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Note: Due to funding no longer being available through the US Small Business Administration (SBA) for the Paycheck Protection Program (PPP), Revenued is no longer accepting applications.
The COVID-19 pandemic adversely affected scores of U.S. small businesses when the government ordered them to close or limit operations to slow the disease’s spread. Concerned that mass layoffs and unprecedented unemployment levels were just around the corner, Congress established the Paycheck Protection Program (PPP) to provide loans to help small businesses meet payroll expenses during the shutdown.
The Small Business Administration (SBA) is no longer accepting PPP applications; however, if it approved your small business loan prior to the Aug. 8 cutoff, you have the option of applying for loan forgiveness. Upon approval, the SBA will forgive your debt, transforming it into a no-interest grant. For these business owners, the cost could be next to nothing.
Though even if you do not apply for forgiveness or are denied, the cost is minimal. The U.S. Treasury and SBA locked loan interest at 1% — much lower than other business financing options — and they prevented lenders from charging fees to borrowers. So if you are wondering how much a PPP loan could cost your small business, the answer is that it varies. Let’s take a closer look.
The SBA established PPP rules that affect who may apply, and how to apply and how much the loan will cost your business. According to the PPP guidelines:
When you have a longer time to pay on a loan, your monthly payments are less, but the loan will end up costing you more in interest.
Since there are no fees or collateral associated with the PPP loan and the interest rate is only 1%, the cost to you and your business is negligible. The low cost of a PPP loan is especially obvious when comparing it to other avenues of financing.
If you borrow $100,000, an unforgiven PPP loan would cost you $2,562.48 in interest over five years, plus whatever accrued during your deferral period.
Other small business financing options will have rates that vary based on risk, but even the lowest is higher than the PPP’s 1% rate. Compare how much you would pay for the same $100,000 over five years with other business financing products. Interest is calculated using the lowest estimated rate for each product:
As shown, the PPP loan has the lowest cost for your business. Additionally, loan forgiveness is not generally an option for non-SBA loans. If your PPP loan is forgiven, it will cost you nothing but the time it took to fill out the application.
By spending your PPP funds on eligible business expenses, you can have your loan entirely forgiven by the SBA. Eligible expenses include:
When a PPP loan is completely forgiven, your business owes nothing. No fees, no interest, no principal. You will not even have to pay taxes on the pardoned amount.
However, suppose you spend less than 60% on payroll or use a portion of the loan for non-eligible expenditures like supplies or mortgage principal. In that instance, the SBA may only partially forgive your loan.
Thankfully, PPP loan forgiveness is not an all or nothing proposition. You can still apply for forgiveness even if you decided to use the loan in a way that did not completely meet the requirements listed above. If that happens, the SBA will forgive only a partial amount, and your company will have to pay back the remaining portion of the loan plus interest.
Let’s consider a couple of scenarios of how that decision could affect your PPP loan cost:
With a $100,000 PPP loan, the SBA mandates that you put at least $60,000 of this toward your employee salaries and associated payroll costs. But if you use $50,000 of it for payroll, and the other $50,000 for other qualified expenses, only $83,333 would be forgiven.
This number is calculated by taking the $50,000 spent on payroll and dividing it by 60%. The $83,333 is considered a grant, of which you spent 60% on payroll. The remaining $16,667 is treated as a loan, and you will have to pay it back with interest at the cost of $427.09 over five years plus any interest accrued during the deferral period.
Now let’s say you took that $100,000, and you DID spend $60,000 on payroll expenses. However, of the remaining $40,000, you only used $30,000 for eligible expenses, and $10,000 went toward other expenditures. In this scenario, $90,000 of the loan would be forgiven. You would be obligated to repay the $10,000 that was used for non-eligible purposes. The cost of interest on this loan over five years is $256.25 plus interest from the deferral period.
Although the calculations may appear confusing, the bottom line is that a PPP loan is an inexpensive way to fund your business. With no fees, 1% interest, and the potential for full or partial forgiveness, it costs much less than other financing options out there.
If you have a PPP loan and have questions about forgiveness, contact the SBA or the lender that helped with your application. To stay informed about any future SBA programs such as the next round of PPP legislation, contact Revenued today. You can call us at +1-877-662-3489 or email [email protected].
Note: Due to funding no longer being available through the US Small Business Administration (SBA) for the Paycheck Protection Program (PPP), Revenued is no longer accepting applications.
Check the links below for Paycheck Protection information and updates. Please consult with a CPA, financial advisor, or attorney before making any financial decisions.
Small Business Administration — Paycheck Protection Program
Benefits.gov — Everything You Need to Know About the Paycheck Protection Program
U.S. Department of the Treasury — CARES Act
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