Understanding Funding for Your Small Business - The Paycheck Protection Program

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*The following is a collection of information we have collected and found regarding eligibility, use restrictions, and loan forgiveness for loans from the CARES act. This post is subject to change if/when new information becomes available.

Important Background & Info:

  • The Paycheck Protection Program (PPP) is the forgivable loan program for small businesses in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

    • Access the application HERE.

  • The SBA has issued a final ruling on application details for the PPP. View those final updates HERE.

  • We will focus on three topics you need to know: loan eligibility, uses, and forgiveness.

  • Loans resulting from the PPP will be distributed using the existing framework of the Small Business Administration’s (SBA) 7(a) program, the agency’s main loan offering.

    • The PPP program is a partnership between private lenders, which issue the loans, and the SBA, which guarantees them. Borrowers will need to apply through banks or other financial institutions/lenders.

  • These loans cover the period from February 15, 2020, to June 30, 2020 (referred to as the covered period).

  • No collateral or personal guarantee is required for these PPP loans and they will have a fixed interest rate of 1% for any amount not forgiven.

  • Payments are automatically deferred 6 months. Interest will continue to accrue.

  • There is no prepayment penalty.

  • If you previously applied for and received a Disaster Loan from the Economic Injury Disaster Loan Program (see note below), you can refinance it as part of a covered loan under this new program.

  • The loans issued under this program are backed by the SBA 100% through December 31st, 2020. After that period, they will return to a 75% guarantee for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.

Note: The SBA also has in place the Economic Injury Disaster Loan Program (a.k.a. EIDLs; application and info here). This program has been expanded & changed under this legislation to now cover more entities [note 1].
EIDLs are separate from the Paycheck Protection Program loans discussed in the rest of this post. You may not receive both a PPP loan and a Disaster Loan for the same purposes (e.g., payroll or rent).

Eligibility:

Who is eligible:

  • For-profits & Non-profits meeting the SBA’s definition of a “small business concern” (checklist found here)

  • Veterans’ organizations, and Tribal businesses

  • Sole proprietorships & Independent Contractors

  • Franchisees listed on the SBA’s registry of approved franchise agreements (found here)

Size Limit:

  • Must employ less than 500 people (this includes full-time, part-time, and those employed on other bases)

    OR

  • Must have less than the maximum number of employees specified in the current SBA size standards for different industries (table found here).

There is also a special eligibility expansion for businesses in the hospitality and dining industries [note 2].

SBA regulations on affiliates (e.g., a third party has the power to control you through majority ownership; see PDF here for more info) are waived for the covered period for:

  • Businesses in hospitality and dining industries with 500 or fewer employees

  • Franchise businesses with SBA franchisor identifier codes

  • Any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act (see PDF here).

Loan Amounts & Uses:

The maximum amount you may receive will be the least of the three:

  • (A) 2.5 times the average total monthly payroll costs incurred in the 2019 calendar year; PLUS the outstanding amount of any SBA Disaster Loan in 2020

    OR

  • (B) For businesses not in existence between February 15th, 2019 and June 30th, 2019: 2.5 times the average total monthly payroll cost from January 1st, 2020 to February 29th, 2020; PLUS the outstanding amount of any SBA Disaster Loan in 2020

    OR

  • (C) $10 million

The minimum amount most banks are accepting for these loans is $25,000.

Borrower requirements to obtain a loan are good-faith certification that:

  • The loan is necessary to continue operations disrupted by COVID-19

  • Funds will help the business pay for payroll expenses, make lease/mortgage payments, or utility payments

  • There is only one application submitted (you may not submit multiple applications for PPP loans)

  • The business will not receive duplicate amounts from this program

Elevate has created a tool to calculate your maximum loan amount. Click HERE to access and download the tool.

Allowed uses for these loans are:

  • Previously allowed uses for normal 7(a) program loans [note 3]

  • Payroll costs

    • Includes: payments to employees (salary, wages, commissions, etc.), paid leave severance payments, payment for group health care benefits (e.g., insurance premiums), retirement benefits, state and local payroll taxes, and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 per year, prorated for the covered period

    • Excludes: individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; payment to employees who work outside of the US; and sick and family leave wages for which credit is allowed under the Families First Act

  • 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

  • Interest on any other debt incurred before the covered period.

Loan Forgiveness

The SBA has released the application for PPP loan forgiveness. View the application here.

Loans will be forgiven up to the amount spent, during the eight-week period (the forgiveness period) after the loan was originated, on:

  • Payroll costs

  • Interest payments on mortgages

  • Rent

  • Utility payments

No more than 25% of the forgiven amount may be for non-payroll costs.

Reductions in loan forgiveness amounts occur if the business cuts any employees or reduces wages during the covered period.
[see formulas in Note 4]

Employers who rehire employees or make up for wage reductions by June 30, 2020, will be exempt from the reductions. Any amount outstanding after subtracting the amount forgiven will be repayable over 2 years.

Any portion of the loan that is forgiven is excluded from taxable income.

  • Tipped employees may receive forgiveness for additional wages paid to those employees.

  • Borrowers seeking loan forgiveness must submit to their lender:

  • Documentation verifying FTEEs on payroll and their pay rates

  • Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments)

  • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees

  • Any other documentation requested

The SBA has 30 days following the enactment of the CARES Act to issue regulations on these forgiveness rules.

Footnotes

Note 1: Economic Injury Disaster Loan Program expansion now includes:

  • A business with 500 or fewer employees

  • Sole proprietorships, with or without employees, and independent contractors

  • Cooperatives with 500 or fewer employees

  • ESOPs with 500 or fewer employees

  • Tribal small business concerns

    Entities applying for loans under the Disaster Loan Program in response to COVID-19 may, during the covered period, request an emergency advance from the SBA of up to $10,000, which does not have to be repaid, even if the loan application is later denied.

Note 2: Businesses in the hospitality and dining industries are also eligible under the following:

  • If you operate on more than one physical location, you must employ 500 or fewer employees per location

  • AND belong in the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS)

Note 3: Previously allowed/standard uses for 7(a) loans

  • Expansion

  • Renovation

  • Vacant land

  • Building purchases

  • Start-up costs

  • Equipment and fixtures

  • Working capital

  • Inventory

  • Seasonal line of credit

  • Refinancing debt

Note 4: Formulas for loan forgiveness reductions

Employee Count Reduction formula:

  • The maximum forgiveness amount from the list above, multiplied by:

    • The average number of full-time equivalent employees (FTEEs) per month (calculated by using the average number of FTEEs per pay period within that month) during the covered period

  • Then divided by either:

    • The average number of FTEEs per month from February 15, 2019, to June 30, 2019

      OR

    • The average number of FTEEs per month from January 1, 2020, until February 29, 2020

Employee Wages Reduction formula:

  • Reduce by the percent that hourly wage rate or annual salary, for each employee, during the covered period are reduced IF the reduction in wages is greater than or equal to 25% of the total wages earned by each employee in the previous quarter before the covered period. This only applies to employees who earn less than $100,000 annually.

Sources:

https://www.steptoe.com/en/news-publications/cares-act-goes-to-the-white-house.html?tab=overview

https://www.bakerdonelson.com/cares-act-understanding-sba-loan-programs-to-determine-eligibility-and-best-fit-for-your-company

https://www.mcafeetaft.com/sba-loans-and-related-relief-under-the-cares-act/

Startup Junkie’s Small Business Relief in Cares Act Document (found here)

https://porterfieldcpa.com/caresact/

https://home.treasury.gov/cares