On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. One aspect of the CARES Act, the Paycheck Protection Program (PPP), permits certain employers to obtain forgivable loans in order to keep employees on the job and to pay overhead costs.
Below are 10 facts small business owners should know about the PPP, which is administered by the Small Business Administration’s (SBA) 7(a) Loan Program.
- Numerous categories of businesses are eligible.
Eligible applicants include certain businesses and nonprofits with 500 or fewer employees (or the amount otherwise specified by the SBA for an applicant’s industry) and individuals who operate as a sole proprietorship or independent contractor. For purposes of qualifying for a covered loan, “employee” includes individuals employed on a full-time, part-time, or other basis. Businesses that are not eligible for PPP loans are identified in the SBA Standard Operating Procedure 50 10.
- The amount you can borrow depends on your immediate payroll history.
Generally, the maximum loan amount is the lesser of $10 million or the average total monthly payments for payroll costs incurred during the preceding calendar year multiplied by 2.5. You should include full-time and part-time employees for purposes of this calculation, but not independent contractors. You can only apply for one PPP loan, so you should consider applying for the maximum amount. The interest rate of the loan will be one percent, and the maturity is two years.
- The loan covers more than just payroll expenses.
In addition to payroll expenses, you may use the loan proceeds to cover certain overhead and benefits costs, including: (a) mortgage interest payments (but not mortgage prepayments or principal payments); (b) rent and utility payments; (c) payment for vacation, parental, family, medical, or sick leave; (d) payment required for the provision of group health care benefits, including insurance premiums; (e) payment of any retirement benefit; and (f) interest payments on any other debt obligations that were incurred before February 15, 2020. However, in order for the loan to be eligible for forgiveness, at least 75% of the loan must be spent on payroll.
- Spend the loan proceeds within 8 weeks after loan disbursement.
Borrowers are eligible to have loan amounts completely forgiven to the extent that the amounts borrowed are spent on permitted categories during the 8 weeks following disbursement of the loan. To the extent a portion of the loan is not forgiven you will not have to make any payments for six months following the date of disbursement of the loan. However, interest will accrue during this period at a maximum interest rate of 4 percent.
- Unauthorized use of loan proceeds may lead to severe penalties.
You can cover no more than eight weeks of payroll and operating expenses with forgivable loans. Any unused proceeds transfer into a 2-year loan with a low interest rate. However, if you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts and you risk liability such as charges for fraud.
- There is a salary cap.
The forgivable loan will cover only salaries up to $100,000. So, for example, if you have an employee making $150,000, the forgivable loan will cover only 100,000 of it.
- The application is available online and will be processed on a “first come, first served” basis.
In light of the pandemic, the SBA encourages applicants to access the SBA Form 2483 application online. However, the SBA does not lend money—instead, it sets guidelines for loans to be made by its partnering lenders. Determine where you intend to apply and notify your lender that you want to apply for a loan under the PPP. Borrowers are encouraged to check first with their existing banking institution to see if such bank is an approved SBA lender, as lenders are giving existing clients priority in the process before new clients, given the volume of applications. Your lender must submit SBA Form 2484
- You will need to gather certain documentation to support your application.
Applicants must certify that the uncertainty of current economic conditions makes the loan necessary to support the applicant’s ongoing operations and that the proceeds will be used to retain workers and maintain payroll, make mortgage payments, pay utilities, and pay other necessary expenses. Be prepared to present certain documentation to support your application, including but not limited to payroll processor records, payroll tax filings, or Form 1099, MISC, or income and expenses from a sole proprietorship. If you do not have this documentation, you can submit bank records sufficient to demonstrate the qualifying payroll amount.
- You may seek loan forgiveness, but layoffs and reductions in wages beyond 25% will begin to reduce the loan forgiveness amount, dollar for dollar.
The aim of the PPP is to maximize employee retention at or near full compensation. Consequently, for each dollar of improper salary reduction, you lose a dollar of loan forgiveness. You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. You will also owe money if you do not maintain your staff and payroll.
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
- You have until June 30, 2020 to apply and receive the loan, and the turnaround time for approval can take 2-3 weeks.
According to the SBA, the goal is to issue a determination on each application within 2 to 3 weeks after receiving a complete application and to make an initial disbursement within five (5) days of receiving signed loan closing documents. Given the expected large number of applicants, it would behoove you to apply as soon as practicable. Keep in mind, the last day to apply for and receive a loan under the PPP is June 30, 2020.