On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. The CARES Act contains an important loan program for small businesses known as the Paycheck Protection Program, to be administered by the U.S. Small Business Administration (SBA).
This program is noteworthy because the loans are intended to function more like grants, meaning that they’ll be eligible for forgiveness provided that businesses satisfy certain requirements. Let’s take a look at some of the key information for these loans. A sample application form can be found here.
Who Is Eligible
Small businesses, meaning those with 500 or fewer employees, may be eligible for this type of loan.
Tip: Sole proprietors, independent contractors, gig economy workers, and self-employed individuals are all eligible for the Paycheck Protection Program.
An eligible business must certify that the uncertainty of current economic conditions makes necessary the loan request to support its ongoing operations. In other words, don’t just assume the SBA will connect your application for a loan to the impact of Covid-19—make this explicit in your application.
Note: Venture-backed startups may encounter difficulties accessing these loans because of SBA “affiliation” rules. For instance, if a lendor grouped together portfolio companies of a VC firm invested in a startup as “affiliates” in determining whether the startup-borrower has 500 employees or fewer, then the startup-borrower might not be eligible for this type of loan. It’s anticipated that the SBA and the Treasury Department will address this concern moving forward, but at present it remains unclear.
While these are the basics, there are other eligibility requirements, and so you may want to consult with legal and financial advisors to determine your business’s eligibility.
What Are The Loan Terms
Businesses can request the lesser of $10 million or 2.5 times the average total monthly payments for payroll costs.
Tip: Payroll costs include salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; severance payment; group health benefit payment; retirement benefit; and payment of state or local tax assessed on compensation.
Businesses may use the loan to cover rent, utilities, payroll costs, group health care benefits, employee salaries and commissions, payment of interest on any mortgage obligation, and interest on any other debt obligation incurred before the covered period (i.e., Feb. 15, 2020 - June 30, 2020).
For those loans that are not forgiven (see next section for information on loan forgiveness), they may have up to a 10-year term, with an interest rate that cannot exceed 4% during the covered period. All loan payments (meaning principal, interest, and fees) are deferred for at least six months and for up to one year.
Additionally, unlike with other SBA loans, the borrower won’t have to provide any collateral or personal guarantee during the covered period.
We’re now getting to the good information for businesses. For many borrowers, their loans will be eligible for forgiveness. The maximum amount of loan forgiveness will be the sum of all payroll costs, payments of interest on any mortgage obligation, rent, and utilities during the 8 week period after the loan is taken out. If eligible for forgiveness, the loan will be forgiven at the end of the 8-week period after the loan has been taken out.
Tip: Borrowers will not be responsible for interest on the forgiven loan amount, provided that the full principal of the loan is forgiven. If the full principal is not forgiven, then the remainder of the loan will operate according to the loan terms.
However, because the program is meant, in part, to incentivize employers to maintain their current workforce, the amount of loan forgiveness a borrower will be eligible for will be reduced if the borrower reduces its number of employees and/or reduces wages or compensation.
So, in short, if you keep all of your employees, the entirety of your loan is likely to be forgiven, but if you lay off employees or reduce wage, then your loan forgiveness amount will be reduced proportionately.
Documenting The Application
In addition to securing loan funds, a primary objective with preparing the application and verifying the forgiveness amount is to document the number of full-time equivalent employees on payroll and their rates of pay for current and historical periods, including payroll tax filings and state income, payroll and unemployment insurance filings; document payments and receipts for mortgage, rent, and utilities; and certify that the documentation is correct and the amount for which forgiveness is requested was used to fund eligible payroll expenses, rent, mortgate payments, and utility payments.
Any other documentation that may be requested the SBA should also be provided.
Applying For A Loan
The Paycheck Protection Program will be administered by the exsiting network of approved SBA lenders. The SBA has given authority to the lenders to make eligiblity determinations, meaning you’ll be dealing directly with the lenders for your application.
Note that borrowers are eligible to apply for this loan until June 30, 2020.
The Paycheck Protection Program represents a real way for struggling businesses to get an injection of cash without being subject to onerous debt. If you have questions about this program, please contact me.