Paycheck Protection Program
The CARES Act signed into law last week created a new type of Small Business Loans that if used for qualifying expenses could be forgivable and not repaid.
The first step that needs to be addressed is to establish if your current financial institution is a “preferred or accepted” SBA lender. Our understanding today, is these banks will be ones able to distribute the loans. Therefore, this hurdle needs to be addressed first. Next, you need to have payroll information ready to provide to the bank so they can determine the amount of the loan that is available for your application. So far this appears to be the quarterly 941 returns for 2019 and a payroll report from March 1, 2019 – February 29, 2020.
If you are awarded a loan, we highly recommend establishing a new and separate checking account for the proceeds to be deposited, allowing for tracing and support for the disbursements which will aid in reporting for forgiveness consideration. For example payroll expenses could be transferred to your current payroll account in lump sum, documenting that the funds were used for payroll costs.
In addition, to the items above, the below is some summary information on the loans, terms, forgiveness that you may want to review. The guidance on details is forthcoming, but this is some early summary information on the provisions.
If you have any questions, please reach out to us!
Paycheck Protection Program:
Temporarily raises the maximum loan amount from $5 million to $10 million during the "covered period," from February 15, 2020, through June 30, 2020. The maximum value of a company's loan will be equal to the lesser of $10 million or the sum of 2.5 times the average monthly payroll cost in 2019. This includes wages for employees as well as expenses for paid sick leave, health care, and other benefits.
Temporarily guarantees 100 percent of the loans, regardless of size. Traditionally, loans up to $150,000 were 85 percent backed by the SBA. Loans greater than $150,000 were 75 percent backed.
Temporarily confers eligibility to businesses--even sole proprietorships and independent contractors--with 500 or fewer employees, regardless of whether a business qualifies as "small" under the SBA's size standards. Traditionally, the SBA uses a web of revenue standards to determine whether a company qualifies.
The maximum interest rate for these loans is now capped at 4 percent. Loan terms are still negotiated between borrowers and lenders and are a product of the prime rate, plus the LIBOR rate. However, rates may not exceed that limit. Previously, fixed rate loans were capped at 6 percent.
Waives the requirement that businesses show they can't obtain credit elsewhere. The inability to secure credit was formerly a requirement.
Annual or guarantee fees for the loan and all prepayment penalties are waived. The SBA formerly levied fees of around 2 to 3.75 percent of the guaranteed portion of a loan.
SBA reportedly plans to have a process in place by end of next week, where the loans can be made and disbursed in the same day, according to The Wall Street Journal. Previously, the SBA said it takes around 5 to 10 business days.
Businesses won't need to provide a personal guarantee or collateral. Traditionally, lenders don't require collateral for loans up to $25,000. For loans in excess of $350,000, the SBA traditionally requires that the lender collateralize the loan to the maximum extent possible up to the loan amount--and that may include requiring a person secure his or her loan with personal assets.
Expands the permitted use of funds to include payroll support, paid sick leave, mortgage payments, rent payments and servicing existing debt. Previously, these items weren't expressly eligible for coverage.
Loan Forgiveness:
Loans may be fully or partially forgiven. Any portion of the loan used to make payroll, pay for utilities, rent, and mortgage interest may be forgiven, dollar for dollar. To receive this dollar for dollar loan forgiveness, however, workers need to remain employed through the end of June. Traditionally, 7(a) loans must be repaid in full, depending on the repayment terms.
In the case of reduced headcount, lenders may reduce the amount of forgiveness for businesses that lay off employees during the first eight weeks following the loan. If wages of employees who earn less than $100,000 a year are reduced, the level of forgiveness may also get reduced.
Businesses that have let employees go before accepting the loan will not be subject to penalties. If those businesses rehire employees after accepting the loan, they'll receive additional credit to cover wages.