Who Wouldn't Take a Potentially Free Loan for Their Business?
The stimulus package just passed by Congress and signed by the President on Friday provides one of the best opportunities for small and mid-sized businesses in years.
The CARES Act creates a new category of Small Business Loans called the Paycheck Protection Program (PPP). The covered period for these loans spans from February 15, 2020 to June 30, 2020. Small businesses and non-profits with 500 or fewer employees are eligible for these loans. If you are a restaurant or accommodations business, such as a hotel, you are eligible if you have fewer than 500 employees per location.
PPP Loan Overview
Unlike any other small business loans, loans under the Paycheck Protection Program DO NOT require a personal guarantee.
The amount of money available is enormous. You can obtain a loan that is 2x times your average monthly payroll, up to $10,000,000. Payroll costs included in this calculation include salary, commission, tips, payments for vacation, parental and sick leave, payments to maintain group health insurance benefits, allowances for dismissal or separation, retirement benefits paid out, and state or local taxes paid on employee compensation. The payroll period used to calculate the loan amount is from February 15, 2019 (or March 1, 2019) to June 30, 2019. If you were not in business during that time period, your maximum loan amount is limited to 250% of your average monthly payroll from January 1, 2020 to February 29, 2020. If you have taken out an Economic Injury Disaster Loan (EIDL), you would add that amount to your payroll costs to calculate your loan amount.
The following expenses are not considered eligible for payroll calculations under the act:
1. Compensation beyond $100,000 for employees or owners
2. Qualified sick leave for which a tax credit is eligible under another coronavirus relief law
3. Compensation for employees whose principal place of residence is outside of the United States
There are seven broad purposes that you can use the loan money for:
1. Payment of payroll costs, excluding exempted costs noted above
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 (not payments on the principal)
7. Interest on debt obligations incurred prior to the covered period
These loans will be subject to a forgiveness amount calculated by adding payroll expenses, covered rent expenses, covered utility payments, and covered mortgage obligations in the eight weeks after the loan is disbursed. However, the amount of loan forgiveness will be reduced by the number of layoffs or salary reductions in the eight week period compared to the covered loan period noted above (February, 1, 2019 or March 1, 2019, to June 30, 2019). Layoffs and salary reductions from Feb 15, 2020 to April 27, 2020 will be disregarded so long as by June 30, 2020, the jobs and reduced salaries are restored. Loan forgiveness must be applied for.
A loan forgiveness application must include the following:
1. Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings
2. Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities
3. Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the guidelines for use
The amount forgiven on the loan does not count as cancelled debt for tax purposes.
The unforgiven amounts of the loan will be subject to a 10 year maximum term, with a 4% interest rate with no loan or prepayment fees.
These loans do not require collateral.
These loans will be traded on the secondary market. There are some restrictions on reasonable expenses and consideration of other loans. For example, only interest on mortgages may be paid, and salary beyond $100,000 is not considered when calculating payroll.
Economic Injury Disaster Loans (EIDL) and the CARES Act
The SBA also provides emergency loans relating to disasters, called Economic Injury Disaster Loans (EIDL Loans). These loans are low interest, and have a maximum amount of $2,000,000. These loans are different than the PPP loans described above. The CARES Act modifies some of the program requirements for EIDL Loans.
The CARES Act waives the requirement of a personal guarantee on EIDL loans or advances of less than $200,000.
The Act waives the requirement that a business be in operation for one year prior to the disbursement of EIDL loan funds, unless that business started after January 31, 2020.
Finally, the Act waives the requirement that an applicant for an EIDL Loan first attempt to obtain credit elsewhere.
Businesses may also be eligible for an immediate $10,000 advance on their EIDL Loan, which does not need to be repaid. You must apply for an EIDL Loan to be eligible for this advance.
If you have applied for certain non-disaster loans from the SBA, you may defer payments for six months. If you do so, the SBA will pay six months of payments on those loans, including interest. According to a fact sheet from the Senate Committee on Small Business & Entrepreneurship, covered loans include, Section 7(a) loans, Section 504 Loans and Microloans. Businesses that take out these non-disaster loans up to six months after the enactment of the CARES Act will also be eligible for this relief.
Regulations are still being drafted. More loan programs may also be created, but the direction is clear.
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