COVID-19 Relief: Paycheck Protection Program and Loan Opportunties Under the CARES Act
This summarizes the Paycheck Protection Loans that will be offered under the SBA 7(a) loan program as expanded by the CARES Act. The final details of the Paycheck Protection Program and other financial assistance programs for small businesses are subject to final approval by Congress and the President.
Paycheck Protection Program
Section 1102 of the CARES Act amends Section 7(a) of the Small Business Act to implement the “Paycheck Protection Program,” which expands the existing Section 7(a) loan program during the period commencing on February 15, 2020 and ending June 30, 2020. Generally speaking, the Paycheck Protection Program authorizes lenders to immediately make low-interest loans of up to $10,000,000 to borrowers to fund eligible payroll costs, certain mortgage payments, rental payments, and utilities payments, which loans would be eligible for forgiveness for certain payroll and certain other operating costs as long as the borrowers maintain their payrolls.
Key Features
Permitted Uses
During the period commencing on February 15, 2020 and ending June 30, 2020, an eligible recipient may, in addition to other permitted uses under the Section 7(a) loan program, use proceeds of the Paycheck Protection Loans for (1) payroll costs, (2) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, (3) employee salaries, commissions, or similar compensations, (4) payments of interest on any mortgage obligation, (5) rent (including rent under a lease agreement in place as of Feb 15, 2020), (6) utilities, and (7) interest on any other debt obligations that were incurred before the covered period.
Maximum Loan Amount
The SBA will ask you to provide documentation on your business’s payroll, mortgage, rent, and utility payments over the previous 12-month period. They will calculate the monthly average cost of those expenses. The maximum amount they can offer is 2.5 times that monthly average cost, but no more than $10 million.
Interest Rate
Paycheck Protection Loans bear interest at a rate not to exceed 4%.
No Guarantees or Collateral; Nonrecourse
No personal guarantee or collateral is required for Paycheck Protection Loans. Paycheck Protection Loans are nonrecourse against any owner of a borrower for nonpayment of a Paycheck Protection Loan, except to the extent the owner uses the loan proceeds for an unauthorized purpose.
Eligible Lenders
The CARES Act provides that a lender approved to make loans under the Section 7(a) loan program is authorized to make Paycheck Protection Loans. According to U.S. Treasury Secretary Steven Mnuchin, almost all FDIC banks will be authorized over the next week to make Paycheck Protection Loans.
Application Process
Applicants will apply directly to the lender. As part of its application, an applicant must make a good faith certifications that, among other things:
- The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; and
- The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
No Fees
There are no fees for applying or receiving a Paycheck Protection Loan.
Maturity
If a balance remains after reduction based on the loan forgiveness (described below), the remaining balance remains guaranteed by the SBA and will have a maximum maturity of 10 years from the date on which the borrower applied for loan forgiveness.
Loan Deferment
Borrowers that were in operation on February 15, 2020 and whose loans are approved on or after the date of enactment of the CARES Act are deemed to be impacted borrowers adversely impacted by COVID-19. The CARES Act directs the SBA to require lenders to provide complete payment deferment relief for all borrowers with Paycheck Protection Loans for a period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year.
No Prepayment Penalties
There is no prepayment penalty for prepayments made on a Paycheck Protection Loan.
Loan Forgiveness
All borrowers of a Paycheck Protection Loan are eligible for forgiveness of such loan in an amount equal to the sum of the following costs incurred and payments made during the 8-week period beginning on the date of the origination of such loan:
- Payroll — salary, wage, vacation, parental, family, medical, or sick leave, health benefits
- Mortgage interest — as long as the mortgage was signed before February 15, 2020
- Rent — as long as the lease agreement was in effect before February 15, 2020
- Utilities — as long as service began before February 15, 2020
However, the amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. But, employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period.
For example, assume the following fact pattern:
Average FTE for 8-week period = 40
Average FTE for period February 15, 2019 thru June 30, 2019 = 50
Average FTE for the period January 1, 2020, thru February 29, 2020 = 50
Loan Principal = $300,000
Loan Principal forgiveness = $240,000, calculated as follows:
$240,000 = $300,000 (loan principal) x (40/50)
Any amount which would be includible in gross income by reason of forgiveness shall be excluded from gross income; $240,000 in the above example.
When submitting your application for loan forgiveness, you must provide the following documentation (no exceptions):
- (1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described in subsection (d), including:
- (A) payroll tax filings reported to the IRS
- State income, payroll, and unemployment insurance filings
- (2) documentation to prove your mortgage, lease, or utility payments
- cancelled checks
- payment receipts
- account statements
- (3) a certification from a representative of the eligible recipient authorized to make such certifications that:
- (A) the documentation presented is true and correct; and
- (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
- (4) any other documentation the Administrator determines necessary.
The lender must make a decision within 60 days of your forgiveness application submission.