In historic legislation, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act contains a series of initiatives designed to help businesses and individuals weather the impacts caused by the COVID-19 pandemic.
The sweeping aid available covers a broad spectrum of assistance. This blog focuses on financial assistance available for a significant subset of employers—those with less than 500 full-time employees. While the precise details of how the aid packages will be administered continues to evolve, the information below addresses many of the frequent questions.
The Small Business Administration (SBA) is providing up to $349 billion (yes, with a “B”) low-interest, long-term disaster loans for qualifying small businesses. The loans are designed to provide working capital for private and non-profit organizations.
Two of the programs are SBA Paycheck Protection Program (PPP) and Economic Injury Disaster Loans. This summary focuses on the Paycheck Protection Program. Of course, there are particular details to the PPP that need to be examined for each business situation.
Q1: When, Where and How to Apply?
On April 3, 2020, eligible small businesses may begin to apply. Businesses apply through a lender approved to issue SBA loans. The lender itself screens the application and funds the loan (later receiving reimbursement from SBA). Unlike traditional SBA products, there is no personal guarantee or collateral guarantee.
Q2: How Much Can My Business Borrow?
The maximum that can be borrowed is $10 million. To calculate how much your business can borrow:
Total average monthly payroll expenses (including health care benefits, retirement benefits, and more)
[Note: use $8,333 per month for any employee earning more than $100,000 per year]
= Loan Amount
Q3: What can the money be used for?
- Employee salaries
- Other payroll support (such as paid sick, family, medical leave)
- Mortgage interest, rent and utility payments
- Group Health Insurance premiums
- Retirement benefits
- State or local tax assessed on employee compensation
Q4: Forgiveness of the PPP Funds
An extremely attractive feature of the PPP is the possibility of funds being forgiven by the SBA.
First, to be eligible for forgiveness, the PPP loan funds must have been spent on:
- Rent on any lease in place prior to February 15, 2020
- Interest payments on any mortgage in place prior to February 15, 2020
- Utilities for service that began before February 15, 2020.
Second, your lender will (a) compare the headcount of full-time & full-time equivalent employees from the covered period and the prior year, and (b) compare the wages paid those employees.
The forgiveness amount will be reduced in proportion to any drop in employee headcount or the drop in wages paid those employees.
Borrowers seek forgiveness by submitting an application to the lender who funded their loan. That lender will judge the borrower’s forgiveness request. The SBA then reimburses the lender directly for the principal amount of the forgiveness along with accrued interest. The SBA reimbursement is supposed to occur within 90 days of the forgiveness decision. The amount not forgiven is carried as an ongoing loan. The remaining amount is payable over 2 years with no prepayment penalty. The currently quoted interest rate is at or near .5%.
And, the icing on the proverbial PPP cake—the amount forgiven is not deemed income to the business!
How to apply? A business can apply here.
As always, please let me know if I can help.