By now you’ve heard about the lending provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). You may have even applied for a loan already. Whether you’re just hearing about the program or you already have a loan, this article is designed to highlight some of the specific provisions that all small businesses and not-for-profit organizations should be aware of.
Let’s start by making a distinction between the two major small business loan relief programs people are currently buzzing about:
- Paycheck Protection Program (PPP) – This is the actual name of the loan program created by the CARES Act. PPP is administered by the Federal Small Business Administration (SBA) through banks and credit unions. These loans are made and held by banks and credit unions and fully guaranteed by the SBA.
- Economic Injury Disaster Loans (EIDLs) – This is a separate SBA loan program not created by the CARES Act, but significantly modified by it. EIDL loans are administered directly by the SBA and lending institutions are not involved in this program.
Many loan applicants will be eligible for both PPP loans and EIDL loans, and it is acceptable to apply for both, but PPP loans can only be obtained from participating banks and credit unions.
PPP loans are intended primarily to help small businesses retain and pay employees. This is an attempt to improve the economy’s employment picture by providing liquidity directly to small employers. But it can get quite complicated. Here are the key elements:
Where can you get a PPP Loan?
PPP loans can be obtained from banks and credit unions that are registered as SBA lenders. Lenders do not have to offer PPP loans. If you haven’t already, it is worthwhile to check with your financial institution to see if they are participating as a lender in the PPP program. Do not contact the SBA directly for a PPP loan.
Note that for a PPP loan application, you must certify that you have not applied for any other loans through the PPP program. There is only one PPP loan allowed per business.
PPP Loan Terms
There are no application or loan closing fees for PPP loans. The typical SBA requirements that the applicant is unable to obtain credit elsewhere, that a personal guarantee from a business owner is provided, and that collateral for the loan be provided are not requirements for PPP loans.
PPP loans will bear interest at 1.0% and are guaranteed by SBA for the entire time any balance is outstanding. Note that all PPP loans include deferral of payments (both principal and interest) for six months. The loan maturity is two years. These loans cannot include pre-payment penalty clauses.
PPP Loan Forgiveness
The CARES Act is designed to allow for some or all of the PPP loan balance to be forgiven. The forgiveness provisions tend to be the main attraction for applicants. However, forgiveness is far from automatic. The borrower needs to do two things to have some or all of the loan balance forgiven:
- Spend the loan proceeds on the following in the first eight weeks after the loan proceeds are disbursed.
- Payroll costs (limited to a maximum of $100,000 of annual compensation per employee, pro-rated, and excluding payroll to anyone whose primary residence is outside the United States).
- Interest on any mortgage obligation (but not principal).
- There are two options for the second step:
- Maintain Employment - Maintain employed FTEs for the eight weeks starting on the date the loan is disbursed (the covered period) as compared to the period February 15, 2019, through June 30, 2019, or maintain employed FTEs for that period compared to the period January 1, 2020, through February 29, 2020, at the borrower’s discretion. To the extent employed FTEs decreases, a percentage of the PPP eligible expenditures in (1) above is eligible for forgiveness based on the percentage of FTEs in the covered period vs. the selected earlier period.
- Rehire - To the extent reductions in FTE and/or payroll expense take place between February 15, 2020, and the date 30 days after the enactment of the CARES Act (April 26, 2020), the borrower may reinstate its FTE and payroll expense to the February 15, 2020 levels (i.e. rehire employees to the pre-reduction FTE and payroll level) on or before June 30, 2020.
As an example for option 2(a), a borrower which had, on average, 50 FTEs from February 15, 2019, through June 30, 2019, but has only 20 FTEs on average for the eight weeks after the PPP loan is disbursed, would be eligible to have 40% (20/50) of its PPP loan forgiven if it spent all of the loan proceeds on the specific costs enumerated in (1) above.
An example of option 2(b) would entail an organization that laid off 40 of its 50 employees in early April 2020 but then hired them all back at equivalent wages before the end of June 2020. Assuming employment was restored to the pre-reduction level, there would be no limit on loan forgiveness related to step 2.
It is critical to understand that loan forgiveness is not automatic and plan your PPP loan amount in a manner that incorporates how much you can expect to be forgiven and how much will need to be repaid.
PPP Loan Limits
PPP loans can be for any amount up to a maximum calculated as two and a half times the organization’s average monthly payroll costs for calendar 2019 (or the 12-month period ending on the date the PPP loan application is submitted) plus the outstanding balance on any SBA loan made after January 31, 2020. There are specific alternate rules for organizations considered “seasonal employers” for which the 12-month average might not be as meaningful.
Note that “payroll” for this purpose includes gross salaries, wages, commissions, tips, group health care benefits, and retirement benefits. This is an area that can get complicated if you have unusual compensation agreements with people. There are also provisions regarding payments for leave time, separation payments, and other items that should be clarified if these apply to your company.
Note that the initial determination of PPP loan amounts should incorporate a consideration of the amount likely to meet loan forgiveness eligibility requirements. Many borrowers will be able to structure their loans to increase the chances of full forgiveness later. Under any circumstances, PPP loans are capped at $10,000,000 per organization.
Organizations eligible to apply for PPP loans include:
- Small business concerns as previously defined by the SBA.
- Other organizations that have not more than the greater of 500 employees or meet the SBA’s established “size standards” for the organization’s industry, which are available here, including:
- Any business concern.
- Individuals operating under sole proprietorships or as independent contractors and some self-employed individuals.
- Non-profit organizations tax-exempt under 501(c)(3) or 501(c)(19).
- Tribal business concerns described in section 31(b)(2)(c).
- There are numerous other detailed criteria by which other organizations might be eligible, including larger multiple-location companies, franchisees, and others.
Applicants must state that their business has suffered a negative financial impact from the COVID-19 situation.
There are a lot of details in the Act and the regulations issued related to the Act. Businesses interested in obtaining a PPP loan should “model” their expected expenditures and FTE count through June 30 to establish an idea of forgivable expenditures vs. amounts to be repaid. Contact your financial institution to see if they are a participating lender for PPP loans. We are happy to discuss the PPP program in more detail and help you as you evaluate and apply for a PPP loan. Feel free to contact Jeff Paille, CPA, Partner.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.