The Paycheck Protection Program (also called “PPP”) authorizes approximately $350 billion in small business loans impacted by the COVID-19 crisis. These loans can be forgiven if the proceeds are used to pay employees and certain rent and utilities. The loan terms are the same for all borrowers.
In order to have the loan forgiven the borrower needs to meet the following conditions:
- The proceeds are used on payroll costs, rent, utility costs and most mortgage interest. This is to be done over the 8 week period after the loan is made; and
- Employee and wages compensation must be maintained compared to a prior defined period.
Payroll costs are limited to $100,000 for each company employee. This amount is to be annualized. As it stands now, the program does not allow more than 25% of the loan forgiveness to be for non-payroll related costs (rent, utilities, etc). All loan payments are deferred for 6 months at which point the borrow can apply for forgiveness.
When can you apply?
On April 3, 2020, the SBA opened the program for small businesses. This includes sole proprietors and businesses with less than 500 employees. They must apply for the loans through approved SBA lenders.
On April 10, 2020, the SBA opened the program to independent contractors and self-employed people through the same SBA lenders. Additional lenders will be able to underwrite these loan once they are approved and formally enrolled as a lender.
Where can you apply?
You are able to apply through an existing SBA lender or through most banks. You can apply at basically any federally insured depository institution, Farm Credit System institution or federally insured credit union that is participating in the program.
Certain other lenders will be able to make these loans once formally enrolled in the system. Make sure you inquire of your local bank to see if they are participating. You can also visit www.sba.gov for a list of approved lenders.
Who can apply?
All businesses who have 500 or fewer employees are allowed to apply. This includes nonprofits, sole proprietors, and independent contractors. It also covers specialty entities like certain Tribal entities and veterans organizations. However, there are businesses in specific industries that have more than 500 employees that can participate in the program if they are able to meet certain SBA employee-based size standards that are applicable for those industries.
As it relates to this program, the affiliation standards of the SBA have been waived for small businesses that are: (1) in the food services or hotel industries; or (2) franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.
What do you need to apply?
You just need to complete and submit the loan application with the required documentation to any an approved lender. The deadline to submit an application is June 30, 2020. You will also need to provide your lender with payroll reports and other supporting documentation.
Do I need to first look for other funds before applying to this program?
No. There is no requirement to try to obtain funds from other sources.
How long will this program last?
The program is open through June 30, 2020. But applicants must apply ASAP as there is a funding cap and lenders will need time to ensure loans are processed. You are only allowed one loan under the program.
What can I use these loans for?
The loan proceeds must be used on:
- payroll costs (including benefits),
- mortgage interest on mortgages originated prior to February 15, 2020
- rent that was incurred under leases in effect prior to February 15, 2020,
- utilities, whereby services began prior to February 15, 2020.
What is included in payroll costs?
Payroll costs are deemed to include:
- Wages and salaries,
- Tips and commissions
- Employee benefits, such as family, vacation, parental, sick or medical leave. It also includes termination or dismissal.
- Payments for group health care benefits, including insurance premiums;
- Retirement benefit payments;
- State and local taxes that are assessed on wages, including state unemployment taxes.
Independent contractors and sole proprietors will include wages, income or net earnings from self-employment
Remember that all the above are capped at $100,000 for each employee (on an annualized basis).
What is the maximum loan?
The loans cover two months of your average 2019 monthly payroll costs, plus an additional 25%. So basically it is 2.5 times your average payroll costs. Loan amounts are capped at $10 million.
If you are a new business or a seasonal company, you can use different time periods that are applicable to your situation.
How does loan forgiveness work?
You will owe the loan at the end of the loan term. However, the loan will be forgiven if the loan is used for payroll costs, rent, utilities or mortgage interest, over the 8 week period after receiving the loan. Again, a maximum of 25% of the loan amount can be for non-payroll costs. You must also repay a portion of the loan if you do not maintain your staff and the related payroll costs.
- Number of Staff: The loan forgiveness is reduced if you lower your full-time employee headcount.
- Level of Payroll: The loan forgiveness is also reduced if wages and salaries are decreased by more than 25% for any employee that made lower than $100,000 (annualized for 2019).
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
How do I request loan forgiveness?
You are able to submit a forgiveness request to the servicing lender. The request must include supporting documents that verify the number of full-time (or equivalent) employees and the related pay rates. It will also include the payments made on rent, mortgage interest, and utilities.
You are required to certify that all documents are accurate and true and that you used the loan to retain employees and make eligible rent, mortgage interest, and utilities. The lender is required to decide on forgiveness within 60 days.
What is the loan interest rate?
The rate is 1.00%. It is a fixed rate and not variable.
When do loan payments begin?
All loan payments will be deferred for 6 months. But interest will begin to accrue based on the date the loan was taken out.
When is the loan due?
In 2 years from the date taken.
Can the loan be repaid earlier?
Yes. The loan has no fees or prepayment penalties.
Is there any collateral required for the loan?
No. There are no collateral requirements.
Is a personal guarantee required for the loan?
No. There is no personal guarantee requirement. But if the loan proceeds are used for fraudulent purposes, you are subject to criminal charges by the U.S. government.
What is required to certify?
You must complete the application in good faith. That means that the economic uncertainty has made the loan necessary to fund your ongoing operations. The loan should be used to cover payroll, retain your workers and rent, mortgage, and utility payments.
You are also allowed to only have one loan under this program. The lender must receive documentation to verify the number of full-time equivalent employees and payroll costs. They must also support mortgage, rent payments, and utilities for the 8 weeks after receiving the loan. Remember that not more than 25% of the forgiven amount maybe for non-payroll costs.
You must certify that the application and supporting documentation is true and accurate. It is punishable by law to knowingly make a false statement in order to secure a loan. You must acknowledge that the lender will calculate the eligible loan amount using the payroll and tax documentation that is submitted.
You also have to cerify that the tax documents are the same as the ones submitted to the IRS. You also must know that your lender can share the information with the SBA and it’s representatives for compliance purposes.