In the face of the growing COVID-19 pandemic, Congress has passed the Paycheck Protection Program, a $349 billion effort to support small businesses and facilitate their ability to continue paying their employees through the crisis period. The law authorizes the granting of forgivable loans, all of which will carry the same terms.
In order for the amount borrowed to be forgiven, borrowing businesses must meet the following requirements:
- They must maintain current employment levels and compensation levels
- The monies borrowed must be used to pay for specific items, including rent or mortgage interest, utility costs, and most importantly payroll costs over the 8 weeks following the granting of the loan
In passing the law, Congress is anticipating a very high level of interest and participation, and as the goal of the program is to encourage continued employment, they have mandated that no more than 25% of the amount eligible for forgiveness can be allocated to non-payroll costs. The per employee payroll costs have a maximum amount set at $100,000 annualized. In recognition of the economic challenges ahead, there is a six-month deferral of all loan payments.
When does the Paycheck Protection Program begin?
There will be a staggered start for application of the loans, as follows:
- Sole proprietor businesses and other small businesses will be able to begin applying for and receiving loans from existing SBA lenders on April 3, 2020. These loans are meant to cover payroll and other specific expenses.
- Self-employed individuals and independent contractors will be able to begin applying for and receiving loans from existing SBA lenders on April 10, 2020. These loans are meant to cover payroll and other specific expenses.
Who will be making these loans? While these loans are initially being offered exclusively through existing SBA lenders, other regulated lenders are pending approval and enrollment. Applications can be submitted through these, as well as any participating federally insured credit union, federally insured depository institution, and any Farm Credit System. For a complete list of participating lenders, visit www.sba.gov.
Who is eligible to apply for these loans?
The Paycheck Protection Program specifies that businesses with 500 or fewer employees can apply: this broad category includes sole proprietors and self-employed individuals, nonprofit and veterans’ organizations, independent contractors and Tribal business concerns alike. The loans are also available to businesses with more than 500 employees in certain named industries depending upon the employee-based size standards that the SBA has established for their industry.
Notably, small businesses that are in the hotel and food industry or that are franchises in the SBA’s Franchise Directory will see the affiliation standards set by the SBA waived for this program. The same is true for those receiving financial assistance from small business investment companies licensed by the SBA. Hotel and food industry professionals can click HERE for NAICS code 72 to confirm.
Paycheck Protection Program Application Requirements
All applications for loans under the Paycheck Protection Program must include the required documentation and be submitted to approved lenders no later than June 30, 2020. Applications must include payroll documentation.
In order to expedite receipt of cash that will allow businesses to continue paying their employees, the SBA is waiving the Credit Elsewhere requirement, and all of the related standard requirements that some or all of loan funding comes from other sources.
Is there a deadline to apply for this program?
The deadline for application to the program is June 30, 2020, but there is a funding cap that may result in it closing earlier. Because of this and the time that will be needed to process each loan, potential borrowers are being encouraged to get their application in sooner rather than later.
Can a business take out more than one loan under the Paycheck Protection Program?
No. There is only one loan available per organization.
Are there restrictions on what the loans can be used for?
The loan proceeds are specifically meant to be used for the cost of payroll and benefits, interest on any mortgage obligations or rental/lease agreements that were incurred prior to February 15, 2020, and utilities that had service established prior to the same date.
For the purpose of the program, payroll costs are defined as gross salary and wages; commissions and tips up to a maximum annualized basis of $100,000 per employee. For businesses operating as independent contractors or sole proprietors, payroll costs are defined as wages; commissions or income, or net earnings from self-employment up to a maximum annualized basis of $100,000 for each employee.
Is there a loan limit?
As indicated above the amount of the loan that can be attributed to payroll costs has a maximum of a $100,000 annualized basis for each employee. Beyond that limitation, maximum loan amounts will be based upon up to two months of average monthly payroll costs plus an additional 25 percent. The calculation will be based upon the previous year’s reported payroll, up to a maximum of $10 million. Businesses that are new, seasonal, or that operate on time periods different from the established standard will be able to calculate on other time periods as applicable.
What determines the amount of the loan that will be forgiven?
Repayment of the loan will be based upon what the business used the loan amount for. If the monies were spent on anything other than the prescribed expenses (payroll, utilities, mortgage interest or rent) over the 8-week span following the loan’s delivery, the money will need to be repaid. Additionally, of those expenses no more than 25% can be allocated for the utilities, mortgage or rental costs. Businesses that apply for and accept the loan without the required maintenance of staff and payroll will be required to repay the loan, with the terms of that maintenance strictly defined as follows:
- Decreasing full time employee headcount will result in a reduction of loan forgiveness
- Decreasing salaries and wages of any employee that made less than $100,000 annualized in 2019 by more than 25% will result in a reduction of loan forgiveness
- Failure to restore full-time employment and salary levels for changes made between February 15, 2020 and April 26, 2020 will result in a reduction of loan forgiveness
Is loan forgiveness automatic?
No. To be approved for forgiveness of your loan you are required to provide the lender servicing your loan with a request that verifies all payments of allowable expenses under the Paycheck Protection Program, as well as the number of full-time equivalent employees and their pay rates.
Upon submission you must also certify the veracity of the information you’ve provided and confirm that the loan amount was used for the allowable expenses. The decision about whether the loan will be forgiven must be made within 60 days.
What are the terms of the loan?
Interest on the loan has been set at a 1% fixed rate, with all payments deferred six months if necessary. It should be noted that deferral does not eliminate the accrual of interest. The loan is due two years after it is granted, though repayment can be made ahead of time with no prepayment penalties or fees. Borrowers need not pledge collateral and no personal guarantee is required either.
What happens if I use the loan for purposes other than those specified.
Forgiveness will not be an option for those who use the loan for purposes other than the prescribed expenses. Further, any fraudulent use of monies provided under the Paycheck Protection Program will result in criminal charges being pursued by the federal government.
What kind of certifications are required under the program?
The focus and goal of the Paycheck Protection Program is to incentivize businesses to maintain their current level of employment so that American workers can keep on working and supporting themselves and their families. To that end, the approval process requires certification in good faith for all of the following points:
- That the COVID-19 pandemic crisis has led the business to need the loan to continue operating
- That the money received will be used for the purpose of keeping employees on the payroll, as well as to help with making payments for mortgage, leases and utility service obligations
- That you have not already received a loan under the Paycheck Protection Program and will not apply for another
The certification process requires the borrower to provide documentation regarding staffing and payroll, including the exact number of full-time equivalent employees, payroll costs, and the amounts owed for covered mortgage interest, rent, and utilities that are due eight weeks following receipt of the loan. Borrowers should be aware that the monies loaned must be largely spent on payroll costs, and that no more than 25% can be spent on the other permitted expenses.
Beyond the specific requirements listed above, potential borrowers must certify that the data and supporting information that they submit with their application is true and accurate. Applicants that knowingly make false statements in order to obtain a Paycheck Protection Program loan put themselves at risk of criminal action. Similarly, by submitting their applicant for a loan, potential borrowers acknowledge that the supporting tax documents that they submit will be used to calculate the amount that they are eligible to borrow and must correspond exactly to IRS tax records. Information submitted to a lender will be shared with authorized representatives of the SBA, including those in the agency’s Office of Inspector General. This information sharing allows adherence with SBA reviews and SBA Loan Program Requirements.
How can we help you?
If you are planning to apply for the PPP, or have any questions about the program, please contact our office to schedule a virtual meeting after April 20th.
There will be a high volume of applicants and we are here to help you through the process. We can help you wade through the SBA finance options and collect financial data needed to apply for the assistance.
Side-By-Side Comparison of the Paycheck Protection Program and Economic Injury Disaster Loans
