Updated to reflect additional information provided by the SBA on April 2, 2020 in its Interim Final Rule for implementation of sections 1102 and 1106 of the CARES Act.
How can the CARES Act PPP loan help your business?
Small Business Loans available
There are two (2) distinct types of small business loans:
- The SBA Section 7(a) Paycheck Protection Program (“PPP”) loans
- Applications are to be submitted directly to SBA loan participant banks
- The Economic Injury Disaster Loans (“EIDL”s)
- Applications are to be submitted online directly to SBA
Both are administered under the SBA guidance and rules. There are similarities and differences, so we will discuss each separately.
Paycheck Protection Program (“PPP”)
The Act appropriates $349 billion to the SBA for the cost of guaranteed loans under the PPP. The PPP loans will be administered pursuant to SBA’s section 7(a) loan program. Loans will be made and serviced by existing banks and lenders enrolled in the SBA 7(a) program, as well as any other lenders determined by the SBA “to have the necessary qualifications to process, close, disburse and service loans made with the guarantee of the Administration.”
- Any business, nonprofit organization, veterans organization, or Tribal business that employs not more than the greater of 500 employees or the number of employees established by the SBA for the industry in which the entity operates.
- Count each individual employed on a full-time, part-time, or other basis.
- If you own several related businesses with a common ownership, you may have to aggregate all employees of all the businesses. Please call for additional guidance on this point.
- Individuals who operate as sole proprietorships or independent contractors, or are self-employed.
- Businesses in the accommodation and food services industry with no more than 500 employees per location.
- Applicants that have received a loan under the SBA EIDL program after January 31, 2020 may still apply for the PPP loan but may not use the proceeds for the same purpose.
Borrowers must certify:
- That the current economic uncertainty makes the loan necessary to support ongoing operations.
- That the loan proceeds will be used to retain workers and maintain payroll or make mortgage, rent, and utility payments.
- The Act waives the SBA’s standard requirement that Section 7(a) loan applicants be “unable to obtain credit elsewhere.”
The Paycheck Protection Program authorizes loans in amounts up to the lesser of:
- $10 million; or
- 2.5 times the recipient’s average monthly payroll costs during the one-year period before the loan is made, plus the value of any outstanding SBA disaster loan received after January 31, 2020
To calculate monthly payroll costs, the PPP includes:
- Employee salaries, wages, commissions, tips, or other similar compensation;
- Employee benefits including costs for paid leave or 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).
For employees whose total payroll costs exceed $100,000, the PPP excludes any costs above $100,000 (meaning, for an employee whose total payroll cost is $125,000, an employer would only include $100,000 of their payroll costs in the calculations).
- A maximum interest rate of 1.0%, based on most recent information from the SBA made available on April 2, 2020.
- A maximum term of up to two (2) years.
- Collateral and personal guarantee requirements are waived.
- The loans are 100% guaranteed by the SBA.
- No prepayment penalties.
- Lenders are required to defer payments of principal, interest, and fees on these loans for at least six months, though interest will continue to accrue during this time.
- SBA will also reimburse lenders for origination or underwriting fees in an amount of:
- 5% for loans of not more than $350,000,
- 3% for loans of more than $350,000 and less than $2 million, and
- 1% for loans equal to or greater than $2 million.
- The loans will be unsecured.
- These loans will not take precedence over existing debt instruments in terms of payment priority.
- There will be no recourse to owners or borrowers for nonpayment, except to the extent proceeds are used for an unauthorized purpose.
- Borrower will have to give a “good faith certification” that:
- The loan is reasonably necessary because of COVID-19; and
- The loan funds are will only be used for the permissible uses.
- The Lender must be able to document payroll.
Permissible Uses of Loan Funds:
- Employee salaries, commissions, or similar compensations.
- Payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person.
- Insurance premiums.
- Costs for continuation of healthcare benefits during paid sick, medical, or family leave.
- Utilities, including electricity, gas, water, transportation, phone and Internet access for service incurred in the ordinary course of business before February 15, 2020, in each case, paid during the eight-week period commencing on the date of origination of the loan.
- Rent and lease payment on leases in existence before to February 15, 2020.
- Mortgage interest payments that existed on February 15, 2020 (which shall not include any prepayment of or payment of principal on a mortgage obligation).
- Interest on debt obligations incurred before February 15, 2020.
This is the most attractive provision of the PPP loans as it provides that:
- The portion of the loan used to cover payroll (not including the compensation for any individual employee earning above $100,000 on an annual basis), mortgage interest, rent, or utility costs for the eight-week period beginning on the date the loan is granted is eligible for forgiveness.
- The forgiven amount of the loan is considered canceled debt and is excluded from gross income for federal tax purposes.
- In order to encourage the retention of employees at existing salaries, the amount of forgiveness is reduced by:
- Any reduction in the average number of monthly full-time equivalent (“FTE”) employees during the eight weeks following loan disbursement as compared to the average number of monthly FTE employees during, either the period between February 15 and June 30, 2019 or the period between January 1 and February 29, 2020, with special rules for seasonal employers; and
- The amount of any reduction in total salary or wages of any employee during the eight weeks following loan disbursement that is in excess of 25% of that employee’s total salary or wages during their most recent full quarter of employment (excluding employees who received, during any single pay period in 2019, wages or salary at an annualized rate of pay of more than $100,000).
- To encourage businesses to rehire employees and reverse recent salary reductions, any loan forgiveness reductions will not be applied if the business increases its FTEs and employee salaries by June 30, 2020 to the levels in effect on February 15, 2020.
- Borrowers with tipped employees may receive forgiveness for additional wages paid to them.
- You will be required to submit a detailed application in support of loan forgiveness directly to the lender. The lender will make a determination on the application within 60 days of receipt of the application; within 90 days after the loan forgiveness amount has been determined, the SBA will reimburse the lender directly for the principal amount of any forgiven debt, plus interest accrued through the date of repayment. SBA will issue additional implementation guidance and regulations regarding the loan forgiveness process.
- Current lenders through the Small Business Administration 7(a) are authorized to make determinations on borrower eligibility and creditworthiness without going through the SBA.
- Lenders will not be determining eligibility based on repayment ability, but rather whether the business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
- Click here for the PPP application.
Deadline to apply to the PPP: June 30, 2020.
Should you have any questions or require assistance, contact us. B&D is open for business and we are available to help you.