CARES Act Paycheck Protection for Small Businesses

Unlike "bailouts" in the past, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") that was signed into law on March 27, 2020 includes some much-needed relief for small businesses. The Paycheck Protection Program designates $349 billion for distribution through the Small Business Administration and its certified lenders to small businesses, independent contractors, 501(c)(3) nonprofits, and certain other organizations (what the Act collectively calls "Potential Borrowers"). The Paycheck Protection Program ("PPP") has the greatest potential benefit because the loans may be fully forgiven. This is effectively a grant for your small business to continue operations during the coronavirus pandemic.

Eligible Organizations and Individuals

All small businesses with fewer than 500 employees are eligible. This includes nonprofits, veteran organizations, self-employed individuals, and independent contractors. These Eligible Entities differ from the typical SBA restrictions allowing for more businesses to qualify for this program. If your business has not qualified for SBA loans in the past, you could still be available for this program.

Loan Terms & Forgiveness

Under the Act, loans made under the PPP are on a 10-year term with deferred payments for at least 6 months & up to one year. Interest rates are not to exceed 4%, and, also unlike other SBA loans, no collateral or personal guarantee is required. However, the US Treasury Department has issued fact sheets providing for two-year loans with interest rates of 0.5%. Because this is such a quickly-developing situation, it is important to carefully review the government information (which can be found here https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf) and work with your lender directly.

Loans can be two months of your average monthly payroll from the last year plus 25% (subject to a $10 million cap). Payroll costs are capped at $100,000 for each employee. Another unique feature of these loans is that owners/principles of businesses are eligible to have their payroll included - and ultimately forgiven - in the PPP. Payroll costs include payments of any compensation with respect to employees that is for:

  1. Salary, wage, commission, or similar compensation;
  2. Cash tip or equivalent;
  3. Vacation, parental, family, medical or sick leave;
  4. Severance pay;
  5. The provision of group health care benefits;
  6. State or local tax assessed on the compensation of employees;

any compensation of a sole proprietor or independent contractor that is not more than $100,000 in 1 year, as prorated for the period February 15, 2020 through June 30, 2020.

Loans may be forgiven up to 100% of principle if borrowers meet certain conditions. Double-check the US Treasury Fact Sheet immediately prior to committing to these loans as the information has been changing rapidly. As of April 1, loans meeting the below conditions shall be forgiven.

  1. The loan funds are used exclusively for payroll costs, mortgage interest, rent, & utilities payments over the 8 weeks after getting the loan.
  2. Your business maintains its gross payroll. For example, say your business has 4 employees with a total payroll of $100,000 between February 15, 2019 to June 30, 2019. If you reduce all employees' wages by 20%, only $80,000 would be forgiven.
  3. Your business maintains (or increases) its number of employees. Sticking with our previous example, if you reduce the number of employees from 4 to 3, only $75,000 would be forgiven. However, if you maintain (or increase) your total number of employees & gross payroll as of June 30, 2020, 100% of the loan would be forgiven.

What to do now

Part of the application requires that your business certify. You must represent in good faith that, among other things:

  1. Current economic uncertainty makes the loan necessary to support your ongoing operations.
  2. The funds will be used to retain workers & maintain payroll or to make mortgage, lease, and utility payments.
  3. You have not & will not receive another loan under this program.
  4. You will provide the necessary & requested documentation to the lender to support your application and certification under the PPP, and that all provided documentation and information is true & accurate. Knowingly making a false statement to get a loan under this program is punishable by law.

Applications are being accepted beginning April 3, 2020. Due to likely high subscription, & limited funding available, it is recommended that you begin the process as soon as possible. To do so, we recommend that you:

  1. Identify your SBA lender & contact it immediately to ley them know that you are interested in taking advantage of the PPP.
  2. Determine & document your payroll costs; total number of full-time equivalent employees; and monthly mortgage interest, rent, & utilities payments from February 15, 2019 to present.
  3. Determine & document the number of full-time equivalent employees per month during January 1, 2020 to February 29, 2020
  4. Download & complete the application available online at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf. This may or may not be the complete application required by your lender, but it is almost certainly going to be required as part of a larger application.