Many small business employers with less than 500 employees (there are exceptions) will be able to receive loans of up to $10 million through the Paycheck Protection Program (PPP) authorized by the CARES Act. An update to the SBA’s existing 7(a) loan program, these loans are intended to be easier for small businesses to obtain.
The maximum amount of the loan is set by formula: average total monthly ‘payroll costs’ incurred during the 1-year period before the date of origination of the PPP loan (exceptions for seasonal employers exist) times 2.5, plus the amount of any other debt approved for refinancing), subject to a maximum of $10 million.
The loan is eligible for forgiveness of indebtedness in an amount equal to the sum of the following costs incurred and payments made during the ‘covered period’ (the 8-week period beginning on the date of the origination of a covered loan):
- ‘payroll costs’,
- interest on a covered loan,
- rent on covered obligations, and
- covered utilities.
Covered in the context of describing expenditures essentially means an obligation, service, or agreement or service that was in place before 2/15/20.
‘Payroll costs’ include:
- salaries, wages, commissions (up to $100k yr proration per employee); tips; vacation, parental, family, medical, or sick leave;
- allowance for dismissal or separation;
- group health care benefits (including premiums);
- payment of any retirement benefit; payment of State or local tax assessed on the compensation of employees; and
- 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 1 year, as prorated for the covered period.
- There are limitations and exclusions.
The amount of the loan subject to forgiveness may be reduced if employees are terminated during the covered period or compensation is reduced by more than 25%.
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.
Other key provisions:
- Maximum interest rate of 4 percent per annum.
- Loans are made by SBA-approved lenders that have delegated authority to make the loans without approval from the SBA (type 7a).
- In reviewing the application, a lender has to evaluate whether the borrower was in business on February 15, 2020 and had employees and/or independent contractors.
- Guarantee fees are waived.
- Loans are non-recourse to the borrower.
- No “credit elsewhere test.” That is, the borrower does not have to demonstrate it was unable to secure financing elsewhere before qualifying for SBA financing.
- No collateral requirement.
- No prepayment penalties.
- Payments are deferred for six to 12 months.
- The applicant is required to certify:
1.) Current uncertain economic times make the loan request necessary to support ongoing operations; and
2.) Funds will be used to keep workers and make payroll, mortgage payments, lease payments, and utility payments; and The applicant does not already have an application pending for other payroll assistance under the CARES Act.
CAUTION: A loan under the Paycheck Protection Program makes the borrower ineligible for the Employee Retention Tax Credit made available under the CARES Act. This does not apply to any credits available under the FFCRA (such as the paid sick leave tax credit) or other credits available under the CARES Act.
Loan amounts and eligibility will ultimately be determined by lenders. For different loan types, different thresholds may apply. Get a full rundown on the SBA’s website.
Apply through SBA approved lenders. Link to application: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf?fbclid=IwAR3fLnFMjW6HsTb6_tOGcQmQw391883R-zkW8aY_Xj-Z1AGIcV2DNs2rF_g
Complete details about this and other SBA loan programs at the SBA’s COVID-19 Loan site.
https://www.sba.gov/funding-programs/loans/paycheck-protection-program
