One of the key provisions of the landmark CARES Act is the Paycheck Protection Program. Congress allocated $350 billion to this program enabling the Small Business Administration to provide loans to small business owners. The loans are fully guaranteed by the federal government.
If you are interested in applying for a loan through the Paycheck Protection Program, here is the application in a fillable PDF format.
Objective of the Paycheck Protection Program
The primary objectives of the Paycheck Protection Program include:
- Provide assistance to businesses so they can retain their employees; and
- Help businesses cover near-term operating expenses during the Coronavirus pandemic.
Who is Eligible for a Loan Through the Paycheck Protection Program
In evaluating the eligibility of a borrower through this program, a financial institution is required to consider two prerequisites: (i) whether the borrower was operational as of February 15, 2020 and (ii) whether the borrower had employees or independent contractors for whom the borrower paid. If these two prerequisites are met, the following business entities and individuals are eligible for a loan through the Paycheck Protection Program:
- A small business with fewer than 500 employees (includes all employees full-time, part-time, and any other status)
- A small business that otherwise meets the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- An individual who operates as a sole proprietor
- An individual who operates as an independent contractor
- An individual who is self-employed who regularly carries on a trade or business
- A Tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
Special eligibility may apply if:
- If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
- If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply
Traditional Requirements for a Business Loan are Waived
Under the Paycheck Protection Program, some of the traditional requirements put in place by the SBA have been waived for this loan program. Specifically, these loans are available with:
- No personal guaranties of shareholders, members or partners
- No collateral
- No proving recipient cannot obtain funds elsewhere
- No SBA fees (may still have to pay lender processing fee)
- No prepayment fee
What can the loans can be used for?
1. Payroll costs, with the following inclusions and exclusions:
Includes: compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) who earn up to $100,000 in 1 year, prorated for the covered period;
Excludes: individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and sick and family leave wages for which credit is allowed under the Families First Act;
2. Other expenses include:
- Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Payments of interest on mortgage obligations;
- Rent/lease agreement payments;
- Utilities; and
- Interest on any other debt obligations incurred before the covered period
In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid.
How Much Can I Get in a Loan?
Loans through the Paycheck Protection Program are designed to cover roughly 2.5 months of payroll, using a calculation of the average monthly payments during the last year period before the loan is issued. For example, if your annual payroll payment was $1.2 million, you can ask for a loan of up to $250,000 ($1,200,000/12 = $100,000, $100,000 X 2.5 = $250,000). However, it is important to note that you cannot obtain a loan larger than $10 million under this program.
Payroll Costs Covered Through the Paycheck Protection Program
Covered payroll costs for employers include:
- The sum of payments of any employee compensation, including salary, wage, commission or similar compensation;
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payments made to cover group health care benefits including insurance premiums;
- Payments made into retirement benefit programs; and
- Payment of state or local tax assessed on the compensation of the employee.
What if I am a Sole Proprietor, Independent Contractor, or Self-Employed?
You are eligible for a loan through this program. Allowable payroll costs are the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.
Are there loan fees?
There are no borrower or lender fees for participation
What are the Typical Loan Terms?
- Up to one year deferral of principal and interest payments.
- Loans are available for up to a 10-year term (amortized) at an interest rate not to exceed 4 percent.
Is there loan forgiveness?
Generally, yes, but the loan forgiveness is not automatic. Borrowers must proactively apply for forgiveness with the lender servicing the loan. Here are some other key factors you need to know about getting your Paycheck Protection Program loan forgiven:
- The forgiven amount will be equal to the amount actually paid for payroll costs, salaries, benefits, rent, utilities and mortgage interest during the eight weeks following disbursement of the loan. Additional wages paid to tipped employees under Section 3(m)(2)(A) of the Fair Labor Standard Acts may also be forgiven.
- The forgiveness amount is subject to reduction if there is a workforce reduction or a reduction in the salary or wages of an employee.
- The loan forgiveness Incentivizes companies to retain employees by reducing the amount forgiven proportionally by any reduction in employees retained compared to the prior year.
- To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
- Reductions in workforce, salaries and wages that occur from February 15, 2020 to April 26, 2020 will be disregarded for purposes of reducing the forgiveness amount so long as the reductions are eliminated by June 30, 2020.
- The forgiven amounts are not taxable as income to the borrower