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Paycheck Protection Plan Forgiveness Terms to Help Businesses


Are you looking for ways to pay your employees during the COVID-19 pandemic? Did you know that small businesses in the United States are receiving $659 billion worth of financial aid?

Since the beginning of May 2020, more than two million loans have already been handed out. The credit terms for these loans are incredibly affordable. Some of the loans will even be eligible for complete forgiveness.

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What is the Paycheck Protection Plan?

The Paycheck Protection Plan was one of several acts passed into law to help small businesses combat the negative impacts of COVID-19. It was included in the Coronavirus Aid Relief & Economic Security Act (CARES Act), which went into effect in March 2020.

The initial act allowed $349 billion to be used for the PPP. After those funds were used up, an additional $310 billion was added to the program.

During the second round of funding, more than 2.4 million loans were approved for small businesses across the United States. Some of these loans will be fully forgiven when used for essential overhead, like payroll, rent, and utilities. If the loan payments aren’t fully forgiven, initial payments won’t need to be paid for six months.

While loans can be made in increments of up to $10 million, the U.S. Treasury has stated that loans over $2 million will be under strict review to ensure an authentic allocation of funds. Also, a PPP loan cannot exceed 2.5 times the debtor’s average monthly payroll, which is calculated based on the monthly average throughout 2019.

PPP loans are administered on a first-come-first-served basis. The federal government or lenders will not charge fees on these loans.

Who Qualifies for the Paycheck Protection Program?

The Paycheck Protection Program was created to help businesses with fewer than 500 employees. It includes the following types of businesses:

  • Sole Proprietors
  • The Self-Employed
  • Private Non-Profits
  • Some Veteran Organizations
  • Independent Contractors
  • Small businesses with under 500 employees

In addition to the above, you need to have been in business before February 15, 2020. You’ll also need to verify that you’re experiencing financial uncertainty due to the current economic lockdowns in place for COVID-19.

If you receive a PPP loan, you will not be able to receive a second loan under the same program.

It’s also worth noting that certain business models are not eligible for the loan. Some of the ineligible business models include:

  • Passive businesses
  • Political lobbyists
  • Gambling businesses
  • Household employers
  • Investment companies
  • Marijuana businesses
  • Others

What are the terms for the Paycheck Protection Program?

The PPP loan might be fully forgiven if you meet the criteria and allocate assets properly.

All your employees need to be on your payroll for eight weeks. Within that time frame, 75% of the PPP loan needs to be used for payroll. Aside from payroll, the loan can only be used for mortgage payments, rent fees, and utilities.

If you’re unable to meet these requirements, there are still attractive credit terms for PPP loans. As previously stated, an initial loan payment isn’t due for six months, and you have two years to pay everything off.

Imagine you maintain almost all the requirements for your loan to be fully forgiven. In this situation, most of your PPP loan will be forgiven. The more you spend on overhead costs outside of the ones listed above, the more you’ll have to pay back before the two-year deadline.

Regardless of how much is forgiven, the loan can only be used for salaries up to $100,000, vacation time, medical leave, retirement costs, cash tips, state taxes, and health care benefits.

You won’t be able to use the loan to pay:

  • Income or payroll taxes
  • Employees outside the U.S.
  • Independent contractors
  • Any salary that exceeds $100,000
  • Shareholder distributions
  • Family Medical Leave (FML) pay that’s covered by the Families First Coronavirus Response Act

What documents are needed for the Paycheck Protection Program?

You’ll need to prepare a few documents before you apply for a PPP loan on the U.S. Treasury website.

The main information you’ll need to verify is for your average monthly payroll costs. This includes the following information:

  • Salaries
  • State Payroll Taxes
  • Retirement Plans
  • Insurance Premiums
  • Net profit for the self-employed
  • Possibly more information (depending on your lender)

You’ll also need to fill out some basic information about your business like your mailing address, information about owners with at least 20% stake, and how the money will be used.

Once you’ve gathered this information, you can take it to a lender approved by the Small Business Association (SBA) that you’ve worked with in the past.

When can I apply for a PPP loan?

Applications for a PPP loan are currently being accepted.

Remember, funds are allotted on a first-come-first-served basis. Make sure to get your documents gathered as soon as possible so you can apply right away.

The deadline for your PPP loan application is June 30, 2020.

What If a PPP Loan Isn’t Enough?

If you’re restructuring your business strategy to survive the COVID-19 pandemic, then a PPP loan might be exactly what your business needs to stave off bankruptcy.

However, it’s worth mentioning that there’s nothing in the CARES Act that would prevent you from filing for bankruptcy after being awarded a PPP loan. After your bankruptcy, the SBA would simply be left with an unsecured loan.

The Small Business Reorganization Act (SBRA) added Subchapter V to Chapter 11 of the Bankruptcy Code. Subchapter V includes substantial changes that benefit small business owners. The terms of this option include:

  • Retain the ownership of your business: Unlike traditional chapter 11, Subchapter V allows you to keep your business as long as you commit all of your company’s projected “disposable income” to paying creditors via a 3- to 5-year payment plan. Once this plan is complete, the remainder of your debt will be discharged.
  • Streamlined relief: Before the SBRA, Chapter 11 cases required a disclosure statement and plan. Subchapter V forgoes the disclosure requirement and saves substantial time and expenses. The process can now be completed in months rather than years.
    Your payment plan also no longer requires the support of creditors if it meets the other requirements for confirmation under the Bankruptcy Code.  As previously, at least one of your creditors had to approve your plan, this change removes a substantial impediment to plan confirmation.
  • Lower upfront costs: With a Chapter 11 Bankruptcy under Subchapter V, you can pay administrative expenses over the life of your payment plan rather than at plan confirmation.  
  • Put a stop to collection efforts: Once you file for Chapter 11, creditors will be unable to collect payments. This buys you time to renegotiate your credit terms, which makes it easier to survive the damage caused by the global economic lockdowns.

Considering bankruptcy? You should always consult with a lawyer before taking action. Every attorney at The Pope Firm is an expert at filing for business bankruptcy in East Tennessee. We identify the best course of action for small business owners and walk you through your options. Contact us today to find the support you need.

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