Understanding the Paycheck Protection Program for Small Businesses

The three P’s stand for Paycheck Protection Program, and it’s a program from the federal government’s Small Business Administration. The idea is that this is an unprecedented time, and as so many businesses have had to close or drastically change the way they do business, there’s been a huge problem of: Our system is not well-designed for the historically high numbers of unemployment that we’re seeing right now. As these shelter-in-place closures are lasting for weeks and now months, what do we do to get people money? PPP is Congress’s way of starting to help get money into people’s hands, in addition to unemployment and the stimulus checks that have started to go out.

The way that it works is businesses that have been impacted negatively by the COVID-19 pandemic—meaning that the loan is necessary to support their ongoing operations—can apply if they have fewer than 500 employees. There are some other requirements—some venture-backed companies are small enough to be eligible, depending on their governance. But the requirements are pretty simple, and basically if you’re a small business and you’ve been significantly impacted by the pandemic, you’re likely eligible for these loans.

The hard part is that while the loans feel like an insane amount of money—hundreds of billions of dollars—the reality is that this is such a huge crisis and the money has gone really, really fast.

Eligible businesses can qualify for loans of up to $10 million. The idea is that if you qualify for a loan and you get the loan and you use most of it to maintain payroll for eight weeks at your employees’ regular salary, the loan can be forgiven.

Seventy-five percent of that loan is expected to go to payroll. What the SBA doesn’t want to see happen is somebody taking a payroll loan and then laying people off and using the money to pay rent for a year or pay themselves for a year.

So you can spend up to 25 percent of that loan on non-payroll costs—which would include mortgage interest, rent, and utilities—and still be eligible for loan forgiveness. It’s set up that way to encourage this to be a loan that goes directly to your workers and your essential operational costs.

Your payroll costs: It’s whatever your average monthly payroll has been for the past twelve months, times two and a half.

There was a whole first round of these earlier in April, and that money went pretty quickly. Now there’s a second round of these loans to help the people who didn’t get it the first time. So if you’ve already gotten it, you won’t be getting it again. But if you haven’t gotten it, then there’s this other tranche of capital available—an additional $310 billion going into PPP. But as we saw last time, it tends to go really quickly.

You can go to sba.gov and use that website to find eligible lenders, but the best thing to do is look at the banks you already work with and reach out to them. Ask them if you’re eligible, and if they are handling these loans.

What happened with the first round of loans is a lot of people were eligible and their banks may have been doing the loans, but it was such a land rush to get in line for them that a lot of people missed out. Especially smaller businesses that don’t have in-house legal and finance teams to move them a little bit faster in the process.

The way that the government wrote the rules for these loans, it’s almost as if you have to run a race against Allyson Felix, one of the fastest women alive: We might be starting at the same time, but it’s pretty clear who’s likely to win. That happened a lot with that first tranche. This is unprecedented; it’s a totally new program that has been spun up in response to the COVID-19 crisis. A lot of the money did go to bigger businesses that had the advantage of relationships with banks. And also you just get through these things faster if you have internal experts to work on it as opposed to needing to figure it out for yourself.

There haven’t been a lot of changes to the second tranche in terms of eligibility or process—it’s not specifically only for super small businesses, unfortunately. But because the size of the loan is based on the company’s size, a lot of the first tranche went in bigger chunks because they were bigger businesses with more employees and so therefore they were eligible for more money.

The most important thing to do is to go on to sba.gov if you didn’t do it the first time, find out the requirements, and make sure you have all the documentation that you need. It’s pretty basic stuff—it was tax season, although that’s been extended—but it’s a lot of that kind of same paperwork that you have when you do your taxes. It’s just about having the documentation ready and then finding out: 1) if your bank is participating in the loan programs at all, because not all banks do, and then 2), if they’re going to take more loan applications. Some banks were so overwhelmed in the first tranche that even with the second tranche, they’re just going to focus on processing the applications that they received the first time, and they’re not going to be taking new applications. Make sure that the bank you’re working with is taking new applications.

The first tranche is 100 percent gone now—but the second, the $321 billion that was allocated for the PPP just this week, will probably last another week or two, about as long as the last one did. But the advantage of this tranche is that people know what paperwork they need, and these banks and funding entities are better set up to do it. It should be a little more orderly. People should be able to get more help. The second tranche will hopefully be able to help more individual businesses because the average loan amount is likely to be lower.

You do want to reach out to your bank and make sure they know that you still want it. Talk with them about their process. If you applied when there was still capital and you didn’t get the loan because you didn’t meet the requirements then, unless you’ve changed your business significantly, you’re not likely to be approved now.

But if the problem was just that the money was gone, you should have a better chance of getting it now. But then the question becomes: Is your bank, or whomever you submitted the paperwork with the first time, an entity that is automatically resubmitting and starting where they left off? Or do you need to proactively talk to them to make sure that you’re going to be at the front of the line when they go to submit the second tranche of loans? That is the most important thing if you did already submit. Get really clear with them. Most banks have been pretty proactive about sharing this, but make sure that you understand how they’re going to be handling the second tranche.

One thing to remember, to the earlier point about larger companies getting to the front of the line with their banks: Banks are worried about making sure that they still have customers on the other side of this, too. While those large customers might have gotten preferential treatment, raise your hand and make it clear that you’re a customer and the bank needs to value your relationship, too.

Banks don’t want to lose their big customers, but they also can’t afford to lose a ton of small customers. It’s okay to have a candid conversation with your banker and let them know that you want to bank with somebody who appreciates small businesses as well as large.

The PPP loan program allows companies who have fewer than 500 employees per location to apply for relief. That includes many large chains. While taking the loans is legal, the public backlash against some large chains that took money has led some to voluntarily return their PPP loans.

There are funding sources available that are not through the government. You can ask your bank if you’re eligible for any other loans they offer—small business loans or otherwise. Several great programs and have launched, like the one from Sara Blakely at Spanx: Her Red Backpack fund is writing grants to female entrepreneurs. Bumble is writing grants to entrepreneurs. Shea Moisture has a grant program for women of color who are founders and entrepreneurs.

And then a lot of big companies that you might be using and other parts of your business are also stepping up. Amazon, if your business is in Seattle, has a grant program; Facebook, Google, Square, Shopify, Etsy, and other big companies like that all have programs that are anything from saying, “Hey, you know, don’t worry about your monthly subscription fees with us,” or “Here are more ad credits so that you can boost sales.”

So there’s a whole range of things that are not nearly as big, obviously, as the federal government, which is uniquely large and can provide people with a lot of capital. But smaller programs can help stand in the gap at least a little bit.

I put together a list of COVID start-up and small business resources in a recent Medium post, which is one place to start.

But there are a lot of companies that are already in the business of giving loans to small businesses (or small Shopify stores or Etsy stores) that have also gotten involved with the PPP loans. Services like Fundera and On Deck—small business loans are what they do day in and day out; they’re also doing this. And a lot of those small business loan services are specifically willing to help people who don’t already use them. That’s probably the biggest difference between them and banks is that most banks, even if they’re doing the program, are doing it only for people who are already clients.