Here's What You Need to Know About the Paycheck Protection Program and Economic Injury Disaster Loans

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As signature programs of the recently passed CARES Act, the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan were designed to keep small businesses afloat and their workers employed through the COVID-19 crisis. But during the programs’ roll-out this week, restaurant owners encountered more questions than answers as banks, lenders, the Small Business Administration (SBA), and the federal government worked to cement fine details

The PPP, which is being administered by banks, is particularly problematic. “They’re building the plane as they’re flying it. It’s a total shit show,” says Liz Hanley, accountant and owner of Liz Is All Biz in San Francisco. “In a time of stress, people want concrete answers and guidelines. That doesn’t exist. Banks are dealing with the same thing. They don’t even know the programs they’re supposed to be administering.”


To help restaurant owners make decisions about whether to participate in the PPP and EIDL, Plate spoke to industry experts and owners across the country. Here’s what we know—and what’s still unclear—about the programs.

Paycheck Protection Program (PPP)

The PPP is a forgivable SBA-backed loan program run by banks and other commercial lenders. It offers businesses with fewer than 500 employees the ability to borrow money to cover payroll and other fixed costs. If businesses use 75 percent of the loan to cover payroll expenses, which includes healthcare and other benefits, 100 percent of the loan is forgivable.

Yes, that’s free money. But not all restaurants are in a position to benefit.

“The goal of PPP is to keep people on payroll and avoid having them go onto unemployment insurance. But since the government was so late in debating and then passing the bill, when it finally went into effect, restaurants were already closed,” says Lee Jacobs, partner at the law firm Helbraun Levey and chair of the firm’s employment practices group. “It’s a cash flow issue for restaurants. Most of our clients exist payroll to payroll. They had to close.”

Many of PPP’s design flaws stem from that botched timing. Even though the program is available to restaurants that have already closed and plan to rehire workers, it really was meant for businesses that are still open.

One such business is Mekelburg’s in Brooklyn. Its two locations are part cafe, bar, and dry goods store. Owner Alicia Mekelburg saw a shutdown coming and was able to quickly transition from dine-in service to full-on grocery. She’s selling cheeses, olive oil, produce, meats, paper towels, and prepared foods. She removed all the tables and chairs from her dining room and built out a craft beer shop. “Unfortunately, there’s nothing like a natural disaster for the grocery business. And with this pandemic, there’s no finish line in sight. People have to eat. Restaurants are closed, and all the competition went away,” says Mekelburg, who retained her entire staff and has hired additional workers who were laid-off from nearby restaurants.

Revenue at one of her stores is on par with pre-crisis levels, and much lower at the other, but grocery margins are even tighter than those at restaurants. The PPP loan was made for Mekelburg, who needs the cash to staff her stores in a way that keeps workers safe and the doors open.

Apply Now If You Think You Need It

Most restaurants aren’t Mekelburg’s, though, and the decision to take money is less clear cut. But there really is no time to wait if you think the loan is right for your business.

The CARES Act allocated $349 billion to PPP. The last day to apply for the loan is June 30. It’s first-come, first-served, and most lenders and advisors believe that the funding will run out quickly. “The need is so great. Almost every single one of our clients is applying,” says Hanley. “I would be shocked if they don’t run out of money in the next two weeks.”

Hanley recommends that eligible and interested restaurant owners apply now. The rush for funds is real, and stressful, and it will make it more difficult for some restaurants to meet the terms necessary for loan forgiveness.

However, there is no penalty for paying the loan off early, and nothing in regulations that states that owners can’t refuse the loan. If you get approved in the weeks to come and realize by then that it was a poor choice for your business, you can say no or give it back.

Calculating Your Loan Amount

In the simplest terms, businesses are eligible for a loan that equals two and a half times their payroll for eight weeks, up to $10 million. This excludes any compensation paid to an annual salary above $100,000. It’s also important to note that tipped workers’ payroll should be calculated based on their take-home pay, including the tips. Further, payroll for independent contractors cannot be included in the loan.

Lenders are calculating average payroll in a few ways. Some might take an average of all of 2019. Others are asking for numbers from February 15 to June 30, 2019. For new restaurants, many banks are looking at payroll for January and February 2020.

You Must Use the Funds Immediately

PPP guidelines clearly state that all funds must be used within eight weeks of the loan date: 75 percent on payroll and 25 percent on fixed costs like rent and utilities.

Ambiguous language found on lending sites has led some restaurant owners to believe that if they accept a PPP loan in the coming weeks, that they have until June 30 to rehire staff. This is false. From a loan date of April 15th, for example, staff must be rehired as quickly as possible and all funds used by June 10.

That timing won’t work for many businesses, who would have to pay employees for eight weeks of potentially idle time, only to run out of funds when restaurants start to open again. No one knows when life or restaurant revenue will return to pre-crisis levels, or when it will be safe to stand shoulder to shoulder in a kitchen. Most of the owners we spoke to can’t imagine resuming dine-in service until July—at the earliest.

Harold Jurado, chef-owner of Ramenwell in San Francisco, isn’t taking the loan. As a ramen shop owner, summer is his slow time, and he doesn’t want to rehire staff through PPP only to lay them off again come July.

Owners and advocates are hopeful that PPP will be extended into the summer. Steven Mnuchin just asked Congress for $250 billion more for the SBA. But there are no guarantees.

Unemployment Benefits and PPP

As New York’s Compagnie des Vins Surnaturels mutated from wine bar to a wine/produce/snack delivery service, all but five salaried employees had to be laid-off. Among its now jobless staff, only half have been able to process unemployment benefits. In between wine deliveries, Partner and Sommelier Caleb Ganzer is dropping off food to employees who haven’t gotten a paycheck in weeks.

Applying for PPP was a fairly straightforward decision for Ganzer: get the funds to take care of his team.

It’s not so easy for other owners. Jon Nodler and his wife Samantha Kincaid own Cadence in Philadelphia. Of their tiny 12-person payroll, they’re the only two left. “It is all so unclear, and it isn’t like our accountant has a plan of action for pandemics,” says Nodler. “We’re kind of just left to our own devices, between figuring out paperwork, trying to do take-out to cover rent, and, most importantly, trying to stay positive.”

Nodler is planning on applying for PPP funds, but he and Kincaid are also considering applying for unemployment, which has been extended to business owners and independent contractors. “We’re trying to be careful because we don’t want to carry any loans, but the business is our whole damn income. It’s just crazy to think no one has the answer,” he says.

To further complicate matters, from April 5 to July 31, many laid-off restaurant workers are eligible for an additional $600 per week in unemployment benefits. For tipped and minimum wage workers, that check is often considerably higher than their old take-home pay. Knowing employees are better off on unemployment in the short-term, some owners aren’t applying for the program.

“That’s the problem. How are you going to convince someone making $1,1000 a week on unemployment to come back at $15 an hour?” says Jacobs. “The federal government isn’t going to say, ‘You worked at Joe’s Pizza Shop, and now you must report back to work.’”

Plus, to qualify for PPP loan forgiveness, business owners have to bring payroll levels to near pre-crisis levels, so hiring back a fraction of the workforce isn’t an option.

In normal times, workers must prove that they are seeking work and have not turned down work in order to get unemployment. But those provisions were eliminated during the crisis to protect workers who feel unsafe returning to their jobs—even for businesses, like restaurants, that have been deemed “essential.”

Businesses with the best chances of bringing back their crews are those that offered benefits and a healthy workplace before the crisis. It’s too late to manufacture caring now.

What Will Your New Payroll Look Like?

Your payroll under PPP will look remarkably like your old payroll in terms of numbers, if not individuals. Jacobs cautions these payroll calculations are among the trickier parts of the law. You endanger loan forgiveness in two ways. The first is a failing to maintain or rehire the same number of full-time employees (aka the headcount test). The second is reducing wages or salary in excess of 25% for any employee who did not earn more than $100,000 in 2019.

Put simply, you must employ the same number of full-time positions, and each worker must make at least 75% of their previous average earnings.

If you accept PPP funds, Jacobs recommends making a best faith effort to hire former employees. For one, it’s the right thing to do, and from a legal perspective, owners will avoid any whiff of discrimination.

However, if your employees opt not to come back to work, you can hire from the now massive pool of America’s unemployed workers. That scenario begs a few questions: Who wants or has the bandwidth to hire and train a new workforce in the middle of a global pandemic? Do you really have enough business to invest in a new workforce?

Carlo Lamagna hopes to bring back his eight employees with the help of PPP funds. “The idea is to rehire staff for eight weeks and use the time frame to reestablish ourselves in the community by catering to hospitals,” says Lamagna, who owns Magna in Portland, Ore. In theory, having the team back together will make it easier to relaunch dine-in service in late summer.

Linden Pride and Nathalie Hudson planned on opening the second location of Dante, their New York restaurant and cocktail bar, the weekend of March 16. Instead, they had to terminate almost half of their 50-person workforce. Now, 30 of Dante’s employees are focused on delivery and to-go service, along with catering meals for hospitals.

Pride applied for PPP funding, even though there’s not enough work to go around. “We’re going to continue to invest in staff in terms of training,” he says. “They’ll do one to two shifts of delivery and take-out and a few shifts of training to get to a four-day work week.” Pride still plans to open not one but two restaurants when dine-in mandates are lifted.

There are other ways owners can get creative. Mekelburg has split her staff into two teams. Each works for two weeks and then takes a paid two-week break. The teams don’t intermingle, so that if someone on Team A contracts coronavirus, everyone on Team A goes into quarantine while Team B steps in to keep the business running. It’s safer for employees, for the business, and for ensuring she adheres to PPP guidelines.

Document Your PPP Spending

If you accept a PPP loan, you must keep accurate records of how you spend the money.  

“This is a loan, and you have to be very careful,” warns Jacobs. “The PPP has a two-part certification process. If you apply, you are certifying to the federal government that you will use money for rent, utilities, your mortgage, and payroll. After eight weeks, you will submit documents to the government proving that you lived up to the certification. The best case: everything goes great. Worst case: you lied, are caught in fraud, and dealing with the federal government. Jacobs is already fielding questions from owners asking if they can “hire” a bunch of family members to maintain payroll levels. The answer to that question is a big, fat, no. That’s fraud.  

What if You Screw Up, But Just a Little?

Not everybody is going to get it right. A well-meaning, honest owner might end up spending 67.9 percent of the funds on payroll. Maybe a manager with a high salary decides to leave the business. Maybe you can only hire two-thirds of the employees you need to make headcount.

The PPP will have a sliding scale of loan forgiveness, but the SBA has not given banks a formula to derive partial forgiveness. It’s a grey area, so it’s better to aim for full compliance.

What If You Really Screw Up?

If you take PPP funds and don’t use them for payroll, you have to repay the loan in full in two years at an interest rate of 1 percent. Payments, but not interest, are deferred for the first six months of the loan. “This is designed to be an elixir to save you, but if you don’t follow rules, it could become the poison to take you down,” Jacobs cautions.

Is PPP Right For You?

Are you Mekelburg’s-level busy right now and hiring new workers? Then, yes, get those funds. 

Have you successfully transitioned to a community kitchen or delivery operation that can employ most of your staff? Yes.

Are you willing to pay workers their salaries for a fraction of their time? Maybe. But will doing so cripple your business come July? Proceed with caution.

“If you’re not open in any shape or form, don’t take the loan,” says Jacobs. “If you’re thinking about making a pivot to delivery or take-out or some other model, then think about the loan and what it will cost to transform your business.”

Also, be honest with yourself: PPP will not work unless you can rehire your staff or quickly hire new workers. If your workplace practices, pay, and management style didn’t engender loyalty before the crisis, why would your staff have your back now?

Economic Injury Disaster Loan (EIDL)

In addition to PPP, restaurant owners can apply for the SBA’s EIDL program. It predates COVID-19 and was designed to aid businesses that sustain “substantial economic injury as a result of the declared disaster.” Restaurants can apply for a loan of up to $2 million, with the loan amount dependent on documented damages and lost revenue.

“When PPP came out, all my clients said, ‘I want to apply and take care of my employees.’ Now, more are interested in the disaster relief loan. They’re thinking about taking EIDL to pivot their businesses,” says Hanley.

The CARES Act also added a new, attractive EIDL feature: a $10,000 grant that acts as an advance on the loan (aka Economic Injury Disaster Loan Emergency Advance). All restaurants with fewer than 500 employees should consider applying.

Even if your business doesn’t get approved for a loan, you may still qualify for the grant. It is actual free money. You can spend it in any way you see fit for your business.

“The SBA has their act together, and they have a closer relationship with the feds,” says Hanley. “I have more confidence they can roll this out than banks and PPP. They already have infrastructure and a system in place for underwriting.”

Just note: The application for the grant and EIDL is one in the same. On that application, you must check a box indicating that you want to be considered for the grant. If you have already applied and didn’t check the box, you need to go back and amend your application. 

Create a Plan for Using the Funds

This is not business as usual. It’s not even disaster as usual. Hanley recommends taking a step back and thinking about what you want for your business so you can use EIDL to move your restaurant forward and not just tread water.

“What will your business look like in a future environment? What do you need for that? We absolutely know that what restaurants look like is going to be different. If you line up the resources to adapt, you’re in a better place,” she says. “You’re already a small business owner. You’ve done this work before. You have creativity and imagination. Lean on that.”

If You Want Money, Pick Up Your Phone

For any other population of owners it might not be a concern, but Hanley is reminding all of her restaurant clients to answer phone calls in the weeks ahead. That strange area code could be someone from the SBA, who’s trying to give you money, and they’re not going to text. “The SBA will call to help you to get through the process. They are wildly understaffed, but they’re working hard to get loans completed. If you want money, pick up the phone,” she says.

What Are EIDL’s Terms?

Like conventional loans, the SBA is only going to give you money that you can repay. The interest rate is 3.75%, and the term can be as long as 30 years. For loans up to $200,000, no cosign is needed. Though the CARES Act, there’s also a one-year deferral on repayment, but interest starts accruing immediately.

If you take PPP funds and end up having to repay all or a portion of the PPP loan, and you take an EIDL, the two loans can be refinanced together in the future.

Consider Local Grants

Hanley also is directing clients to apply for local grants that have less competition and quick turnaround time. In addition to EIDL and PPP (and unemployment), Lamagna applied for grants from The James Beard Foundation and Prosper Portland. Right now, he’s waiting on answers from all organizations, lenders, and government entities—and doing his damndest to plan for a full reopening in the months to come.

Caroline Hatchett is a New York City-based food and drinks writer, who also happens to host the world’s only casserole lifestyle podcast.

Applied for an EIDL loan two weeks ago. Did not get any acknowledgement that my application was filed.