By now you have heard of the stimulus bill (CARES Act) passed by Congress. The small business-focused of the CARES Act is the Paycheck Protection Program. Here are the highlights of the Program. Be sure to consult with your attorney, accountant and other advisors before committing to any loan.
Who is eligible?
Employers with up to 500 employees. 501(c)(3) nonprofits, sole-proprietors, independent contractors, and other self-employed individuals are also eligible. There are gross annual receipts thresholds for certain industries.
Where do I apply?
The SBA is guaranteeing the loans and businesses will need to apply through banks and credit unions. Approximately 1,800 lenders are already approved to issue 7(a) loans. The
bank at which you’ve set up your business banking account will be a great place to start.
How much can I borrow?
The maximum loan you can receive will equal 2.5 times your average “payroll costs” during the 1-year period before the loan is taken.
What are Payroll costs?
- Employee salaries, wages, commissions, etc. up to $100,000 per year
- Payment for vacation, parental, family, medical or sick leave
- Severance payments
- Group health insurance
- Retirement plan contributions
- State and local taxes assessed on such compensation
How fast can I get the money?
Treasury Secretary Mnuchin has indicated that he expects them to be ready (the loans disbursed) by the end of next week. If so, that is amazingly fast. After some needless delay in the Senate, the Treasury Department will be fast-tracking this.
How can I use the Funds?
Allowable uses include payroll costs (defined above), interest payments (not principal) on mortgages, rent, and utility payments.
Can I defer the payments on the loan?
Borrowers can completely defer repayment of principal and interest for at least six months but not more than one year. Apparently, the particular deferment period will be up to the discretion of the bank that issues the loan.
Will the loan be forgiven?
The amount of loan forgiveness will equal the sum of the employer’s:
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- Payroll costs (as broadly defined above)
- Interest (not principal) on any business debts that were incurred prior to February 15, 2020
- Rent
- Utilities, including electricity, gas, water, transportation, telephone and internet access
Which are incurred during the 8-week period that begins on the origination date of the 7(a) loan. Hopefully, the country will have returned to work well before these 8 weeks elapse.
The amount forgiven cannot exceed the original principal amount of the loan.
The loan forgiveness concept encourages employers to keep everyone employed. The amount of loan forgiveness will be reduced proportionally by the reduction in full-time equivalent employees during the “covered period” of February 15, 2020 – June 30, 2020, compared to February 15, 2019 – June 30, 2019. So, if you employed 15 FTEs in 2019 and 10 now, the forgiveness will be reduced by one-third. It will be further reduced to the extent that employees are being retained but are having to take pay cuts of more than 25%.
The CARES Act encourages employers to rehire workers and/or restore the pay of employees who were kept but took big pay cuts. If by June 30, 2020, you rehire the laid-off employees and/or restore the salaries of the employees who took pay cuts, then your loan forgiveness will not be reduced.
Is there a lot of red tape?
Lenders can make determinations on borrower eligibility and creditworthiness of small businesses without going through all of SBA’s normal channels. But they will require the following. Your payroll provider and insurance company can assist you in gathering this information.
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- Employee wages for the last 12 months, including your employees, you, and your family – contact your payroll provider for the report.
- This report must also show paid time off, vacation, sick pay, family medical pay, etc. All of this is eligible to be included. The more you can show the better, as this
will increase the loan amount. - Withholding for state and local taxes on employee compensation.
- 1099s paid to independent contractors.
- Documentation showing how much, you, the employer paid in employee group health insurance premiums for the past 12 months.
- Documentation showing the amount of retirement plan funding the employer made for employees over the past 12 months. (Employees’ own 401(k) salary deferrals won’t count for these purposes).
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This will take some time and effort, so use start assembling these materials immediately. Be prepared to apply for and get the loan as soon as they are available.
Borrowers will also need to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.
What’s the fine print?
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- Loan balances will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact.
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There are no pre-payment fees.
- Ensures that the processing and disbursement of covered loans prioritizes small business concerns, businesses in rural markets, veterans and members of the military.
- There are restrictions on businesses who receive the loans. Those businesses may not issue dividends for up to a year after the loan is no longer outstanding and must
retain 90% of employment levels as of March 24 “to the extent practicable” through September 30.
There is a lot of information floating around right now, more information is available at SBA.gov.