What is the Paycheck Protection Program?
Paycheck Protection Program is a business loan program worth $593 billion set up by the U.S Federal Government under the Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) in 2020 to help sustain various businesses setups without them having to lay-off their employees. This program seeks to protect both the business and the employers. It provides security to vulnerable small to medium businesses. This program does not only reach out to small business entrepreneurs but individuals and non-profit organizations as well. It also seeks to help poor tribal businesses who are not being able to pay their employees.
People could only apply for a Paycheck Protection Program loan till June 30, 2020, which later got extended to August. Only businesses in the U.S run by the residents, who have been in operation on February 15, 2020, can apply for this loan. Only small businesses receive the loan; hence it is imperative that they meet the requirements of being a small business. The business should not have more than 500 employees in the country or outside. Also, their net worth should not exceed $15 million with a net income of not more than $5 million for the last two years before the application.
More about the Paycheck Protection Program
Loans will be denied to applicants with criminal records, or household helps, or people who have passive incomes. Institutions that receive some sort of funding from the government are also denied provisions under the CARES Act. This Act is particularly to serve those businesses which have faced a huge setback due to the Corona Virus pandemic. Any company that had gone bankrupt even before the pandemic is not eligible to apply for the Paycheck Protection Program. The primary goal of the Act is to sustain those businesses which might prove profitable to the nation in the long run. The loan will keep the company running, and keep the employers on the payroll, only if they are convinced that the business will prove to be an asset to the nation, and will contribute considerably to the nation’s growth.
How to apply for Paycheck Protection Program?
Before an individual or a business applies for the Paycheck Protection Program, they must ensure that they meet the various requirements to be able to apply. The application does not cost anything. The loan issued will depend on the applicant’s payroll costs. Payroll costs comprise all sorts of payments the company is liable to make to the employees. This may include their salaries and all the allowances that the company has promised to its employees. However, the payroll does not include the social security, the Medicare tax, and the unemployment tax on the employers’ part.
A private lender receives the application directly. Federally insured banks or credit unions are some private lenders. The applicant has to submit all important documents authenticating the details in the application made. On failing to provide documents to support their financial details, the applicant remains at the mercy of the private lender in case he is convinced by the bank statements. Making false statements and documents can lead to life imprisonment. Since there are no charges for application, the Small Business Administration compensates the private lenders for the processing of the Paycheck Protection Program.
Applications for Paycheck Protection Program are approved and disbursed on a first-come, first-served basis. The Equal Credit Opportunity Act safeguards the applicants’ interests by making it necessary for the lender to take a decision regarding the application within 30 days of its making. This gives the applicant a clear understanding of where they stand with their company or individual venture.
Paycheck Protection Program Loans
If the business does not apply for loan forgiveness, they do not have to start paying the principal or interest before 10 months of the disbursement of the loan. This gives the applicants a choice to gauge for themselves how much financial load they can bear at a given point in time. The Paycheck Protection Program loans have a rate of interest of 1 percent and are guaranteed by the U.S Small Business Administration. The Paycheck Protection Program is a non-recourse loan, which means no individual is personally liable for the loan. It usually takes place against some real estate. If the borrower fails to repay the loan, the lender can seize the property and sell it to retrieve his loss.
However, if the property sells at a much lower rate than the loan, the lender cannot exert the borrower. It is a crucial clause on the lender’s part. It is up to them to remain cautious of the transactions they make.
Use of Proceeds
Paycheck Protection Program also states the use of proceeds under the following heads.
- The loan can only be used to make the payroll costs, which include all the allowances promised to the employees along with the salary. It should, however, not exceed the limit of $46,154 per employee.
- The overhead expenses on the employer’s part comprising of the social security tax, and the medical emergency funds are not included in the payroll cost and thus, not under the allowable use of funds.
- There are certain allowable uses of funds that do not fall under the payroll costs. They include paying off the interest for a mortgage the company had to make. Also, paying for other utilities like food, and electricity incurred in the name of the company.
Paycheck Protection Program had to face considerable criticism for being a confusing process altogether. It focused more on the government’s profit out of the entire deal. Instead of uplifting the business of the company or individuals. The Paycheck Protection Program has been reported to have practiced class and racial discrimination while accepting loans. The rejection of around 95% of black business owners’ applications took place. This heavily impacted the black community in the U.S. Due to lack of funding around 41% of black businesses are not in operation.
It was a looming concern if this program was designed to make a wider gap between the whites and blacks in terms of socio-economic standings. Companies without any name received many business loans. This exposed the corrupted nature of such programs. Hence, the residents did not get many benefits out of the Paycheck Protection Program.