Small Business Bulletin on the Paycheck Protection Program
The Paycheck Protection Program, or PPP, originally established by Congress in March 2020 as part of the CARES Act, can be a potential lifeline for small businesses struggling due to the current crisis. The original deadline to apply for a PPP loan had been August 8, 2020. However, on December 21, Congress passed the Consolidated Appropriations Act, 2021 which will provide supplementary PPP funding, permitting employers and self-employed individuals to seek “second draw loans.” The new law does change some of the terms of the program.
To ensure that New York's small businesses and non-profits gain access to these funds and avoid fraud in the process, the New York State Attorney General (NYAG) developed this bulletin summarizing the program and highlighting some risks for small businesses to keep in mind. In addition, the NYAG will continue to monitor the market and will take action to hold lenders and agents accountable for any efforts to defraud New York small businesses.
What is the Paycheck Protection Program?
The Paycheck Protection Program is a source of forgivable, low-interest, no-fee, no-collateral, no-personal-guarantee loans guaranteed by the U.S. Government as a response to the coronavirus (COVID-19) pandemic. The loans are administered by eligible financial institutions (see below) under the authority of the U.S. Small Business Administration (SBA).
Under the CARES Act, PPP loans generally were made available to small businesses and non-profit and religious organizations with 500 or fewer employees, subject to some statutory and regulatory exceptions. PPP loans were also available to sole proprietorships, independent contractors, and self-employed persons.
The December 2020 act imposes additional restrictions on PPP lending, including that second-time borrowers cannot obtain PPP loans if they employ more than 300 employees or are publicly traded. The act also requires that borrowers have experienced at least a 25 percent reduction in gross receipts from the same quarter of the previous year in order to be eligible for a PPP loan. Borrowers may be eligible for a second PPP loan even if they obtained a PPP loan previously in 2020.
Interest rates for PPP loans are fixed at 1% per year. Under the CARES Act, loans could be issued in amounts up to $10 million, depending on borrowers' payroll costs, with no collateral or personal guarantee required. The December 2020 act dramatically lowers the maximum PPP loan amount from $10 million to $2 million. PPP loans have two-year terms, and borrowers make no payments until 6 months after taking out the loan, although interest will accrue during this time. Borrowers pay no fees on PPP loans.
The loan amounts will be forgiven as long as:
- Under the CARES Act, the borrower uses at least 75% of the loan proceeds to cover payroll costs (up to $100,000 per year per employee) during the 8-week period after the loan is issued, with the remainder being used for payroll, mortgage interest, rent, and utilities. Under the December 2020 act, this percentage is reduced to 60%, and borrowers may also be able to use the remainder of PPP loan proceeds to pay for certain other expenses, such as software and cloud computing services, essential goods, and expenditures made to adapt business activities to comply with federal and state health guidance.
- The borrower maintains employee and compensation levels.
PPP loans will be issued on a first-come, first-serve basis until funds designated by Congress are depleted. Under the December 2020 act, Congress has authorized an additional $284 billion for PPP loans nationwide
To learn more about PPP loans, be sure to read the following guides:
- View the SBA's PPP loan overview.
- View PPP Fact Sheet from the U.S. Treasury.
- View PPP Frequently Asked Questions (FAQs) from the U.S. Treasury.
5 Steps You Can Take to Protect Yourself and Your Business from Fraud When Applying for a PPP Loan
1. Deal Only with Trusted Lenders – and Don't Be a Victim to Phony PPP Lenders
- Don't take out a PPP loan from a lender you do not trust or recognize without conducting appropriate due diligence. To find a lender eligible to issue PPP loans, visit the SBA's website. Click the "FIND A LENDER" link to find an eligible lender located near you.
- PPP rules allow the loans to be arranged by agents, including attorneys, accountants, and consultants. An agent is not required, however, and you should be wary of promises from parties who are not authorized lenders to expedite a loan on your behalf. To minimize the risk of fraud, you should contact an eligible, trusted lender yourself and not rely on agents or lenders that cold-call your business.
- If you do decide to work with an agent, make sure the agent is a person or company you recognize and trust. Confirm in writing that the agent is working with specific lenders eligible to participate in the PPP program, and confirm in writing the agent's full name, phone number, and mailing address. Do not pay the agent any fees (see below).
- Some lenders may advertise PPP loans even though they have no authority from the U.S. government to do so. They may also advertise loans "administered" by the SBA, even though true PPP loans are administered only by lenders, not the SBA itself.
- If an unauthorized lender promises a PPP loan or a loan "administered" by the SBA, that promise may be a sham, and the lender may be trying to sell you a different type of loan or funding – possibly with higher interest than permitted for PPP loans and with improper fees. Always confirm that a lender is eligible to issue PPP loans and that you are being offered a product consistent with terms of the PPP program described above.
2. Make Sure the Information in Your Loan Application is 100% Correct, and Don't Let Anyone Add Information that Isn't Accurate
- Unscrupulous agents or lenders may encourage borrowers to put false information in their loan applications in order to get the biggest loan possible (and to maximize their fees).
- Don't be a victim to this fraudulent practice. A fraudulent loan application can result in criminal liability for the borrower. To avoid this risk, make sure that everything in your application is correct, and don't let any agent or lender put inaccurate information in it.
3. Don't Pay Fees to Get a PPP Loan
- Lenders and agents may not charge borrowers fees or commissions in order to issue and service PPP loans.
- Lenders will be paid fees only by the SBA, not by borrowers. The SBA will pay lenders processing fees of 5% (for loans up to $350,000), 3% (for loans more than $350,000 but less than $2 million), or 1% (for loans of $2 million or more).
- If you are working with an agent, the agent's fees are to be paid only by the lender, and the agent is not allowed to charge you anything or take any amounts from the principal of your loan.
4. Don't Pay above 1% Annual Interest for a PPP Loan
- PPP loans are low-interest loans, with annual interest rates of just 1% per year. Do not agree to any PPP loan that carries an interest rate higher than 1%.
5. Watch the Small Business Administration's Website for New Developments
- This Consumer Alert from the Office of the New York State Attorney General reflects guidance from the U.S. government as it exists on April 14, 2020. But the PPP is a brand-new program, and its rules could change from day to day. Be sure to regularly check the Small Business Administration's website for new developments concerning PPP loans.
Have You Been Defrauded in Connection with a PPP Loan?
If you believe you have been defrauded by someone offering, issuing, or servicing a PPP loan, or if you have been offered a PPP loan by a lender that does not appear on the SBA.gov website as an eligible lender, you may file a complaint with the Office of the New York State Attorney General's Office of Consumer Frauds and Protection , either online or by phone at 1-800-771-7755.
You may also submit a complaint to the U.S. Federal Trade Commission
Be sure to save all documents and communications concerning the loan, including agreements, emails, and advertising.
Information on Business Interruption Insurance
Business Interruption Insurance may cover total or partial suspension of business operations due to a direct loss, damage, or destruction to the insured property by a covered peril.
Interruption by civil authority coverage may cover the actual loss sustained by the insured during the length of time when access to the business premises is specifically prohibited by order of civil authority.
Because coverage varies across policies, you will need to read your particular policy and consult your broker or insurer to determine if you have these coverages and whether they are applicable.
What types of losses may be covered?
These coverages may provide for replacement of such things as revenue, rent payments, taxes, loan payments, payroll for employees and relocation costs.
What steps should I take to protect my rights?
Insurers may disclaim coverage for items they are required to insure if the insured does not provide timely notice of the claim. If you think you may have this coverage you should put your insurer on notice that you may be pursuing a claim.
Is my business interruption coverage applicable to COVID-19?
Whether this coverage is applicable to the current pandemic will depend on the specific terms of your policy and the specific facts involved in the disruption of your business.