Even the most prepared businesses need to plan for what happens if cash flow decreases or runs out. With the uncertainty of how COVID-19 will affect your business long term, you may be wondering how long you can continue to pay your employees or rent. Now that the CARES Act has been enacted, your business may be eligible for loans and advances designed to keep you in business. In part two of our three-part series of blog posts, we'll discuss eligibility and application information on Paycheck Protection Program Loans.
Paycheck Protection Program loans are 100% federally-guaranteed loans available under a new subsection of the Small Business Act designed to help employers retain their employees and help businesses cover their near-term operating expenses during the COVID-19 crisis.
Who is eligible?
- A small business with fewer than 500 employees (includes all employees full-time, part-time, and any other status)
- A small business that otherwise meets the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- An individual who operates as a sole proprietor
- An individual who operates as an independent contractor
- An individual who is self-employed who regularly carries on a trade or business
- A Tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
Note that if you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis. Also, if you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company, the normal affiliation rules do not apply.
You must have been in business as of February 15, 2020 and have had employees or independent contractors you paid. Unlike other SBA loans, you are not required to prove you cannot receive credit elsewhere in order to receive funds provided under this program.
What are the loan terms?
- Up to one year deferral of principal and interest payments
- Available for up to a 10-year term (amortized) at an interest rate not to exceed 4%
- Some traditional SBA requirements are waived for this loan program, including:
- No personal guaranties of shareholders, members or partners
- No collateral
- No proving recipient cannot obtain funds elsewhere
- No SBA fees (may still have to pay lender processing fee)
- No prepayment fee
Are there loan fees?
There are no borrower or lender fees for participation.
What can the loans can be used for?
- Payroll costs
- Includes compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) who earn up to $100,000 in 1 year, prorated for the covered period
- Excludes individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and sick and family leave wages for which credit is allowed under the Families First Act
- Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Payments of interest on mortgage obligations
- Rent/lease agreement payments
- Interest on any other debt obligations incurred before the covered period
How much of a loan can I receive?
- No loans may be larger than $10 million.
- Loans are designed to cover two-and-a-half months of payroll, using a calculation of the average monthly payments during the last year period before the loan is issued. For example, if your annual payroll payment was $1.2 million, you can request a loan of up to $250,000 ($1,200,000/12 = $100,000; $100,000 X 2.5 = $250,000).
- Allowable payroll costs for employers are the sum of payments of any compensation with respect to employees that is a: salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits including insurance premiums; payment of any retirement benefit; and payment of state or local tax assessed on the compensation of the employee.
- Allowable payroll costs for sole proprietors, independent contractors, and self-employed individuals are the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.
Can the loan be forgiven?
You must apply for forgiveness with the lender servicing the loan. Lenders have 60 days to review and make a determination. Any portion of the loan that is forgiven will be excluded from gross income. Section 1106 of Title I outlines forgiveness of loans obtained under the CARES Act. Specifically:
- The forgiven amount will be equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and mortgage interest during the eight weeks following disbursement of the loan. Additional wages paid to tipped employees under Section 3(m)(2)(A) of the Fair Labor Standard Acts may also be forgiven.
- The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.
- The loan forgiveness Incentivizes companies to retain employees by reducing the amount forgiven proportionally by any reduction in employees retained compared to the prior year.
- To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
- Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.
- The forgiven amounts are not taxable as income to the borrower.