Continuing our discussion of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), this article will cover the Paycheck Protection Program. This is the “forgivable loan” program that you may have heard about.
CARES Act Paycheck Protection Loan
- Paycheck Protection Loans will be administered through the Small Business Administration’s 7(a) Loan program. 7(a) loans are made through existing approved SBA lenders and are 100% guaranteed by the SBA. To participate, you must contact an SBA lender.
(Note that Paycheck Protection Loans are not the same as SBA Disaster Loans which are made directly by the SBA. A few weeks ago, Congress made small business owners in all U.S. states and territories eligible for SBA Disaster Loans due to Coronavirus (COVID-19). SBA is now indicating that emergency advances on Economic Injury Disaster Loans of $10K will not need to be paid back.)
- Businesses that have fewer than 500 employees (or fewer than the NAIC Code employee size standard) are eligible for Paycheck Protection Loans.
- Applicants will be required to make a good-faith certification that the loan is necessary due to the uncertainty of the current economic conditions caused by the coronavirus.
- The maximum loan amount is $10 million or 2.5 times the average monthly payroll costs over the previous year, excluding annual compensation of amounts over $100,000 per person. Payroll costs are defined broadly and include benefits such as group health insurance premiums and retirement plan contributions.
- The loan proceeds may be used for a variety of costs, including payroll, group health insurance, rent, mortgage interest, and utilities.
- The primary benefit of the loan program is the possibility of having all or a portion of the loan forgiven. The amount eligible for forgiveness are expenditures made during the 8-week period following loan origination date on the following: payroll, rent (on a lease in force before February 15, 2020), utilities, and group health insurance.
- To qualify for loan forgiveness, the business must maintain the same number of employees (measured in full-time equivalents) from February 15, 2020, through June 30, 2020, as it did during either the same period in 2019 or from January 1, 2020, until February 15, 2020. To the extent this requirement is not met, the amount of the loan eligible for forgiveness is reduced.
- Other benefits include:
- The amount of loan forgiven is not included in taxable income.
- The maximum interest rate is 4%, and the term can be up to 10 years.
- Payments will be deferred for a minimum of 6 months and up to 1 year.
- No collateral is necessary.
Not surprisingly, some of the language in the bill is unclear and certain provisions are still being discussed and debated among practitioners (and we assume lenders). Ultimately, whatever the lenders say will go.
If you plan on applying for this loan, we would be interested in hearing about your experience. What banks are taking applications? What information is required? How long is the application process? Please let us know by responding to this article or through email at firstname.lastname@example.org.
Please stay tuned. We will continue to provide more information throughout this week.