On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted as an economic relief package in response to the COVID-19 pandemic. The CARES Act provides economic support at the federal level to the business sector, employees, individuals and families, and specific industries that have been impacted, including air transportation, healthcare, and education. This includes the Individual Stimulus Check payments for Americans, and for small business owners, access to a new expanded SBA Loan Program called the Paycheck Protection Program, which can provide businesses with a loan that could potentially be 100% forgiven, effectively creating a loan that converts into a Federal grant program for small businesses.
Summarized below are key aspects and frequently asked questions our firm has received about the Paycheck Protection Program, a $349 billion SBA-administered loan and loan forgiveness program described in Division A, Title I – Keeping American Workers Paid and Employed Act of the CARES Act.
Am I Eligible to receive a Paycheck Protection Program Loan?
These special SBA Loans have expanded qualification guidelines so that most small businesses will qualify for these new Paycheck Protection Loans. In order to qualify a business must:
- Have fewer than 500 employees (including full-time, part-time and temporary employees)
- Be in business prior to February 15, 2020
Other traditional SBA Loan requirements such as revenue limitations, credit availability, etc. have been suspended for this loan program and do not apply to Paycheck Protection Loans.
Do I need to have any collateral or other credit support for a Paycheck Protection Loan?
No, a borrower will not be required to pledge any collateral or provide personal guarantees to secure a Paycheck Protection Loan.
How much of a loan can I receive?
Loans are available to small businesses up to the smaller of:
- 250% (2.5 times) your monthly payroll costs (including wages, healthcare and other benefits, but excluding employer payroll taxes)
- or -
- $10 million
Your monthly payroll cost is calculated as follows:
The total of:
- Employee wages paid from the 1 year prior to loan application (up to $100,000 per employee)
- Paid Sick Leave, Group Health Coverage Cost and Other Benefits for the same period
This total equals your annual eligible payroll cost.
You then divide your annual eligible payroll cost by 12 to get your average monthly payroll.
The maximum loan amount is 250% (2.5 times) your average monthly payroll.
Ex. An employer has 4 employees each making $50,000 per year plus a 3% employer retirement contribution and offers Health Insurance that costs $ 6,000 per year for each employee. The total wages would be $200,000 ($50,000 wages times 4 employees) and the total other benefits would be $30,000 ($6,000 health insurance plus $1,500 retirement multiplied by 4 employees) so the total annual eligible payroll cost would be $230,000 ($200,000 wages plus $30,000 benefits).
This $230,000 is then divided by 12 to get the average monthly payroll cost of $ 19,166.67
The maximum loan amount would be 250% of the $19,166.67, which equals $ 47,916.67 ($19,166.67 times 2.5)
What can I use the loan proceeds for?
The proceeds of a Paycheck Protection Loan may only be used for the following items:
- Employee salaries, wages, commissions or similar compensation
- Other Payroll Costs
- Costs related to Group Health Insurance Coverage and Insurance Premiums
- Mortgage interest payments
- Rent payments
- Interest on any other debt during the Covered Period
How much of the loan can be forgiven?
During the 8-week period beginning on the date a Paycheck Protection Loan is funded (the Forgiveness Period), a borrower will be eligible for forgiveness and cancellation of indebtedness for up to 100% of the principal amount of the loan. The amount eligible for forgiveness is the total costs incurred during the 8-week Forgiveness Period of the following expenses:
- Mortgage Interest
The forgivable amount of the loan may be reduced if the employer terminates, lays off or otherwise reduces the salaries of employees during the forgiveness period. Generally speaking, if a borrower retains 100% of their employees then up to 100% of the Paycheck Protection Loan can be forgiven provided that the loan was used to pay for the above listed expenses. If the borrower only retains 80% of their staff during the Forgiveness Period, then only 80% of the loan can be forgiven.
There are other exemptions and relief from the forgiveness reduction if the borrower rehires employees or makes up for wage reductions by June 30, 2020.
What are the terms of any Unforgiven Paycheck Protection Loan?
If a portion of the Paycheck Protection Loan is not forgiven at the end of the Forgiveness Period, then the borrower will need to repay that unforgiven portion of the loan to the bank that issued the loan. Many of the terms of this loan will be subject to the credit approval of each specific borrower and lender, but the general guidelines are:
- Interest rates on these Paycheck Protection Loans may not exceed four percent (4%) annually.
- Any loan remaining must have a maturity date of the loan no later than 10 years from the application date for the loan.
- The SBA will direct all lenders to defer payments (principal, interest and fees) on these loans for a minimum of 6 months and a maximum of 12 months.
How do I apply for a Paycheck Protection Loan?
Since this is a Small Business Loan, the actual loan application is made with a bank that offers SBA Loans. The SBA is currently expanding its network of lenders that offer SBA loans so that the majority of banks can offer these Paycheck Protection Loans, not just the current group of SBA Preferred Lenders. To apply for one of these loans or get more details about the application process contact your business banker.