Congress passed and President Trump signed a $2 trillion stimulus package known as the Coronavirus Aid, Relief and Economic Security Act or CARES for short. There are numerous provisions in CARES but one of the most intriguing is a new SBA loan known as the Paycheck Protection Program. The purpose of this loan program is to provide funds to small businesses to keep their employees on the payroll instead of laying them off during this difficult economic time.
Loan Qualification and Maximum Loan Amount
Any business, including nonprofits and sole proprietors, with fewer than 500 employees qualify. The “covered period” is from 2/15/20 – 6/30/20. The maximum amount you can borrow is 2.5 times your average monthly payroll costs (calculated over the previous 12 months). Payroll costs include wages, independent contractor costs, group health insurance, retirement benefits, and state and local payroll taxes. Payroll costs do not include federal payroll taxes nor any compensation in excess of $100,000 to an individual employee. Thus, if your average monthly payroll cost is $20,000, you can borrow $50,000.
The loan proceeds may be used to pay payroll costs (as listed above), rent, utilities, interest on mortgage debt or interest any other debt that was incurred prior to 2/15/20. You must certify to the bank “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of” your business and that you will use the loan proceeds for the allowable uses.
There are no fees associated with these loans nor any personal guaranty or collateral required. The interest rate cannot exceed 4% and it must be repaid within 10 years, with no prepayment penalty. You can defer payments for anywhere from six months to one year after the loan.
Potential Loan Forgiveness
Part or potentially all of the loan amount may be forgiven. The amount that may be forgiven is the sum of your payroll costs, rent, utilities and interest on a mortgage that you pay in the first eight weeks after the loan is funded. However, the loan forgiveness amount will be reduced if you cut your number of employees during that eight-week period compared to previous pay periods or if you cut an employee’s pay by more than 25%. This is a fairly complex formula. Basically, if you to continue paying your employees through this economic downturn, the government is willing to forgive the loan. If your number of employees decreases or pay rates to decrease, then loan forgiveness can be reduced or eliminated and you will be required to repay the non forgiven amount. Any amount of loan forgiveness is not taxable to you.
Getting a loan
You need to contact your banker to start the loan process. I expect this will be a high demand loan considering the potential for forgiveness. Thus, you may want to start this process as soon as practicable. This law is only hours old so more guidance is forthcoming.
If you have any questions or want to discuss further, please don’t hesitate to call. There are numerous other provisions of CARES, which will affect many of you. We will keep you informed of those provisions in future email posts.