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On Friday, March 27th, Congress passed the CARES Act, which is the big stimulus bill in response to COVID-19. Part of the stimulus plan includes the Paycheck Protection Program (PPP), which provides funding for Small Business Administration (SBA) loans that can actually be forgiven.
The Paycheck Protection Program provides free money for your business from the government as an incentive for you to keep people employed.
Any business under 500 employees is eligible for the PPP. Nonprofits with fewer than 500 employees and sole proprietors/independent contractors are also eligible, so if you are a freelancer you could qualify for this type of loan. There are even some exceptions for certain types of businesses that have over 500 employees.
To receive a PPP loan, you apply directly with a bank or a lender that is SBA approved.
They are not taking collateral, they do not require a personal guarantee, and, unlike some other SBA loans, you don't have to show that you have sought and been unable to obtain credit elsewhere.
If you meet the criteria for forgiving the loans, the government will pay the lender for you. Because the loans are backed by the government, we expect some of the underwriting qualifications to be relaxed - meaning that it should be easier to qualify for this loan than it is for a typical SBA loan, by far.
Also, keep in mind that if you are receiving tax credits for your payroll (which is also provided for under the CARES Act), you can't do both the tax credit and this loan.
So how do you qualify for that forgiveness? Well, it's pretty simple. You have to keep the same number of workers employed at roughly the same wages. And if you can do that for the next few months, the government will pay the loan back for you.
As the bill is written, you can get up to 2.5 times your average monthly payroll. So, if on average you pay your team $20,000 a month, the amount for you would be $20,000 times 2.5, which is $50,000.
The loan doesn’t just have to be used for payroll. You can also use the money for your rent or your mortgage, utilities… Up to 25% of the loan can be used for those other essential costs for your business.
Now, the big question on everybody's mind, is "how much of the loan will be forgiven?"
The answer: 100% off it (as long as you meet certain conditions).
We did another video on SBA Economic Injury Disaster Loans (aka Disaster Assistance Loans). Those loans offer low-interest rates, but you are required to pay them back. The PPP loan does not need to be paid back as long as you can show, over the next eight weeks after receiving the loan, that you kept everyone on the payroll at the same wages.
Additionally, payments will be deferred for six months, so you don’t have to pay them off in the meantime.
The government has directed banks that they can start accepting applications for this type of loan as soon as Friday, April 3rd.
Now, whether that will actually happen is unknown. There are a lot of specific rules that the banks are looking for from the government and there will be a huge demand from banks so we don't know how quickly these will process.
The government wants banks to process them with all due haste and they want it to be a matter of weeks. Banks are not sure if they will be able to actually accomplish that goal. But the idea is to get money in small business owners' pockets or freelancers' pockets by the time the next payroll period comes around at the end of April/beginning of May.
You apply to these loans directly through a bank or other approved SBA lender. For more information, go straight to the SBA.gov website.
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