Stimulus SBA Loan and Forgiveness Program (“Paycheck Protection Program”)
As part of the new stimulus package making its way to the House and President for signature this Friday, $349 billion is earmarked to assist small businesses with loans. The loans will be administered through the SBA 7a loan program via qualified commercial lenders and pertain to companies that have seen business decline as a result of COVID-19. The objective is to help businesses impacted to ease payroll/overhead burden and bring back workers who may have already been laid off. The program can be retroactive to February 15, 2020, to help bring workers who may have already been laid off back onto payroll. The loan covers the period from February 15 to June 30, 2020.
Under the drafted regulations small businesses are considered to be businesses that meet the following key criteria:
- Less than 500 employees
- Must have been in business as of 2/15/2020 and had employees or independent contractors who received salary
*Note: special consideration is given to franchisors and the hospitality sector (restaurants and hotels) where employees are counted by physical location. Therefore, a restaurant with 600 employees over five restaurant properties would qualify for these loans. With this change, a number of larger independent restaurants and franchise owners would be eligible to participate in the SBA loan program.
How is the Maximum Loan Calculated?
The maximum loan is calculated based on the following calculation.
If you were in business during 2/15/2019 – 6/30/2019:
- Average total monthly payments for payroll costs incurred during the 1 year period before the date the loan was made (except that if applicant is seasonal employer, then average total monthly payments for payroll for the 12 week period of 2/15/2019 or 3/1/2019 and ending 6/30/2019)
- Multiplied by 2.5 plus
- The outstanding amount of a loan already made by 1/31/2020 from a previous program under the “Business Loans Program Account” SBA title V Act of 2020 or $10,000,000
If not in business 2/15/2019 ending 6/30/2019:
- Average total monthly payments for payroll costs incurred 1/1/2020 – 2/29/2020
- Multiplied by 2.5 plus
- The outstanding amount of the loan under previous “Business Loans Program Account” SBA title V program made by 1/31/2020 or $10,000,000
*Note the payroll costs are not allowed to include salaries for any person that gets paid $100K or more or any payments for salaries already covered by the tax credit under the Families First Coronavirus response act.
What Expenses Qualify?
These loans are permitted to be used to cover the following costs:
- Payroll costs
- Costs related to continuation of group health benefits and sick leave
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- Retirement benefit
- State local taxes assessed on employee compensation
- Employee salaries, commissions and similar compensation paid to independent contractors
- Interest on mortgage obligations – not to include any prepayment of mortgage principal
- Interest on any debt occurred before covered period
How is the Conversion To Grants/Debt Forgiveness Calculated and Applied For ?
If the loans are used only to fund the above detailed costs during an eight week period after the origination date of the loan, they would be available for conversion to grant/forgiveness. These loans are also considered non-recourse and guarantees have been waived. Any amounts not used for permitted costs are considered guaranteed by the owners of the businesses and paid back within 10 years using an interest rate of not more than 4% (repayment deferred 6-12 months). Applications require certification of good faith of the business that the funds will be used for permitted costs to keep workers employed. The certification of good faith should also include the loan is being requested due to the uncertainty of the current economic conditions and the loan is needed to support ongoing operations of the business and support the ability to maintain mortgage, lease and utility payments in addition to payroll. Acknowledgement should be provided that no other loan application is in process or has been. Borrowers can re-hire workers previously laid off and not be penalized by this exception. More specifics regarding the forgiveness calculations are as follows :
- Principal amounts on the loans, for the first 8-week period from when the loan was made, are available for forgiveness if loan funds are used to cover payroll costs, benefits, interest payments on mortgages (not including prepayments or principal), independent contractors, rent and utilities.
- To get the full benefit of loan forgiveness, businesses must keep their employees and pay them at least 75% percent of their prior-year compensation.
- The amount of the loan that may be forgiven will be reduced ratably if the average number of full-time equivalent (FTE) employees during the 8-week forgiveness period is less than the average number of FTE employees at either, (a) the period February 15, 2019, through June 30, 2019, or (b) the period January 1, 2020, to February 29, 2020; the employer chooses which period to compare. To encourage employers to rehire workers laid off due to the COVID-19 crisis, employers that rehire previously laid-off workers will not be penalized for having a reduced payroll at the beginning of the forgiveness period. If, during the period from February 15, 2020, through 30 days after enactment of the CARES Act, there is either a reduction in the number of or wages paid to FTE employees and the employer eliminates the reduction by June 30, 2020, the amount of loan forgiveness will be determined without regard to the reduction.
To apply for forgiveness, businesses must submit documentation regarding the eligible uses of loan funds, a certification that such documents are true and correct, as well the amount to be forgiven, and any other documentation the SBA Administrator deems necessary. The SBA will purchase any loan forgiveness amounts from its certified lenders. Forgiveness of debt is typically income for tax purposes, but in this case waived and not taxable to recipients.
Will the Paperwork be as Extensive Other SBA Programs?
It has been indicated that a significant portion of the SBA’s standard paperwork requirements/prerequisites would be waived in order to expedite the funds toward small businesses. Borrowers making a good-faith statement are presumed eligible for the loans. Prior requirements such as “collateral” and “credit elsewhere” are also anticipated to be waived. Fees would also be waived under the covered period (the period beginning on February 15, 2020 and ending on June 30, 2020).
What About Previous Loans?
Loans made under previous “Business Loans Program Account” SBA title V program can be refinanced into a loan under this new program. The formula under the Maximum Loan Calculation integrates this.