The Paycheck Protection Program: What is it and what does it do for small businesses?
Congress recently approved an additional $310 billion in funding for the Paycheck Protection Program as part of the CARES Act, the stimulus bill created in light of the economic downturn due to COVID-19. We’ve broken down the basics of the Paycheck Protection Program for small business owners, so you can understand how to navigate the program and receive funds as quickly as possible.
What is the Paycheck Protection Program?
The Paycheck Protection Program, otherwise known as the PPP, is the driving factor in the small business portion of the coronavirus stimulus package. The PPP is a forgivable loan that allows small businesses to continue paying their employees, mortgage interest, rent, and utilities, over eight weeks. It’s intended to help businesses keep their workforce employed during the COVID-19 pandemic. Businesses can receive up to $10 million, or 2.5 times their monthly payroll.
Who is eligible for PPP?
Small businesses—companies with fewer than 500 employees—can apply for PPP loans. Businesses must demonstrate that they have been negatively affected by the coronavirus. Qualified businesses include any business categorized under “accommodation or food service,” such as restaurants or hotels, with 500 or fewer employees, tribal businesses, independently owned franchises, self-employed workers, independent contractors, sole proprietors, or gig workers.
Where can you apply?
PPP loans are managed by certified Small Business Administration (SBA) lenders. You can apply for a PPP loan through approved SBA lenders or any federally insured depository institution, federally insured credit unions, and Farm Credit System institutions. Talk with your preferred lender to see if they’re participating. The SBA also has a lender search tool on their website. If you have already applied, check with your lender to verify your application status. The deadline to apply is June 30th, 2020, when the program ends, but you should apply as soon as possible. You should only apply through approved SBA lenders—many scammers are using this time of desperation as an opportunity to take advantage of people. Legitimate lenders will not ask for your Social Security number, bank account, or credit card numbers upfront.
As the SBA accepts loan applications, Georgia’s Own will process member requests in the same manner in the order they are received: please submit your contact information to [email protected]. In your email, please include the business name, type of industry and if you are business or retail type, number of employees, and contact information, such as an email address and/or telephone number.
How does PPP loan forgiveness work?
If you use the loan for anything other than payroll costs, mortgage interest, rent, and utilities throughout the loan, your loan will not be forgiven. Also, it’s only forgivable if you keep all your workers. So, if you previously laid off employees, you’ll need to rehire them. You can submit a request for loan forgiveness through your lender. The number of full-time employees and pay rates, as well as payments on the eligible mortgage, lease, and utilities will need to be verified. However, the loan carries a 1% interest rate that must be paid back within two years—payments can be deferred for six months.
For more information on loan resources for small businesses, visit sba.gov. And, to see how Georgia’s Own is helping members, small businesses, and the community during this time of need, visit our website.
What you need to know before lending (or borrowing) money from family
In the midst of a financial crunch, most people consider borrowing money from a family member to be a better option than a bank or credit union, a good friend, their 401(k) plan, or even a low- or no-interest credit card. While most people look to their family as the non-judgmental, do-anything-to-help, ideal solution to their financial dilemmas, there are pros and cons to entering into this arrangement for both the lender and the borrower.
It seems like a simple transaction
From the borrower’s perspective, the application process is simple—just ask. Other than explaining why it’s needed, there are typically no other requirements to meet, not even a credit check. Even better, family members are often generous enough to loan money for free. Most don’t charge any interest, or if they do, it’s much lower than the best rate a bank or credit union could offer.
Family members are often eager to help, but if they’re lending money, they should understand their motivation behind their offer and the risks they assume in doing so.
The details define the loan
When a family member loans money to another family member, details need to be documented, and specific expectations must be set. Conversations around money are tough and sometimes extremely awkward. Think of this as the price you pay for borrowing money from a relative.
Discussions should address the reason for the loan and whether or not the lender is expecting to be repaid. A repayment schedule should be agreed upon, including dates, amounts, and method of repayment, and steps that will be taken if the borrower defaults on the loan.
The borrower should be able to provide the plan for repaying the loan and address the possibility of missed payments. Discussions should also define any rights that are granted to the lender until the loan is repaid in full, like approving large purchases or vacation plans, reviewing a monthly budget, or monitoring bank accounts.
The more detail discussed before the loan is issued, the better chance of preserving the family relationship. Many family loans are successful, but, in order to avoid tensions, communication must be continuous, clear, and in writing. While some family members might consider this too formal, it’s for the protection of both parties.
Lenders need to protect themselves
Any time you lend money, there’s a risk that the borrower will not be able to repay the loan. While you may have every confidence that the borrower will be true to their word, lenders should consider collateral to secure the loan. In the case of default, the sale of any named asset could help recover the outstanding balance.
Speak with your attorney to discuss any additional risks that you should address in order to protect yourself. You can also ask your attorney to draft the written agreement that includes the agreed upon details of the loan and its repayment.
Tax implications to consider
In addition to ironing out the details of the loan, there are serious tax issues to consider. The transfer of large amounts of money can alert the IRS. Even without any wrongdoing, it could trigger an audit into your finances.
There are also rules that address the minimum interest rates that can be charged on personal loans and a potential gift tax that can be assessed in some cases. There may be other tax implications that you hadn’t yet considered, so be sure to talk with your tax advisor before you set an interest rate, sign any documents, or transfer any funds.