.

Does it make more sense to use this program or to lay off workers who are eligible for unemployment benefits?

Businesses that use this program must retain employees for the eight weeks of the covered period.  That is what allows access to the funds to also cover rent, utilities, and mortgage interest. After the 8-week period, business owners can evaluate changes to policy and to the economy and re-calibrate.

Whether or not staying on the job or taking unemployment benefits is better for an employee in the short run will vary. Weekly unemployment benefits in Montana are roughly 1% of annual earnings up to a benefit of $487 per week. Unemployed individuals now get an additional $600 a week of unemployment through the CARES Act, regardless of income. This could be more than what an employee was making before. However, given that workers in Bozeman often juggle several jobs at once, it’s not clear how eligibility will shake out for your worker if they combine jobs. They could get nothing in unemployment benefits if that is the case.

What if I fired employees who are applying for unemployment benefits?  Do I need to rehire them immediately?  Or can I wait until my loan is approved?

As long as they are on payroll during the covered period, you can wait to rehire.  This makes the most sense if workers need money for bills immediately and a business owner needs some time to apply.

When and how can I get a PPP small business loan?

Beginning April 3, 2020, you can apply through any bank or credit union.  A sample form of what will be asked of you can be found here. Technically, you can wait until June 20^th to apply, but the CARES act only stipulates $349 billion for this program. Funding may run out relatively quickly.

What about other programs?

There are other options to consider, such as the Small Business Administration’s disaster loans. While technically you can apply for this and the PPP, you can’t use them for the same purposes and the interactions are complicated.  Other options, such as asking a lender for deferrals on loan payments, are easily combined with the PPP.

There is a lot of uncertainty and each small business owner must make decisions that will help keep doors open in the future.