At Dudai Legal, we work with businesses of all sizes, and since the CARES Act was passed, we have received a lot of questions about its various provisions. Most employers are interested in the Paycheck Protection Program because of its loan forgiveness provision.
What is the Paycheck Protection Program?
The Paycheck Protection Program (“PPP”) is an extension of the Small Business Administration 7(a) program. The PPP provides federally-guaranteed loans up to a maximum amount of $10 million to eligible businesses. These loans may be fully or partially forgivable, to encourage businesses to retain employees through the COVID-19 crisis. The loans may be forgiven for use on certain operational costs including payroll, rent, mortgage interest, or utilities. You have to certify that the “uncertainty of economic conditions makes necessary the loan request” to support your ongoing operations.
“Payroll” is defined very broadly and includes salary, wage, commission, or similar compensation, payment for leave [vacation, parental, family, medical, or sick], group health care benefits including insurance premiums, and payroll taxes.
The PPP covers the period beginning February 15, 2020 and ending on June 30, 2020. The PPP is very new, and the SBA needs to delineate the exact rules before they can be implemented by participating banks. In order to apply for the Paycheck Protection Program you need to contact a bank directly; you should contact a 7(a) bank that has SBA loan experience.
How much can I receive as a loan and am I eligible?
The maximum value of a company's loan will be equal to the lesser of $10 million or the sum of 2.5 times the average monthly payroll expenses in 2019. So, if you pay $10,000 a month on average for “payroll” expenses, you qualify for a $25,000 loan.
The PPP temporarily confers eligibility to businesses with 500 or fewer employees, and waives the requirement that businesses show they cannot obtain credit elsewhere; the inability to secure credit was formerly an SBA loan requirement. Additionally, the maximum interest rate for these loans is now capped at 4 percent, and annual or guarantee fees for the loan are waived along with prepayment penalties. 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.
Now, the most important part.
What are the terms of the Loan Forgiveness for the Paycheck Protection Program?
Any portion of the loan used to make payroll [as defined above], pay for utilities, rent, mortgage, and existing business debt may be forgiven, dollar for dollar.
Your company’s expenses for the eight-week period after the origination of the loan will be analyzed. Every dollar spent on payroll, utilities, rent, or interest on mortgage debt will be added together. This total amount will be forgiven, up to 100% of your PPP loan.
To receive this dollar-for-dollar forgiveness, workers need to remain employed through the end of June. Businesses that have let employees go before accepting the loan will not be subject to penalties. However, the amount that is forgiven will be reduced for businesses that lay off employees during the first eight-weeks following the loan.
The program was funded with $349 billion, but many businesses will apply for the funds and it is advisable to move quickly. Make sure you have your business’ financial documentation together, like your balance sheet reflecting payroll expenses, mortgage/rent, utilities, etc. Contact us today if you have additional questions or concerns, or need some help!
Click here for a nifty chart prepared by EIG.