Help is on the way
Many businesses have had to temporarily shut down, lower employee wages, or reduce or eliminate personnel in the wake of stay-at-home orders issued to combat the spread of COVID-19—but help is on the way!
The CARES Act, signed into law on March 27, 2020, amends the existing Small Business Act (“SBA”), allocating $349 billion to create a new business loan program with relaxed qualification standards (the “Paycheck Protection Program”), specifically designed to infuse businesses with necessary cash to maintain or rebuild their workforces.
The Paycheck Protection Program will provide unsecured, federally-backed loans with low, fixed interest rates (capped at 4%, although the SBA website lists the current rate at 1%) to help qualifying businesses cover operational costs such as rent, insurance premiums, continuation of health benefits, utilities, and most importantly, payroll, during the COVID-19 emergency.
Unlike existing SBA loan programs, for which many businesses cannot qualify, the requirements for the Paycheck Protection Program are minimal. Here’s who qualifies: any business with fewer than 500 employees that paid payroll and payroll tax as of February 15, 2020 (including sole proprietorships, independent contractors, other self-employed individuals, and non-profits). The 500-employee threshold is a “head count,” and does not distinguish between full- and part-time employees. Applicants do not need to provide tax returns, credit history, or financial statements to qualify, but must make a good-faith certification that:
- The loan is needed to continue operating during the COVID emergency;
- Funds will be used for approved purposes (as described below);
- The applicant does not have pending any duplicative loan applications or for the same purpose or amount; and
- From February 15, 2020 until December 31, 2020, the applicant has not received any duplicative amounts under the Program.
Loan proceeds can be used for:
- Compensation (salary, wages, commission, or similar compensation, payment of cash tip or equivalent);
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment of interest on debts incurred before February 15, 2020;
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; or
- Payment of state or local tax assessed on the compensation of employees.
So, how much can a business borrow under this program? Generally, a business can borrow 2.5 times their average monthly payroll costs, based upon the payroll expenditures incurred over the preceding year, or, if a business is newer, incurred during the first two months of this year. Note that “payroll costs”, as defined in the CARES Act, do not include compensation to an individual employee in excess of $100,000 annually.
When the period to use the loan proceeds expires (eight weeks from the date of origination), debt service may be deferred for up to one year at the election of the borrower. However, if the loan proceeds are used for approved expenses (and a big chunk of those expenses are payroll), the loan principal will be forgiven, provided that a borrowing business’s workforce is restored to its original size and level of compensation by June 30, 2020. Because the loan amount is calculated using a historical measure of a business’s payroll costs, the loan proceeds can be used to rehire employees who have been laid off due to the COVID-19 emergency.
For more information about calculation of the loan and forgiveness amounts, click here for a helpful illustration created by the U.S. Chamber of Commerce.
The application window for businesses opens Friday, April 3, 2020, and Friday, April 10, 2020 for independent contractors and sole proprietors. The window closes for all borrowers on June 30, 2020.
Early indications are that this program will be oversubscribed, so any business seeking a loan under the Paycheck Protection Program should apply as soon as possible. To apply, we strongly recommend connecting with an SBA-approved lender, as this will streamline the approval process. Resources on how to find an SBA lender, as well as other information regarding the program, can be found on the SBA’s website.
We understand that many business owners have had to make hard choices regarding their employees during these truly uncertain times. This unprecedented program gives employers the chance to rebuild their workforce and keep people on the payroll, at low cost and with little risk to the viability of their business.
If you would like to discuss the program in more detail, would like assistance in selecting a lender, or submitting an application (the form can be located here) Spierer, Woodward, Corbalis & Goldberg is standing by — it would be our pleasure to advise you.
Please note that this is an extremely dynamic situation, and governmental guidance, regulations, or economic developments may render some information contained herein obsolete—SWCG will release further information as the situation evolves.