Over the weekend, the Small Business Administration announced that $175 billion of the second round of funding for Paycheck Protection Program (PPP) has already been given out. That means that less than $135 billion of the $310 billion authorized for the program by the latest stimulus bill remains.

Originally created by the CARES Act, PPP loans are a much needed lifeline for small businesses. The loans can be for 2.5 times payroll costs, up to $10 million, and feature a streamlined application process and fewer requirements. Most significantly, PPP loans can be forgiven, fully or in part, depending on if borrowers maintain head counts and payrolls at pre-pandemic levels and use their loan for permitted expenses.

The Small Business Administration (SBA) classifies PPP loans as 7(a) loans. If you are interested in applying for one, read on to understand what is required, how much you can borrow (use our PPP calculator, below), how forgiveness works and other key details. You should also research other business relief options. If you’re feeling overwhelmed, now may be a good time to consult a financial advisor.

Who Qualifies for a PPP Loan?

Any small business with 500 or fewer employees may be eligible. This includes small businesses, S corporations, C corporations, LLCs, private nonprofits, faith-based organizations, tribal groups and veteran groups. Self-employed individuals who file an IRS Schedule C with their Form 1040, such as independent contractors and sole proprietors, are also eligible. (Partners who report self-employment income, however, are not eligible as self-employed individuals.)

Restaurants and hospitality businesses may qualify if they have 500 or fewer employees per location. Details on the size standards and exceptions are on the SBA website.

Ineligible businesses include those engaged in illegal activities, owners more than 60 days delinquent on child support obligations, farms and ranches, sex businesses, lobbyists and gambling establishments. Also, in response to the outcry over public companies receiving PPP loans when most mom-and-pops, who really need the government help, didn’t, the Treasury has ruled that hedge funds, private equity firms and most public companies with substantial market values are ineligible for PPP loans. Also, the program is closed to companies that are involved in bankruptcy proceedings.

Do Venture Capital-Backed Startups Qualify for a PPP Loan?

Startups, by definition, tend to have far fewer than 500 employees. But in the existing framework of the SBA’s 7(a) program, startups backed by venture capital firms may be required, in their application for a PPP loan, to count both their own employees and those of the VC firm and its other portfolio companies. That could push the employee count of the startup’s PPP loan application over 500 – effectively disqualifying it. As a general rule, though, such “affiliation rules” only apply if the VC firm owns more than 50% of the startup or if it exerts operational control over the startup.

But what if several VC firms own a combined 50% or more of the startup? Would that count as an affiliation? The SBA has generally ruled no: several VC firms owning a majority of a startup’s equity does not make the startup their affiliate. You can read the April 3 guidance.

That said, the SBA has subsequently issued new guidance intended to close the PPP program to companies that can raise capital. It specifically rules out most publicly traded companies, but it also emphasizes that borrowers must certify that they need the loan to stay afloat. If funding from your backers is an option, you may be ineligible for a PPP loan.

Terms of a PPP Loan

The government’s efforts to help businesses have resulted in generous terms for PPP loans. Borrowers can receive two and a half times their average monthly payroll costs (excluding compensation in excess of $100,000 per employee) incurred 12 months before the date the loan is made (some lenders are simply using 2019 numbers). For example, if your monthly average payroll (excluding compensation in excess of $100,000 salaries) in the last 12 months is $10,000, you may borrow up to $25,000. Additionally, you can include as payroll costs: payment for vacation, parental, family, medical and sick leave (that is not covered by another emergency loan/grant); payment for dismissal or separation; payment for group health care coverage, including insurance premiums; payment for retirement benefits and payment of state and local taxes assessed on employees’ compensation.

Also, you can add to your total loan amount the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less any “advance” that is forgivable under an EIDL COVID-19 loan.

The maximum any business can borrow is $10 million. This calculator gives a snapshot of what you can borrow:

The money can be used for payroll (no more than $100,000 annual salary per employee) as well as benefits (including paid sick leave and insurance premiums) and taxes on compensation. Up to 25% of the loan may be used to cover mortgage interest, rent, utilities and interest on pre-existing loans.

The covered expenses have to be incurred from Feb. 15, 2020 through June 30, 2020. Businesses have to have been operating by Feb. 15, 2020.

Any portion of the loan that is not forgiven will carry an interest rate of 1.0% and is due to be paid back within two years. However, payments are deferred for the first six months. There’s no pre-payment penalty.

PPP Loan Forgiveness

Borrowers will have their loans forgiven if they use the money for designated expenses. Participants are eligible for loan forgiveness for the amounts spent on authorized expenses over the eight weeks after receiving the loan.

Total payments for payroll over the eight weeks after the loan is disbursed may be forgivable. Mortgage interest, rent and utilities are also forgivable, up to 25% of the PPP loan. (Note that if your loan is forgiven, theses expenses covered by the loan are not tax-deductible, the IRS recently stated in Notice 2020-32.)

To get the entire amount of the loan forgiven (assuming that at least 75% is spent on payroll and the rest on permitted expenses), you must meet two criteria. First, the full-time employee head count cannot decline from average monthly levels during 2019 or during the past 12 months. If your business launched in the second half of 2019, you can use average head counts from January 1, 2020 to February 29, 2020. If your business is seasonal, you can base your monthly averages on numbers from February 15, 2019 or March 1, 2019 to June 30, 2019.

Second, for loans to become full grants, employers cannot cut salaries or wages. If they do, the forgiven amount will be reduced. Employers who already let workers go (between February 15 and April 26, 2020) have until June 30 to restaff.

The SBA has yet to issue guidance on how a smaller staff or payroll will reduce the amount eligible for forgiveness. Accounting firms and law firms are offering different interpretations online. We will add this information to this article as soon as the SBA releases it.

Another provision of the program allows borrowers who already have disaster assistance loans to defer payments through Dec. 31. This is an automatic deferment. Borrowers don’t have to do anything to qualify for it.

The SBA has a summary of loan terms here.

Is a PPP Loan Right for You?

Initially, most business owners probably think that of course they’ll apply for a PPP loan. It’s free money if you qualify for forgiveness, after all. But after more consideration, some have decided to pass.

One reason is the fact that the loan provides funds to cover payroll for only eight weeks. So business owners who think it will take longer than that for their revenues to return may not see the point in borrowing the money to make payroll for eight weeks only then to let people go. This is especially the case if most of their workers are minimum wage or close to it, since the CARES Act that created the PPP also authorized a $600-per-week boost to unemployment benefits. So minimum wage workers and other low-wage workers would get more money unemployed ($600 per week, plus the regular amount allowed by the state program) than employed.

Also, the lack of clarity, especially when it comes to forgiveness, is giving many businesspeople pause. The legislation was written so quickly and the program launched so hastily that the guidelines are riddled with holes. For example, SBA guidelines say you can spend up to 25% of the loan on non-payroll costs. But what if you spend more? It’s not clear if that would disqualify all forgiveness of the loan or only a percentage of it. Another example: the SBA just announced that it will audit any loans greater than $2 million and possibly others when reviewing applications for forgiveness. Presumably, it will be checking to see that public companies and other businesses that have access to financing actually needed the loans, which is an interpretation of the rules that came out about three weeks after the loan program opened. (Borrowers who are rethinking their loans have until May 7 to return the money penalty-free.)

Hopefully, with the next major stimulus package, Congress will elucidate the terms of forgiveness – and clarify other confusing things about the program (e.g., the law does not mention the 25% cap for non-payroll costs). When that legislation passes, more business owners may decide that a PPP loan does make sense for them – or not. Keep checking this article for updates; we will add them as new guidance comes out.

When and How to Apply

To increase your likelihood of getting money in the new round of funding, you should line up a bank and submit your application right away. The program ends June 30, but it is first-come, first-served, and the new round of money is expected to go as fast as the first round – if not faster.

Borrowers can apply to any SBA-approved lender, including participating commercial banks and credit unions. A list of approved lenders can be found on the SBA website. Note that many lenders are limiting eligibility to those businesses with whom they have a pre-existing relationship, such as previous loans or a business checking account. Check out our list of participating banks and their requirements (we will continually update it).

The new bill sets aside $30 billion for lending by midsize insured depository institutions and state and federal credit unions (all with $10 billion to $50 billion in consolidated assets). Another $30 billion will be set aside for lending by small banks and credit unions (with less than $10 billion in consolidated assets) and community financial institutions (e.g., minority depository institutions and SBA-certified development companies). The idea behind these measures is to help ensure that more rural, minority-owned and women-owned businesses get loans this round.

The program also provides for waivers that would normally be applied to SBA loans. Those include waivers for fees charged to borrowers and lenders, as well as prepayment fees. A requirement that borrowers also have credit elsewhere is likewise being waived for this program. There are no requirements for collateral or personal guarantees.

Business owners must submit applications to a participating lender, who in turn sends them to the SBA for approval. The SBA evaluates them the same day they are received.

You must submit your loan application to a lender, but you can find a sample application at the SBA website. The SBA estimates the application process should take about two hours and 10 minutes. However, this is assuming all required documents are available. It may take a few days to gather the necessary paperwork. Additionally, due to the high volume of applications, lenders are struggling to process applications in a timely manner. Indeed, many banks are asking for customer patience on their websites.

The Bottom Line

The Payroll Protection Program provides a total $659 billion ($349 billion initially plus a $310 billion infusion) – to small businesses and independent contractors who maintain payrolls and head counts during the COVID-19 crisis. The lending program uses a streamlined, low-documentation process and does not require collateral. And, if qualifying employers don’t lay off employees or cut wages, the loans can be forgiven, effectively making them full or partial grants, depending on how borrowers put the proceeds to use.

The PPP loan program is one of many government programs to help small businesses. And private initiatives, such as Facebook grants, are also available.

Tips for Business Owners During the Coronavirus Crisis

• Many financial advisors specialize in working with business owners. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
• In addition to the new PPP loan, the SBA also has other loan programs to help small businesses, including Economic Injury Disaster Loans (EIDLs).

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