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.
PPP Guidelines Related to Cost
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:
- The government and the SBA-approved lender cannot charge you fees.
- No collateral or personal guarantees are needed, so the loan will not cost you valuable assets or private funds if you cannot pay it back.
- The interest rate is 1% per year on any unforgiven portion, which begins to accrue when you receive the money. This means for every $100 you borrow, your cost is essentially $1 per year.
- For unforgiven loans issued:
- Before June 5 — You have two years to pay it back.
- After June 5 — You have five years to pay it back.
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.
- Your payments are deferred for the first six months, and then you have 10 months to apply for forgiveness. If your forgiveness application is denied or you fail to submit it in the allotted time, you must start paying the loan back with interest.
What the Loan Could Cost You
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:
- Traditional bank loan (4%) — $10,499.13
- Other SBA 7(a) loan (6.3%) — $16,835.63
- Online term loan (7%) — $18,807.19
- Line of credit (8%) — $21,658.37
- Business credit cards (13%) — $36,518.44
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.
If Your PPP Loan Is Forgiven
By spending your PPP funds on eligible business expenses, you can have your loan entirely forgiven by the SBA. Eligible expenses include:
- Payroll (at least 60 % of your total expenditures)
- Mortgage interest
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.
Partial PPP Loan Forgiveness
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:
Less Than 60% to Payroll
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.
Contact Revenued to Learn About the Next PPP Funding Round
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 (855) 943-5363 or fill out our contact form here on this website.
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
U.S. Congress — PPP Bills
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