The Definitive Guide to Loans After PPP

When the Small Business Administration launched the Paycheck Protection Program (PPP) as part of the CARES Act in April of 2020 in response to the COVID-19 pandemic, the (PPP) was seen as a bottomless source of funding to help small businesses avoid economic disaster.

Small businesses throughout the nation were scrambling to figure out what is a PPP loan for small businesses and how to apply for a PPP loan. So, exactly, what is a PPP loan for small businesses? And how many small businesses received PPP loans?

From April 3, 2020, through May 31, 2021, the Paycheck Protection Program authorized approximately $800 billion in low-interest, noncollateralized loans for businesses – both large and small – that were negatively impacted by COVID-19. The interest rate for PPP loans was one percent, which helped to keep the monthly payment affordable for small businesses.

As of June 30, 2021, more than 11.8 million PPP loans were issued. Of that number, 708 loan recipients received the maximum amount of $10 million. The fact that many of these loans qualified for forgiveness only added to the rush of businesses looking to learn how to get a PPP loan. PPP loan forgiveness turned most PPP loans into grants. As of May 2022, 89% of the total value of PPP loans had been forgiven.

Can Small Businesses Get a Second PPP Loan?

The popularity of the PPP has some small business owners still wondering, “Are small business PPP loans still available?”  and “Can my small business get a PPP loan?”  The answer to both questions is no. The first round of the PPP ran from April 3, 2020, through April 16, 2020. Second loans were available during the second round of the PPP, which occurred in May of 2021, and the program closed for good on May 31, 2021.

While other forms of small business loans remain available – including the popular 7(a) loans from the SBA – we are unlikely to see a program of “forgivable loans” again. The CARES Act and its Paycheck Protection Program (PPP) loan program were passed in response to the economic devastation caused by the COVID-19 pandemic. While the program was successful in keeping tens of thousands of small businesses afloat during unprecedented times and saved countless jobs, the program cost billions of dollars. The political will in both parties to enact such a large initiative likely won’t be there in the near future.

But as the PPP has faded into history, some lingering questions remain for small business owners.

Do Small Businesses Have to Pay Back Their PPP Loan?

PPP loans were created to be forgiven rather than repaid. But, to qualify for loan forgiveness, small businesses had to prove that they used the funds for eligible expenses and to keep staff employed.  To be eligible for PPP loan forgiveness, small businesses must have spent at least 60% of their loan on eligible payroll costs. Non-payroll expenses that exceed 40% of the funds received from the loan are not eligible for forgiveness. That formula gives small business owners a template to answer the question of “How much will my small business have to repay?”

From the advent of the PPP, virtually all loans of $50,000 or less were granted forgiveness if the small business that received the loan applied for it. On December 27, 2020, Economic Aid Act was signed into law.  This act brought about an easier forgiveness process for PPP loans of $150,000 or less. The SBA complied with the requirements of the Economic Aid in January of 2021. As a result, all loans of $150,000 or less face a simplified forgiveness process,

While some larger PPP loans have to be paid back, most smaller loans from the PPP have been forgiven. Still, the loan forgiveness is not an all-or-nothing proposition. Small businesses that spent most of their PPP money on eligible expenses were able to get that portion of the loan forgiven. The remainder had to be repaid.

For those small business owners who have yet to apply for forgiveness for their PPP loan, there is no deadline to apply for forgiveness. Small businesses can apply for forgiveness at any point up until maturity of the loan. If a small business satisfied all the criteria required by the SBA, it’s safe to say that its PPP loan will be completely forgivable.

Can Small Business Owners Use Their PPP Loan to Start a New Business?

The answer is yes, but only if the business was operational on February 15, 2020. In other words, if a business owner had started recently started a business just before the pandemic struck in earnest, that owner could qualify for a PPP loan to fund the business. But PPP loans couldn’t be used to open a business after the cutoff date. The program was meant to preserve existing companies and jobs.

Can Small Business Owners Pay Themselves with PPP Loan Funds?

This is another common question for small business owners in the aftermath of PPP. Again, the answer is yes. Small business owners could use PPP funds to pay themselves to compensate for their loss of business income. This is called “owner compensation share.”  To qualify for the full amount of owner compensation share, small business owners have to cover a period of at least 11 weeks in which they need to compensate themselves for lost income.

Can I Sell My Business After Receiving PPP Funding?

An active PPP loan is not an obstacle to selling a business. But the business owner who received the loan still remains subject to their obligation under the terms of the loan and has to meet those obligations. In this instance, the owner must coordinate with the buyer of the business to make sure the funds and expenses of the PPP loan are properly divided between the two parties and all responsibilities are met.

What is the Size of a Small Business?

The SBA’s definition of a small business can vary between industries, revenue, and number of employees. For instance, the SBA defines small businesses by their revenue, which can range from $1 million to more than $40 million. The SBA definition of a small business is usually a staffing level of fewer than 500 employees.

Can a Small Business Get a Loan Without Collateral?

Collateral is an asset that sometimes can be needed to secure a business loan. For small business owners who lack such assets, finding a business loan that doesn’t require collateral can be an important objective. Fortunately, there are business loans available that don’t require collateral. SBA 7(a) loans and short-term loans from alternative online lenders fall into this category.

Post-COVID Financing Options for Small Businesses

It’s not likely that there will be another PPP loan for small businesses at any time in the future. But, even without the PPP, there are other opportunities for financing that small businesses can take advantage of. Economic Injury Disaster Loans (EIDL) are one such opportunity.

The SBA had created programs for COVID-19 Economic Injury Disaster Loans and EIDL Advances to help small businesses recover from the adverse economic impacts of the COVID-19 pandemic.  While these two programs closed in May of 2022, non-COVID-related EIDLs are still a viable source of financing for small businesses or private non-profit organizations that have sustained economic injury in a disaster area.

The SBA can provide up to $2 million in disaster assistance to a business in the form of both physical disaster loans and EIDLs. In addition, the SBA does not charge any upfront fees or early payment penalties. Repayment terms are determined by the ability of the small business to repay the loan.

Small business owners can online for disaster loan assistance through the secure SBA Disaster Loan Assistance website. Additional information about the EIDL program is available through the Economic Injury Disaster Loan page.

SBA 7(a) Loans

During the pandemic, more small business owners than ever before became aware of the SBA’s loan programs. Prior to 2020, less than 25% of small owners had any involvement with SBA loans. In 2021 that number rose to 40 percent. These numbers don’t include PPP loans or EIDLs.

The most common loan that the SBA offers is its 7(a) loan. This loan can cover amounts up to $5,000,000. It can cover a wide variety of small business investments and can be used to buy both long and short-term resources. To qualify for an SBA 7(a) loan, an applicant must operate a for-profit business and must have used other financial assets at some point in its history.  Small business owners interested in applying for an SBA 7(a) loan cannot have any outstanding federal debt.

SBA Express Loans

Another popular loan program that the SBA offers is its SBA Express loans. These loans can be for amounts up to $350,000. They are ideal for long-term, working capital investments. As such, they can be used to buy equipment or other items normally purchased with working capital. In addition, SBA Express loans typically feature a faster turnaround time for approval than other small business loans.

Approval for SBA Express loans, SBA 7(a) loans, and all SBA loans offered in 2022 can be difficult.  But these loans all offer long terms and affordable interest rates that can make them an attractive option for small business owners.

Term Loans

Term loans, typically secured by small business owners from traditional banks, feature the standard loan formula of providing a sum of money upfront that is then repaid at regular intervals over an agreed-upon length of time. This type of loan falls into two categories:  short-term and long-term loans.

Short-Term Loans:   The repayment terms for these loans are typically 18 months or less, and the amount of the loans tends to be less than long-term loans.

Long-Term Loans:  Repayment of a long-term loan normally takes place over a range of two to 10 years. Long-term loans can provide funding anywhere in the range of $5,000 to $2 million.

Both short-term and long-term loans can help with a variety of financial needs, such as:

  • Marketing/Advertising
  • Expanding business into another location
  • Acquiring another business
  • Covering payroll gaps.

Interest rates for long-term loans tend to be fixed and lower than rates for short-term loans. This turns repayment of the loan into a fixed monthly expense and thus makes it easier for a small business owner to budget.

Requirements for a Term Loan

Every lender has its own terms and requirements to meet for a business term loan.  But, in most cases, small business owners have to submit a business plan, the reason they want funding, proof of revenue and bank statements, and taxes for the past three years.

Long-term loans typically are provided by traditional banks and credit unions. Short-term loans have increasingly become the domain of alternative online lenders, which generally have less restrictive criteria to qualify for a short-term loan.

Online Lenders
This relatively new breed of lenders is usually able to provide a quicker application process and faster funding. This expediency, however, comes with a price:  online lenders routinely offer higher interest rates than banks. Still, many small business owners seem willing to pay the price for quicker access to financing.

Businesses with bad or mediocre credit, along with newer businesses with little history of revenue, have also found online lenders more receptive to meeting their financing needs.

In February of 2021, Standard and Poor’s released a report concluding that online lending – also known as fintech lending — will exceed pre-pandemic levels by 2024.  More specifically, small and medium-sized business lenders are expected to raise their loan originations by 16.2% for a projected annual total of $15.8 billion within that same period of time.

Small businesses that choose to look for funding from a fintech lender have the option of shopping for loans through a marketplace. This means that they can submit one application to the marketplace and receive multiple offers from different lenders.

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