PPP Loans: A Guide for Restaurants

Paycheck Protection Program (PPP) loans have been a ray of sunshine for restaurants, and now they've gotten an extension. President Biden recently prolonged the PPP loan deadline to May 31, 2021, giving small businesses a few additional weeks to submit their applications.

If your restaurant has yet to take a first-draw or second-draw loan from the PPP pot, you still have a chance. As of April 5, $68 billion remains in funding, but the money is going fast. "This program actually is not going to, you know, continue on until May 30, as the money's going to run out,” said Erik Asgeirsson, president and CEO of CPA.com.

PPP loans can be a lifesaver for restaurants in desperate need of working capital. These SBA loans have the potential for complete forgiveness, which essentially means the Small Business Administration (SBA) is giving your business a tax-free grant—aka, free money. Plus, the funds can be used on restaurant payroll, rent, utilities, and more.

Time is running out, so let's get straight to it. Below, we'll explain everything your restaurant needs to know about PPP loans in 2021:

PPP Loans in 2021

PPP loans have changed a lot over the last 13 months, but let's not focus on the past—let's just look at the most up-to-date characteristics. The SBA financially backs these loans, but they don't do the actual lending. Instead, they partner with SBA-approved banks that foot the actual cash to qualifying small businesses.

First-draw borrowers can receive a PPP loan for up to $10 million (2.5x monthly payroll), while second-time borrowers can receive up to $2 million. However, restaurants fall into a special category, and that means you're eligible to borrow up to 3.5x your monthly payroll expenses on your second draw (but still with the $2 million cap).

When you complete your paperwork, you'll agree to either an 8-week or 24-week coverage period, and that's the special window of time when you'll need to use the entirety of your PPP loan. If you spend any funds outside of that covered window, it's not the end of the world—but those expenses will be converted into a non-forgivable loan that you'll need to pay off.

Restaurant Borrower Qualifications

There's no difference between other industries and restaurants when it comes to borrower requirements.

Here's how to qualify for a first-draw PPP loan in 2021:

• Been in business before February 15, 2020
• Have fewer than 500 employees (if you own multiple restaurant locations, then you'll need fewer than 500 employees per location)
• Still be open and operational

And here's how to qualify for a second-draw PPP loan:

• Must have used up your first PPP loan
• Have 300 or fewer employees (if you own multiple restaurant locations, then you'll need 300 or fewer employees per location)
• Proof that you've experienced a 25% or greater loss in gross revenue
• Been in business before February 15, 2020
• Still be open and operational

Eligble Uses of PPP Funds

Initially, you could only use PPP loans on payroll, rent, and utility expenses, but the SBA has since updated the list of eligible spending. Here's how you can spend your PPP funding in 2021:

• Payroll: Salaries, wages, tips, commissions, employee benefits, group insurance benefits, and paid leave.
• Rent: Payments on rental properties with a lease agreement that went into effect before February 15, 2020.
• Interest payments: Interest payments for mortgage obligations that went into effect before February 15, 2020.
• Utility payments: Water, gas, electricity, transportation, telephone, and internet service fees for agreements that went into effect before February 15, 2020.
• Worker protection expenditures: Costs for investments in protective equipment and workplace changes to help make your restaurant safer and comply with COVID-19 protection measures.
• Operations expenses: Payments for cloud computing, accounting, human resources, and remote workforce-enabling software.
• Property damage costs: Costs for damages incurred from 2020 civil unrest that your insurance didn't cover.
• Supplier costs: Necessary expenses incurred to a supplier before you obtained a PPP loan.

Qualifying for PPP Loan Forgiveness

You'll need to follow a few rules to qualify for 100% loan forgiveness. The SBA's regulations control how, where, and when your restaurant spends PPP funds to ensure the loan gets used appropriately. Here are the rules:

1. Spend funds on eligible expenses (listed above)
2. Follow the 60/40 payroll rule
3. Spend during the elected coverage period
4. Maintain staffing requirements
5. Maintain salary requirements
6. Submit forgiveness application on time
7. Provide the necessary documentation

1. Spend Funds on Eligible Expenses

Only funds spent on the eligible expenses listed above will qualify for forgiveness.

2. Follow the 60/40 Rule

You must spend at least 60% of your funds on payroll costs to be eligible for complete forgiveness. You can spend up to 40% on other qualified expenses, but if you exceed that 40% limit, costs beyond that will be deducted from your forgivable portion.

3. Spend During the Elected Coverage Period

You must incur (not necessarily spend) your expenses during the 24-week or 8-week coverage period. Your coverage window begins when your lender sends your first payment, which may be different than the day you signed your loan agreement.

When it comes to incur versus spend, this plays a big part with payroll costs. You don't need to change your payroll schedule to fit the covered period, so long as those expenses are sustained during that timeframe.

4. Maintain Staffing Requirements

The SBA originally created the PPP program to protect jobs, and that's why this requirement is still a big part of the loan. You'll need to use your funds to maintain the same number of employees you had before the COVID-19 pandemic.

If you've had to let employees go, then you'll need to re-hire them or at least attempt to re-hire them. Document these conversations with written letters or emails so that you can provide documentation proving you made the attempt and the employee rejected.

5. Maintain Salary Requirements

You'll also need to maintain at least 75% of your previous payroll levels. If you've had to decrease hours or wages, you'll need to bump these back up so that you're not reducing any of your employee's salaries (for those earning less than $100,000 annually) by more than 25%.

6. Submit Forgiveness Application on Time

Your lender will provide all the forgiveness information you need, but you must send in your application within ten months of the end of your coverage period. If you miss the deadline, your loan deferment will end, and you'll have to start making loan payments with a 5-year term and a 1% fixed interest rate.

7. Provide the Necessary Documentation

Loans for less than $150,000 only require a one-page certification that declares the total amount of your loan, the number of employees retained with the funds, and how much of the funds you spent on payroll costs.

Loans exceeding $150,000 require a bit more documentation. Lenders will likely ask for payroll reports, tax filings, health insurance invoices, income statements, and more. Keep records of all your PPP spending to ensure you have the details you need.

Where to Apply for a PPP Loan

Not every SBA-approved lender is providing PPP loans at this point, but you still have plenty of options.

The SBA has a map to help you find eligible PPP lenders in your area. They also provide a Lender Match tool to connect you with potential lenders who are still offering PPP loans.

Regardless of who you choose for your PPP loans, it's a good idea to get started as soon as possible. While the deadline is soon, the funds are given out on a first-come-first-serve basis.

Frequently Asked Questions (FAQs)

Where is the best place to apply for a PPP loan?

Not every lender is currently accepting PPP loan applications, and some have limited applicants to current customers or only second-draw borrowers. You'll need to go with a credible bank or alternative lender that works with your situation. If you already have a lender for your restaurant, check with them first.

Is 7Shifts software an eligible PPP expense?

Yes, it is! The entire 7shifts labor management platform, including scheduling software, time clocking apps, task management and more, falls in the operation expenditures bucket, so you can use your PPP funds on your monthly bill.

What if I don't qualify for full forgiveness?

100% forgiveness is the goal, but you can be eligible for partial forgiveness, too. Failure to meet any of the seven qualifications we mentioned doesn't mean your loan is unforgivable—it just means a portion of your loan won't be.

Alternative Financing Options for Restaurants

PPP loans are one of the best ways to finance your restaurant right now, but they're not your only option. If you don't qualify for one reason or another (or you've already spent the entirety of your loan), you can still access capital through alternative loans:

• Business Line of Credit: A line of credit can expand your working capital to cover unexpected costs or day-to-day operations. Tap into your line, repay the funds, and get immediate access to the total credit line again—simple as that.
• Term Loan: Business term loans get you access to a lump sum of cash that you'll pay back (with interest) over a predetermined period with regular monthly payments. They're relatively safe, predictable, and flexible.
• Business Credit Card: Use a business credit card to buy what you need now and pay later. Your credit card usually won't be substantial enough to cover hefty expenses, but it can cover minor repairs, inventory purchases, and even gaps in your cash flow.
• Merchant Cash Advance: Trade tomorrow's earnings for money today with a merchant cash advance. It's not the cheapest form of financing, but it's great for new businesses or those struggling with their credit score.

Samantha Novick

Formerly senior editor at Funding Circle, specializing in small business financing. Bachelor's from the Gallatin School of Individualized Study. Work featured in a number of top small biz publications