CARES Act - Paycheck Protection Program
March 31st, 2020
As part of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act passed this week, the Paycheck Protection Program will provide nearly $350-billion in 100% federally guaranteed emergency loans to American small businesses for payroll and cash-flow assistance. If a borrower satisfies certain conditions, portions of the loans will be forgiven. All small business owners should evaluate whether a loan under the Paycheck Protection Program could help them operate through and survive the current crisis. The Program is an extension of the Small Business Administration 7(a) program which will be implemented by the 1,800 SBA-approved lenders. If you have an existing banking relationship with such a lender, you should contact that bank without delay to review your eligibility.
We remain committed to helping you and your business through these difficult times. Please do not hesitate to contact us should you need assistance with the processing of your loan through the Payroll Protection Program. Please note that the Treasury Department has not released the specific process of applying for the Payment Protection Programs loan as yet. It is expected that Treasury will release those guidelines by this Friday, April 3, 2020. We will provide updates as we receive them.
Highlights of the Paycheck Protection Program include:
Who is Eligible?
Businesses, non-profits, veterans’ organizations, and tribal business concerns employing fewer than 500 employees and those employing more than 500 employees but fewer than the maximum established by the SBA at 13 C.F.R. 121.201 for the applicable business type. Note a Special Rule Applicable to NAIC 72 (Accommodation and Food Services), makes any such hospitality business with fewer than 500 employees per location eligible. Self-Employed Individuals are eligible if they would be eligible for sick leave under the Families First Coronavirus Response Act.
Eligible companies must have been in operation on February 15, 2020 and must have had, as of that date, employees for whom the company paid salaries and payroll taxes, or paid independent contractors.
What Does the Program Provide?
An unsecured loan with a maximum interest rate of 4% which may be used for the following approved purposes: (a) payroll costs; (b) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (c) employee salaries, commissions, or similar compensations (with some limitations for salaries in excess of $100,000 and exclusions for employees outside the U.S.); (d) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (e) rent; (f) utilities; and (g) interest on any other debt obligations that were incurred before the “covered period” of February 15, 2020 to June 30, 2020. Repayment of the loan will be deferred for at least six months and up to one year from origination. There is no prepayment penalty.
When applying for a Paycheck Protection Loan, a borrower must certify that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient and acknowledge that the funds will be used for the above purposes, including to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
How Much Can You Borrow?
Two and a half (2.5x) times your average total monthly payroll costs for the trailing 12 months prior to the date on which the loan is made, plus the outstanding balance of any SBA Economic Injury Disaster Loan (EIDL) disbursed between January 31, 2020 and the time the Paycheck Protection Loan is made, up to a maximum loan of $10,000,000. The payroll of Borrowers deemed to be a seasonal business are calculated using the 12-week period beginning February 15, 2019 or at their election, March 1, 2019 to June 30, 2019. Any business operating for less than a year will be calculated using the average payroll from January 1, 2020 through February 29, 2020.
How Much of the Paycheck Protection Loan Can Be Forgiven?
The portion of the loan used during the eight (8) week period after the origination date, subject to proper documentation, on (i) payroll costs, (ii) interest on a covered mortgage obligation, (iii) rent payments, and (iv) covered utility payments, may be forgiven up to 100% of the loan. Forgiveness of debt shall be made by application to the lender and is not taxable. Upon forgiveness, any remaining balance shall have a maximum 10-year repayment term.
Critically, the amount of forgiveness will be reduced if you reduce employee headcount. To determine the reduction, divide the average number of employees you have during the eight weeks following loan disbursement by either the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020, whichever is more advantageous. Moreover, if you reduce by more than 25% the salaries or pay of those earning less than $100,000, there will be a proportionate reduction in the amount of forgiveness.
If you have already reduced headcount or pay following February 15, 2020, you can avoid the penalty by rehiring all employees by the earlier of (a) the closing of the Paycheck Protection Loan or (b) June 30, 2020.
What are Other Benefits of Paycheck Protection Loans?
Of particular note to eligible borrowers, all personal guarantee and collateral requirements are waived under the Paycheck Protection Program. All loans are non-recourse against individual shareholders, members, or partners of an eligible recipient, except to the extent proceeds are used for an unauthorized purpose. Also, typical SBA fees, including application, guaranty and annual fees applicable to other SBA 7(a) loans, are waived.
How Does a Business Apply?
As indicated above, the Paycheck Protection Loans will be made through an SBA-approved lender. Current approved lenders may, but are not obligated to, elect to participate in the Program, so check with your lender. The deadline to apply is June 30, 2020. The SBA will be providing additional guidance to lenders and borrowers in the coming days, though it likely will take a week or more before Paycheck Protection Loan applications can be processed.
Borrowers should refer to www.SBA.gov for the most current loan application information.