Many U.S. small businesses affected by the COVID-19 pandemic received help through billions of dollars the federal government made available through loans that could be converted to grants if companies utilized the money to pay employees.
However, the deadline for the second round of that program called the Paycheck Protection Program Flexibility Act (PPPFA), ended on Aug. 8, 2020, leaving many small businesses without funding.
As the shutdown drags on and small businesses struggle to stay afloat, a new funding round will hopefully be passed by Congress. If this happens, you will want to know if your small business should use PPP loans. Let’s take a look at their potential benefits and shortcomings.
PPP Loan Lending Slows in the Second Round
Congress formed the Paycheck Protection Program (PPP) as a Coronavirus Aid, Relief, and Economic Security (CARES) Act initiative. The initial funding of $349 billion approved businesses on a first-come-first-serve basis and was depleted in 13 days. Federal lawmakers freed up another $310 billion in funds in June 2020, and loan approvals for that round went much more slowly — following the August 2020 deadline, almost $134 billion was left unused, according to an SBA report.
Experts cited several reasons for the lending approval slowdown, including lower demand, changing forms, technical difficulties, shifting SBA guidance, and some banks only extending the process exclusively to existing customers. Other business owners were discouraged by spending restrictions or felt uncertain about the program’s rules.
Determining the Pros and Cons of PPP Loans
Let’s look at the potential pros and cons of PPP loans so you can decide if it is right for your small business if and when Congress reauthorizes the program. Let’s first look at the pros:
1. PPP Loans Are Up to 100% Forgivable
One of the PPP’s central objectives is to provide money to help business owners keep workers on their payrolls. If your company follows these SBA rules for spending PPP money, you won’t have to pay back the loan:
- Debt interest — According to the PPP Flexibility Act, funds can be utilized to cover the interest on debt happening before Feb. 15, 2020. Business owners cannot use PPP money on debt incurred after that date.
- Mortgage interest — Though mortgage principal is not a permitted expense, businesses can use PPP loan benefits on mortgage interest.
- Payroll — The PPP Flexibility Act requires that at least 60% of PPP funding be used on qualified payroll costs. This covers paychecks, health insurance, employee compensation taxes, retirement benefits, paid leave, and paid employee time off.
- Leases — PPP funds can be used to pay leases on offices, manufacturing, or retail space.
- Utilities — Utility payments are required to have been made within 24 weeks after the loan was issued.
Once your loan is forgiven, there are no taxes owed on it.
2. Low PPP Loan Interest Rats
The interest rate for PPP loans is 1% per year and starts accruing when you receive the money. The interest-only applies to portions of the loan that were not forgiven by the SBA. For each $100 you borrow, the loan cost is $1 per year.
Loan repayment is deferred until you receive the approval for loan forgiveness from the SBA. Therefore, even if you are required to repay your loan, you have up to 10 months free of payments.
As noted above, the 1% interest starts accruing as soon as you receive the loan and will continue during the grace period.
3. You Can Use PPP Funding as a Short-Term, Low-Interest Loan
Even though PPP loan forgiveness rules state at least 60% of your PPP loan must go toward maintaining payroll, and 40% on business-related rent and utilities, etc., that limitation only applies to the funds for which you plan on requesting forgiveness.
The PPP still makes sense if you decide not to apply for forgiveness and pay it back at 1% interest. In this case, you can view the PPP as a low-interest, short-term business loan.
Let’s now look at the potential cons of using PPP loans:
1. A Complicated Application Process
Applying for a regular business loan can be complicated, let alone one backed by the government and its potential red tape. You may feel overwhelmed with the number of SBA-approved lenders and each of their requirements, plus the SBA’s changing guidelines — the whole application submission and approval process can make you feel like you are aiming for a moving target.
You can avoid this frustration by using Revenued to apply for the next round of PPP funding. Apply online using Revenued’s step-by-step application process, complete with a video to help you through it. And if you are still stuck, Revenued’s live customer service representatives are available to assist you.
2. PPP Loan Forgiveness Must Be Applied for and Paid Back if Not Spent Properly
You might think that a loan program created as forgivable would automatically be forgiven; however, the PPP loan does not work that way, and the next round will likely be the same.
Along with your completed PPP loan forgiveness application, you must include records detailing that you spent the money on payroll and eligible business expenses. Following submission, lenders have 60 days to let you know if your PPP loan forgiveness application was approved or denied.
3. A Borrowing Limit of Two-and-a-Half Times Your Average Monthly Payroll
The PPP loan amount covers only eight weeks of expenses, and you are limited to up to 24 weeks to spend them. You cannot extend spending beyond Dec. 31, 2020. For many small business owners, eight weeks of expenses are not worth applying for the funds and then applying for forgiveness.
Yet, for small business owners on the ropes, that is two months of revenue you don’t have to worry about. That could make or break many small businesses.
Small Businesses That Use PPP Loans Should Turn to Revenued
Sign up using our online form to stay informed about future COVID-19 relief programs, including a potential new round of PPP funding. If you decide to use future PPP loans for your small business, call Revenued today at (855) 943-5363.
For updated Paycheck Protection information, please click on the links below. Be sure to consult with an attorney, CPA, or advisor prior to making financial decisions.
U.S. Congress — PPP Bills
Benefits.gov — Everything You Need to Know About the Paycheck Protection Program
Small Business Administration — Paycheck Protection Program
U.S. Department of the Treasury — CARES Act
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