UPDATE (4/1/20): Applications for small businesses and sole proprietorships will be available April 3, 2020. Independent contractors and self-employed individuals can apply beginning on April 10, 2020.
Click here for the application form. Fact sheets for borrowers and lenders are also available. The Treasury urges those in need of funding to apply quickly, noting that the program has a cap and demand is likely to be high.
President Trump’s signing of the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020, marks the enactment of the largest economic stimulus legislation in the history of the United States. The 880-page, $2 Trillion legislation includes numerous provisions designed to provide economic stimulus for individuals and businesses negatively impacted by the Novel Coronavirus (COVID-19) pandemic (see related post).
One the most discussed aspects of the legislation is the Paycheck Protection Program, providing $350 billion to qualifying small businesses in the form of federally guaranteed loans. The essence of these provisions in the CARES Act are to expand the availability of loan funds from traditional Small Business Administration (SBA) programs and to enhance both access and ease of the loan application and origination process.
Not only are the loans offered by that program 100% guaranteed by the federal government, but if certain employment thresholds are met, borrowers may also qualify to have the loans forgiven in the future on a dollar-for-dollar basis. Appropriately, as the name of the program suggests, the relief is is designed to provide a direct incentive for small businesses to maintain employment levels or restore employment levels by June 30, 2020.
Note also that the company loans made under this program will not require a personal guarantee of any kind, nor will borrowers be required to put up any type of collateral securing the loan. Finally, and historically, SBA loans were permitted only when the borrower was unable to obtain the funds under a more traditional credit arrangement elsewhere. In this program, borrowers will not be burdened with this requirement.
Moreover, the maximum interest rate for these loans is capped at 4%. Loan terms are still negotiated between borrowers and lenders and are a product of the prime rate, plus the LIBOR rate. However, rates may not exceed that limit, which under the traditional SBA 7(a) program, had been capped at 6%.
The loan program will be administered by the Small Business Administration in compliance with their historical SBA 7(a) program. The CARES Act provisions generally represent a significant extension of the SBA 7(a) program, widely expanding access and availability of the traditional loans. The measure also expands the criteria for qualifying for loans granted under the SBA’s Economic Injury Disaster Loan Program, or EIDLP (see related post).
While the actual details on how to apply for the newly enhanced loans remain unclear (the SBA is expected to release guidance this week), the parameters of the loan changes have been revealed. The following information is provided in light of the language in the CARES Act legislation and the SBA protocols for obtaining an historical 7(a) loan.
As to qualification, small businesses are defined as follows:
- A small business with fewer than 500 employees
- A small business that otherwise meets the SBA’s size standard
- A Internal Revenue Service organization exempt from tax under Internal Revenue Code Section 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 any trade or business
- A Tribal business concern that meets the SBA size standard
- A Internal Revenue Code Section 501(c)(19) Veterans Organization that meets the SBA size standard
There are also special rules for the food services industry (NAIC Code 72) that allow companies in that sector to apply the 500-employee rule on a per-physical-location basis. Another special rule restricts application of the general SBA rules for their normal affiliation rules (that generally limited SBA borrowings) for franchises or those companies receiving financial assistance from a Small Business Investment Company.
Amount of Loans
The amount that can be borrowed under the program is formula-based. Under this formula, the borrowed amount may be up to 2.5 times the borrower’s average payroll. The loan availability is capped at $10 million per borrower.
Of course, in applying for such a loan in light of the formula, the details are critical in facilitating the most-advantageous loan scenario. In light of this challenge, it is necessary to understand what payroll costs are includible in the definition of average payroll and which are not. In addition, these computations differ in consideration of a traditional employer and a sole proprietor, independent contractor or someone that is self-employed.
For regular employers, “included costs” consist of:
- Salaries, wages, commissions or similar compensation
- Payments of cash tips and gratuities, or the equivalent
- Payments for vacation pay, parental, family, medical or sick leave
- Allowance for dismissal or separation
- Payments for group health care insurance premiums and other health care benefits
- Payments into retirement plans
- State and local taxes assessed on employee compensation
For determination of average payroll for sole proprietor, independent contractor or someone that is self-employed, “included costs” consist of:
- 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.
Finally, in determining average payroll for purposes of applying the formula, the following are considered to be “excluded costs”:
- Compensation of any individual employee in excess of an annual salary of $100,000, prorated for the period February 15, 2020, through June 30, 2020
- Payroll taxes, railroad retirement taxes and income taxes
- Any compensation paid to an employee whose residence is outside the United States
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (FFCRA); or qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA
Note that for non-seasonal employees, the maximum loan under the formula contemplates average total monthly payroll costs incurred during the year prior to the loan date. If a business did NOT exist in 2019, or was not operational during that period, the average total monthly payroll will be based on costs incurred in January and February 2020.
For employers whose revenues are seasonal, the average monthly payroll will be measured based on the 12-week period beginning on February 15, 2019, or March 1, 2020 (decided by the borrower) and ending June 30, 2019 (or 2020).
Perhaps the most significant aspect of the loans offered under the Paycheck Protection Program is the ability to have some, or all, of the loans forgiven in the future. Essentially, a borrower company is eligible to have loans forgiven at an amount equal to the amount that the borrower spent in the eight-week period following the date of origination on the loan on the following items:
- Payroll costs (defined exactly the same as discussed above in conjunction with loan eligibility)
- Interest on mortgage indebtedness incurred in the ordinary course of business
- Rental payments on a lease
- Payments for utilities, including electricity, natural gas, water, transportation, telephone and internet access
- For borrowers that have employees who receive tips, any additional wages paid to those employees in the covered period
In no case will the loan forgiveness exceed the principal. There are, however, a number of instances where the amount of the loan that is forgiven can be reduced. These are primarily invoked when salary and wage reductions reflect a failure to maintain employee positions, which is logical, given the intent of the program in the legislation.
The rules require a reduction in the amount of the forgiveness calculated in accordance with the above-noted determination if there is a reduction in the borrowing company’s number of employees or a reduction of greater than 25% in wages and salaries paid to employees. The amount of the reduced loan forgiveness is calculated by the following mechanical calculations:
In conjunction with a 25% reduction in the number of employees:
- Payroll costs, as computed for loan eligibility as noted above, times
- Average Number of Full Time Equivalent employees (FTEs) per month for the eight week period beginning on the date of loan origination, divided by
- One of three options:
- Average number of FTEs per month for February 15, 2019 to June 30, 2019, or
- Average number of FTEs per month for January 1, 2020 to February 20, 2020, or
- Average number of FTEs per month for February 15, 2019 to June 30, 2019 (for seasonal employers)
In conjunction with a 25% reduction in the amount of wages and salaries:
- Payroll costs, as computed for loan eligibility as noted above, minus
- Excepting any employee earning more than $100,000 on an annualized basis in 2019, the amount of any reduction in wages and salaries that is greater than 25% than that included in the company’s most recent full quarter.
The law does include a very important relief provision for companies that have had to release people from their payrolls due to COVID-19. This relief provision offers those employers an opportunity to cure a situation that might otherwise have resulted in a reduction of the loan forgiveness offered under this element of the new law. In these cases, the rules allow for a “rehiring” of employees or a restoration of wages. However, the period for taking these steps to cure the problem expires on June 30, 2020.
Reductions in employment or wages that occur during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness if by June 30, 2020, the borrower eliminates the reduction in employees or reduction in wages. Thus, June 30, 2020, becomes a critical planning date for companies finding themselves in this situation.
How does a business take advantage of these loans? The process is essentially one of application and provision of key documents from which the lenders will discern qualification and eligibility. The first step in determining that eligibility mandates that lenders consider first whether the borrower was in business on February 15, 2020, and whether that borrower had employees at that date for whom the Company paid salaries and wages and associated payroll taxes or paid independent contractors.
In addition, lenders will also ask applying companies to certify in good faith that:
- The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
- The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
- The borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for through this program
- From February 15, 2020, to December 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for through this program
Note: There is an opportunity to fold emergency loans made between January 31, 2020, and the date this loan program becomes available into a new loan
If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for certain documents such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship. The U.S. Chamber of Commerce has issued a checklist guide to help potential applicants to prepare to file for a loan under this program.
Other specific documentation that will likely be required when the Small Business Administration announces its formal protocols include:
- The number of FTEs and pay rates
- Internal Revenue Service payroll tax filings (Forms 941)
- State income, payroll and unemployment insurance filings
- Cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations and covered utility payments.
Anticipated Timing/Availability of Loans
The Small Business Administration expects to release its protocols and procedures to lenders this week The law requires that these be released no later than seven days after the date of enactment, but their hope is for an earlier release. The lenders will need several days to digest the SBA rules and should start making loans through this program no later than middle of the week beginning April 6, 2020.
In the interim, a free online referral tool that connects small business owners with participating SBA-approved lenders is available at the Small Business Administration website. Ultimately, the matching process will include describing your business’s needs, which will lead to a lender match in one or two days, and can then lead to an application.
It is hoped by the Congress, the White House and the Small Business Administration that the proceeds from these loans will be made available within one or two days after application. In certain cases, loans may be made available the same day as application.
The National Council of Nonprofits provides specific information about the loans available for nonprofits under the CARES Act.