The CARES Act and SBA Loans Overview
The CARES Act included a $349 billion allocation of funding for fee-free loans to U.S. businesses pursuant to Section 7(a) of the Small Business Act (15 USC 636(a)).
IMPORTANT: These programs are first come first serve, so you must get your application in as soon as possible.
1. Who is Eligible?
a. U.S. businesses, non-profits and veterans’ organizations and tribunal concerns with less than 500 employees.
NOTE: The Borrower’s SBA industry size standard allows a potential loan applicant to have more than 500 employees (ie. franchises, restaurants) – then the applicant could potentially apply for each location.
b. Sole proprietorship, independent contractor and self-employed persons (from February 15, 2020 through June 30, 2020 – the “covered period”).
2. What loans does the CARES Act make available to me?
a. Paycheck Protection Program (“PPP”) Loan: (2.5 x average monthly payroll) – more details below.
b. Economic Injury Disaster Loan (“EIDL”): $10,000 – This is a new grant program created under the CARES Act to provide quick relief for applicants. Applicants can receive up to $10,000 to cover immediate payroll, mortgage, rent and other specified expenses. This grant does not have to be repaid.
3. Where/how do I apply?
a. Apply directly through the SBA at https://www.sba.gov/disaster-assistance/coronavirus-covid-19.
b. Apply with private lenders. SBA has a list of preferred lenders. If you have an existing relationship with a bank, start there first. If you don’t have an existing relationship with a bank, do your best to open a business account and establish a relationship. Like it or not, many lenders are offering priority to those with an existing business account.
Gather your documentation now. Lenders are asking for evidence of payroll costs. This can include payroll ledgers, tax returns, bank statements, etc. Lenders also want proof of ownership such as articles of incorporation/organization, operating agreements, business formation documents, etc. Many payroll providers are already developing documents to use for the PPP application.
4. How much can I borrow under the PPP?
a. Applicants can borrow 2.5 times the Borrower’s average total monthly payroll costs for the one-year period prior to the date on which the loan is made for a max of $10,000,000.
What are “payroll costs”?: (i) all salary, wage, commission or similar compensation; (ii) payment of cash tips or equivalent; (iii) payment for vacation, parental, family, medical or sick leave; (iv) allowance for dismissal or separation, (v) payment required for the provision of group health care benefits, including insurance premiums, (vi) payment of any retirement benefits; and (vii) payment of State or local tax assessed on the compensation of employees.
Payroll costs are NOT: Compensation for an individual employee in excess of an annual salary of $100,000, as prorated for the covered period. federal taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code for the applicable period, (iii) any compensation of an employee whose principal residence is outside the United States, and (iv) qualified sick leave and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act
EXAMPLE: If your average monthly payroll costs is $4,500, you can apply for 2.5 x $4,500 = $11,250. Don’t worry if you don’t do the math right because lenders will be vetting all applications and lend what you qualify for.
5. What’s the deal with loan forgiveness?
a. Your PPP loan can be forgiven IF: You use the loan amounts to pay for payroll costs, mortgage interest, rent, utilities and interest on other outstanding debt obligations incurred prior to February 15, 2020.
b. You will have to pay back your PPP loan IF:
You use the loan amounts for anything other than payroll, mortgage interest, rent, utilities and interest as above. So in short, use the money for what you’re supposed to use it for, otherwise, it will not be forgiven – in full or in part.
Any amounts that are otherwise eligible for forgiveness will also be reduced if the borrower’s average number of full-time employees per month during the covered period has decreased compared to its average number of full-time equivalent employees per month during either (1) the period from February 15, 2019 through June 30, 2019 or (ii) January 1, 2020 through February 29, 2020. Loan forgiveness will also be reduced if the borrower cuts employee salaries by more than 25%.
What if I have already laid employees off? If you have already furloughed or laid off employees, as long as you restore the number of employees and their pay prior to June 30, 2020, this will not impact the loan forgiveness.
6. Interest Rates/Deferment: The CARES Act states that the interest rate on the PPP loans cannot exceed 4%. Lenders might charge a lower rate, depending on your credit history, etc. The CARES Act requires lenders to provide complete payment deferment for a minimum of six months and up to one year.
7. How long with it take for my loan to be approved and funding to occur?
Lenders are overwhelmed with inquiries and applications. Many of them just now started to accept applications. The process could be days to weeks. So, get your application in sooner rather than later. Once the application is approved, my sense is that funding should follow soon after. Funding will likely occur as a direct deposit into your bank account.
8. Is the portion of the PPP loan that’s forgiven taxable?
No. Any loan amounts that are forgiven are excluded from gross income
9. How will I apply for loan forgiveness?
An applicant must submit a detailed application that includes documentation verifying the number of full-time equivalent employees on payroll and pay rates for the covered period, as well as certification and documentation that the amount of forgiveness requested was used to retain employees, or make payments for mortgage interest, rent and/or utility payments. In short, keep pristine, detailed and organized records!