Today, March 27, 2020, the United States House of Representatives is expected to pass the Coronavirus Aid, Relief, and Economic Security (“CARES” or “CARES Act”) Act. The CARES Act will then be sent to the President for his signature. The CARES Act includes a loan program to keep small businesses afloat during mandated COVID-19-related closures. The program is called the Paycheck Protection Program (PPP), and will use the architecture of the SBA’s existing 7(a) loan program and will make forgivable loans of up to $10 million available to qualifying small businesses. Under the CARES Act the SBA is mandated to draft implementing regulations, within 15 days.
WHO CAN APPLY?
- A business, qualifying nonprofit organizations, tribal business concerns, veteran’s organizations — with not more than 500 employees or the applicable size standard for the industry as provided by the SBA, if higher.
- It includes sole proprietorships, independent contractors, and self-employed individuals are also eligible.
- Businesses that fall within NAICS Code 72, which applies to accommodations and food services, are also eligible if they employ no more than 500 people per physical location.
HOW MUCH CAN A BUSINESS BORROW IN PPP LOANS?
The maximum loan size available to any business is equivalent to 250 percent of the employer’s average monthly payroll costs (e.g., roughly 10 weeks of payroll expenses) over the year prior to the loan or $10 million, whichever is less. Payroll costs are defined broadly to include wages, salaries, retirement contributions, healthcare benefits, covered leave (parental, family, medical and sick leave), vacation and other expenses. Calculations of the maximum loan amount will vary slightly for seasonal businesses and businesses that were not operating between February 15 and June 30, 2019.
WHO CAN MAKE PPP LOANS?
PPP loans will be made by lenders who are currently approved as 7(a) lenders or who are approved by the SBA and the Treasury Department to become PPP lenders.
RESTRICTIONS ON USE OF PPP LOAN PROCEEDS?
PPP loan proceeds are generally to be used for:
- Payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person
- Group healthcare benefit costs and insurance premiums
- Mortgage interest (but not prepayments or principal payments) and rent payments
- Interest on debt that existed as of February 15, 2020
TERMS OF PPP LOANS?
- A maximum interest rate of 4%.
- Maturity of no later than 10 years after determination of the amount, if any, to be forgiven, see below.
- Payments will be deferred for 6–12 months, and the SBA is directed to issue guidance on the terms of this deferral.
- No collateral or personal-guarantee requirements.
- No recourse to owners of borrowers for nonpayment, except to the extent proceeds are used for an unauthorized purpose.
- No prepayment penalties.
- No guaranty fee and annual fee.
CAN PPP LOANS BE FORGIVEN?
PPP loans can be forgiven to the extent that the loan proceeds have been used for the following costs incurred and payments made during the eight-week period after the loan is made:
- Payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person
- Group healthcare benefit costs and insurance premiums
- Mortgage interest (but not prepayments or principal payments) and rent payments on mortgages and leases in existence before February 15, 2020
- Certain utilities, including electricity, gas, water, transportation, and phone and Internet access for service that began before February 15, 2020
- Additional wages paid to tipped employees
Caveat: Loan forgiveness will be reduced if the borrower fails to maintain the average number of full-time equivalent employees during the loan period as compared to the time period prior to the loan (either February 15 – June 30, 2019 or January 1-February 29, 2020 as selected by the borrower). The amount forgiven will also be reduced to the extent that employees, earning less than $100,000, have their compensation reduced by more than 25% against the most recent full quarter. Borrowers have the ability to avoid these penalties by curing the reductions (the number of employees or compensation) by June 30, 2020. Forgiven amounts will not constitute cancellation of indebtedness income for federal tax purposes.
WHOM SHOULD I CALL?
We recommend contacting an SBA approved lender as soon as possible to learn what you will need to provide for underwriting and approving a PPP loan.
We will update the information on our website as new information becomes available. If you have questions about SBA’s Paycheck Protection Program please contact us.
Posted in: Business Planning