March 27, 2020
With cash flows fluctuating due to the recently declared public health emergency due to the COVID-19 outbreak, many small businesses have been unable to make payroll in recent weeks. More disconcerting is the number of employers that are already shuttering their doors and furloughing workers, eliminating paychecks for thousands of workers.
A cornerstone of the recently passed CARES Act is the Paycheck Protection Program which attempts to address this problem. The Paycheck Protection Program is designed to keep employees connected to their employers, keeping them paid even if a business is temporarily closed. It is intended to ultimately ensure the survival of small and medium enterprises by making loans and conditional grants quickly available to them.
Here is a snapshot of what is involved in the Paycheck Protection Program as it pertains to a reading of a recent publication by the U.S. Small Business Administration.
1. Funding for up to eight weeks of payroll
The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.
2. $349 billion in total federally backed loans
The CARES Act has authorized commitments to the SBA 7(a) loan program, as modified by the CARES Act, in the amount of $349 billion. The Payroll Protection Program covers the period beginning February 15, 2020 and ending on June 30, 2020 (the Covered Period).
3. Loans forgiven if they are used to keep employees paid
Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge businesses any fees.
4. Firms with 500 or fewer employees, and self-employed can apply
Small businesses with 500 or fewer employees–including non-profits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independents contractors–are eligible. Businesses with more than 500 employees are eligible in certain industries.
- Starting April 3, 2020, small businesses and sole proprietorships can apply
- Starting April 10, 2020, independent contractors and self-employed individuals can apply. There is encouragement to apply as quickly as you can because there is a funding cap.
5. Relaxed loan vetting
For eligibility purposes, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
6. Calculating the loan value
During the Covered Period, the maximum loan amount permitted for an eligible Covered Entity is the lessor of $10,000,000 and an amount calculated based on a payroll formula that essentially equals 2.5x the average monthly payroll costs incurred in the one-year period before the loan is made.
The interest rates for loans borrowed by a Covered Entity under the program may not exceed 4%.
Any Paycheck Protection Loan that has a remaining principal balance after any applicable loan forgiveness (as covered below in detail) must have a maturity date no later than 10 years from the date on which the borrower applied for loan forgiveness.
The SBA will direct lenders to defer all payments (principal, interest and fees) due under a Paycheck Protection Loan for a minimum of 6 months and a maximum of 12 months.
7. Loan forgiveness tied to keeping employees on books
During the 8-week period beginning on the date a Paycheck Protection Loan is funded (the Forgiveness Period), a borrower will be eligible for forgiveness and cancellation of indebtedness for up to the full principal amount of such loan. The amount eligible for forgiveness (the Total Eligible Forgiveness Amount) is equal to the total costs incurred and payments made during the Forgiveness Period for 1. payroll 2. mortgage interest 3. rent and 4. utilities.
The loan forgiveness amount available to a borrower is subject to reduction if the borrower terminates employees or reduces employee salary and wages during the Forgiveness Period. There is, however, relief from the forgiveness reduction if the borrower rehires employees or makes up for wage reductions by June 30, 2020.
8. The loan application
9. How to find an approved lender
As an employer, it is important that you have the resources to navigate this unprecedented time during this crisis. Being able to access funds that will ensure your ability to keep your employees paychecks coming over the next couple months will be vital for business success and ultimately reinforce your employees’ decision and confidence that made you their employer of choice. We are positioned to work with you to access these programs and others both now and in the future by starting a conversation now.