What does the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” Provide to Small Businesses?
By Bryan Drago, Associate
March 29, 2020
As a Long Island based firm we service many small businesses that have seen devastating loss of revenue during this social distancing period. We will be closely monitoring the available governmental assistance and providing additional updates as they become available.
We are starting this series with a look at the loans available under the Paycheck Protection Program (PPP) of the CARES Act. The small business-focused PPP increases the government guarantee of loans to 100-percent through Dec. 31, 2020, for SBA 7(a) loans. The PPP waives both borrower and lender fees, scraps the “credit elsewhere test” for loans made under the program, and waives collateral and personal guarantee requirements. PPP has a host of attractive features, such as forgiveness of up to 8-weeks of payroll based on employee retention and salary levels, no SBA fees and at least 6 months of payment deferral. Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020. This program would be retroactive to February 15, 2020, in order to help bring workers who may have already been laid off back onto payrolls.
We break down the PPP overview into 5-sections. How do I qualify for the PPP? How are you supposed to spend the money? How much can you borrow? How much of the loan will be forgiven? And how do I apply?
How do I qualify for the PPP?
Under the CARES Act, lenders are able to make determinations on borrower eligibility and creditworthiness of small businesses without going through all of SBA’s normal channels. Since determining repayment ability simply is not possible during this crisis, lenders are to determine whether a business:
• was operational on Feb. 15, 2020,
• had employees to whom it paid salaries and payroll taxes at that time,
• makes a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19,
• certifies they will use the funds to retain workers and maintain payroll, lease, and utility payments; and
• is not receiving duplicative funds for the same uses from another SBA program (although you may be able to roll your SBA loan into this loan/program).
How am I supposed to spend the PPP loan proceeds?
Allowable uses for the loan include:
• payroll (employee salaries, paid sick or medical leave),
• insurance premiums,
• mortgage interest/rent, and
• utility payments.
How much can I borrow?
The economic stimulus provides a formula by which the loan amount is tied to payroll costs incurred by the business (in order to determine the size of the loan). The maximum loan computation is based on “payroll costs”. It is 2.5 times the average monthly amount from “the 1-year period before the date on which the loan is made” unless the Administrator says that you are seasonal. If you are seasonal it is the amount you paid in 2019 for the 12-week period beginning February 15, 2019 or at your election March 1 to June 30.
PPP loan details:
• balances will have a maturity date of not more than 10-years,
• sets a maximum interest rate of 4%, and
• allows complete deferment of loan payments for at least 6-months and up to 12-months.
How much of the PPP loan can be forgiven?
An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
• payroll costs,
• any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation),
• any payment on any covered rent obligation, and
• any covered utility payments.
The “covered period” is defined as the eight-week period beginning with the origination of the loan.
How do I apply?
For you to participate you need to contact a bank. US Bank has a pre-application you can do on-line. If you have an existing banking relationship, you should contact that bank first thing.
There is a lot of information available online at this time but two sources for comprehensive information are SBA.gov and SmallBusinessDisasterSupport.com. If you have any specific questions on the PPP loan or other aspects of the CARES act please feel free to email me at my provided email address.
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