Payroll Protection Loans: On Friday, March 27, 2020, Congress passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide financial assistance to individuals and businesses. One major portion of the CARES Act of interest to small businesses is the ability to obtain loans under Section 7(a) of the Small Business Act through what is being called the “Paycheck Protection Program”. These loans will be provided through SBA-approved lenders, who have been delegated authority to make loans without SBA review. This program provides an emergency loan that can be forgiven under certain circumstances. The purpose of this program is to provide an incentive for small businesses to keep workers on the payroll or rehire laid-off workers that lost jobs due to COVID-19.
Who can apply: Small businesses, nonprofits and veterans organizations that generally have fewer than 500 employees (this is a total head-count, not an FTE count) are eligible for the loans. Self-employed individuals, sole proprietors, and some freelance workers are also eligible to apply. Some accommodations will be made for businesses in the accommodation and food services industry.
Use of Loan Proceeds: Eligible small business can use these loans to cover payroll (excluding the compensation an individual employee in excess of an annual salary of $100,000 as prorated), health care costs, mortgage interest payments, rent and utility payments, and interest on pre-existing debt obligations.
Loan Terms: The amount of the loan cannot exceed the sum of 2.5 times the average monthly payroll cost during the year prior to the loan, and is capped at $10 million. The loans will have a maximum interest rate of 4%. Loans under the program are fully guaranteed by the federal government. Collateral and personal guarantees are not required. To be eligible, a borrower must be in operation on February 15, 2020, and have paid employee salaries and payroll taxes.
Forgiveness: Loans under the program are eligible for forgiveness up to the aggregate amount of payroll payments (excluding costs of compensation for employees paid above $100,000 annually), interest payments on mortgage obligations, rent payments and utility payments made during the eight-week period following loan origination as long as the amount does not exceed the original principal. Amounts not forgiven continue to be guaranteed by the SBA and will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness.
What Should a Business Do?
- Contact your lender to determine if your lender is participating in this program. Many lenders are going to start rolling out resources such as webinars in the coming weeks to help answer questions.
- Get organized. Lenders are going to be swamped with requests. The businesses that have documentation organized and ready to go are going to enhance their chances of obtaining a loan.
- Gather your most recent Federal tax return, your organizational documents, information about the owners of the business, and your payroll information for 2019 (Form 941).
- Work in conjunction with your accountants and other trusted financial professionals.
- Stay calm. There will be tons of details that will be revealed by SBA lenders in the coming weeks. Take your time and get your application right the first time.
This summary and legal alert is an overview of the new guidance. It is not intended to be, and should not be construed as, legal advice for a specific factual situation.