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The Paycheck Protection Plan (PPP) Explained by a Fellow Small Business Owner

Updated: Oct 5, 2020

Update as of April 1, 2020: The Treasury posted the Paycheck Protection Program (PPP) Information Sheet along with the draft application.

The updated clarification provides 2 changes to initial guidance:

  1. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven PPP loan amount may be for non-payroll costs. This did not impact our example below but should be considered when sizing your loan.

  2. The maximum term for the balance of the PPP loan is 2 years (vs up to 10 years as originally contemplated) and the interest rate is ½% vs the up to 4% as originally reported. The amortization in our example has been updated accordingly.

Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.

Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.

What is the Paycheck Protection Program (PPP) and how does it benefit small businesses?

By now you have probably heard of the CARES Act that was signed into law. You are probably asking “what does this all mean for me, the small business owner?”

Importantly the legislation includes a new loan program – the Paycheck Protection Program (PPP) administered through the SBA – that provides up to $349 billion in loans to eligible entities, with such loans being subject to forgiveness under certain circumstances.

I have read the Paycheck Protection Program and a bunch of thought leadership pieces. They are informative but fall short of answering three fundamental questions (below) for me and my fellow 30 million small business owners across the US:

  1. Is my business eligible?

  2. If so, for how much?

  3. How much of the loan is forgivable and under what circumstances?

Is my business eligible?

Can you make a good faith certification that:

  1. You are a small business, nonprofit or veteran’s organization that employs less than 500 people at a single location

  2. The uncertainty of current economic conditions makes necessary the loan request to support your ongoing operations; and

  3. The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments

If so, for how much?

You are eligible for 2.5 times your average monthly payroll up to $10,000,000.

The average is computed based on payroll costs for the trailing 12 months beginning on April 1, 2019.

Computing Your Average Monthly Eligible Costs

I am more of a case study kind of guy. Let’s walk through one.

Let’s say you have 4 employees and your payroll including the salaries of your employees, vacation benefit, healthcare, retirement benefits and state and local taxes varies between $10,000-$12,000 a month.

To determine your average monthly eligible costs simply add the payroll costs from April 2019 to March 2020. In our example, our annual total is $132,000. Divide this by 12 months and receive an average monthly cost of $11,000

Calculating Maximum Loan Amount

Now that we have determined that our average monthly eligible expenses are $11,000 we can determine our maximum loan amount. We are eligible for a maximum loan amount of 2.5 times our average monthly eligible expenses of $11,000 or $11,000 x 2.5 = $27,500.

Employees Making Over $100,000 Per Year

While not relevant for our example above, the definition of payroll costs caps salary at $100,000 per employee or a maximum of $8,333 of associated payroll costs per month for employees making over $100,000. In our example, if you had 1 additional employee making $150,000 a year the additional monthly eligible payroll costs would increase by a maximum of $8,333 and your maximum loan amount would increase to $48,333.

Sources of Info

As a small business owner who is pulled in a million different directions you might not have your average monthly cost for salaries at the tip of your tongue.

There are likely 3 easy places to find this information. An export from your Quickbooks, an export from your payroll provider or a review of your monthly bank statements that can be accessed online.

In Quickbooks you can access this info from the Reports section/ Profit & Loss. There is also a great feature that lets you search/filter expense by date range:

How much of the loan is forgivable and under what circumstances?

How much of the loan is forgivable?

A business owner is eligible for loan forgiveness for 8 weeks of payroll. The max loan sizing is equal to 2.5 times our average total monthly payroll costs or approximately 10 weeks of payroll. Rent and utility expenses are also forgivable expenses under the PPP and if there is a left-over balance after paying payroll are good forgivable options for using the balance of the PPP funds.

Update as of April 1, 2020: Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.

In our example we secured a PPP loan of $27,500 (2.5 times the average monthly total of our trailing 12 payroll). Let’s say our payroll for April ’20 is $12,000 and May ’20 is $10,000 for a total of $22,000.

Our loan PPP loan amount is $27,500 and our monthly payroll for our eligible 8-week period of April and May is $22,000. The $27,500 PPP loan - $22,000 of April and May payroll leaves us with an additional $5,500 of forgivable PPP funds that can be put towards rent and utility costs.

Rent for April and May is $1,500 per month (total of $3,000) and Utility Costs are $500 per month (total of $1,000). Our total eligible monthly PPP expenditures are $22,000 in payroll + $3,000 in rent + $1,000 in utilities or $26,000. Our initial loan amount was $27,500 and we incurred $26,000 of eligible PPP expenses over the 8-week period. Our balance of PPP funds is $1,500.

While $26,000 of our $27,500 will be deemed forgivable (more detail below), we are carrying a balance on our PPP loan of $1,500.

The $1,500 balance will carry a maximum maturity date of 2 years from the date on which we asked for payment forgiveness (June 1st in our example) and carry an interest rate of 1%. Sample payment terms below.

I don’t want to carry a Balance on my PPP Loan.

If you do not want to carry a balance on the PPP loan an option is to cap your loan request at less than 2.5 times payroll. If your payroll, utilities and rent are fixed and/or predictable you can simply request a loan amount of 2 times versus the 2.5 allowable. In our example, you would request a total amount of $26,000 to zero out your loan.

Forgivable Under What Circumstances?

In our example we have a full-time workforce of 4 and we kept them employed from the time we took out the loan until June 30th 2020. In this case $26,000 of the $27,500 loan is forgiven.

If your workforce is kept intact and the loan is used for a maximum of 8 weeks of payroll, rent, and utilities the loan will be forgiven provided you submit application to the lender that originated the loan that includes:

  1. documentation substantiating the number of full-time equivalent employees on payroll and pay rates for applicable periods (including payroll tax filings; state income, payroll, and unemployment insurance filings);

  2. documentation substantiating payments on covered mortgage obligations, lease obligations and utilities (such as cancelled checks, payment receipts, and transcripts of accounts); and

  3. a representative’s certification.

What if I don’t keep my full-time workforce employed or reduce their salaries

The amount of forgiveness decreases if we decrease the size of our full-time workforce or if we reduce any employee’s salary by more than 25%.

Reduction in Workforce

We reduce our workforce of 4 employees to 3 employees prior to obtaining the loan. This will impact our maximum forgiveness amount but does not have a bearing on our loan amount. The formula is:

Eligible Payroll Cost x Full Time Employees at time of the loan / Full Time Employees from 1/15/19-6/30/19 or FTEs from 1/1/20-2/29/20 (owners option on time period).

In our example, we had $27,500 of eligible payroll expenses x 3 (employed at time of loan origination / 4 employees (employed Jan 1, 2020-Feb 29,2020) = $20,625 of forgivable expenses. Although only $20,625 of our $27,500 is forgivable we can still put the left over $6,875 towards rent and utilities. It will then roll into a 10 year note with a maximum interest rate of 4%

Salary Reduction of more than 25%

The maximum forgiveness amount will be reduced dollar-for-dollar for any wage or salary reduction of an employee in excess of 25%, measured against the wage and salary for such employee during the most recent full quarter prior to loan origination. However, employees paid more than $100,000 in 2019 are not subject to the 25% limitation on salary decreases described above.

In our example, we have 4 full time employees and an average monthly payroll of $2,750 (total of $11,000 per month) or $8,250 per quarter per employee for a total of $33,000. If we reduce everyone’s pay by 40%, the first 25% reduction or $2,062.50 per employee per quarter does not impact loan forgiveness. The next 15% or $1,237.50 per employee per quarter reduces loan forgiveness dollar for dollar. In this case we have $1,237.50 per employee per quarter x 4 employees = $4,950 of impacted loan forgiveness.

Going back to our previous example we had $26,000 of maximum loan forgiveness.If we reduced all 4

The Fine Print

Fees — SBA will not collect any fees on loans issued under the Paycheck Protection Program.

Deferment — All loan payments (principal, interest and fees) are deferred for at least six months, and up to one year.

Prepayment — Loans will not have any prepayment penalties.

Nonrecourse — Loans are to be nonrecourse, except to the extent the loan proceeds are used for a purpose other than borrower’s payroll, mortgage interest, rent and/or utilities expenses.

Collateral/Personal Guarantee — A borrower (and its stakeholders) will not need to provide any collateral or personal guarantee through June 30, 2020. Borrowers should review lender-provided loan documents to confirm the collateral and personal guarantee terms of their Paycheck Protection Loan beyond June 30, 2020.

Next Steps:

Hopefully this article helps you determine if your business is eligible for the Protection Payment Plan for how much and under what circumstances the loan is forgivable. If you are interested in pursuing the loan I would:

1. Fire up your QuickBooks and compute

a. your average monthly payroll expenses for the trailing 12 months

b. compute rent and utility as there are eligible expenses

c. Average # of FTE’s per month Feb 15, 2019-June 30, 2019 or Jan 1, 2020-Feb 29, 2020

2. Contact your banker/local bank to see if they participate in the SBA 7(a) program. You can also visit SBA to see the 100 most active SBA 7(a) lenders.

MD Energy Advisors demystifies energy through education, and can help commercial real estate clients increase asset value by anticipating and solving their energy problems. Learn more at or call us at 410.779.9644.

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