Is the “Paycheck Protection Program” right for your business?
American citizens are facing new challenges every day. As the coronavirus continues to spread, businesses are looking for ways to generate incomes, keep operations flowing as much as realistically possible, and retain busy, paid employees.
The private sector is doing all it can, and the government is making efforts to help as well. One of the most significant efforts is the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes multiple layers of benefits and stimulus packages to keep American citizens and businesses going.
In Title 1 of the act you will find a key provision: the “Keeping American Workers Paid and Employed Act.” Within this section, you will find the Paycheck Protection Program. (Hey, somethings don’t change, like highly layered and complex legislation…somehow that’s oddly comforting!)
The Paycheck Protection Program is providing the Small Business Administration with $349 billion in lending capability, providing emergency financing to small businesses all across the country.
Note: This article is meant for general information only and was written to the best of our ability based on the information we currently have available. Provisions and details of the CARES Act, as well as future legislation, will likely change, so speak with a qualified SBA representative or talk with a lender over the phone before making any decisions.
The Paycheck Protection Program: An Important Part of the CARES Act
The Paycheck Protection Program is providing $349 billion in federally-guaranteed loans that will be available to small businesses and various non-profit organizations, as well as veterans and tribal organizations. Through no fault of their own, numerous businesses have already been forced to lay off workers, but this program is offering financing that not only covers the future, but will also cover past payments. This should allow previously laid-off workers to return to a business’s payrolls.
How You Can Use This Program?
To use this loan, you will need to contact a lending agent, not necessarily the SBA, although the SBA may be able to guide to you an eligible lender. Lenders started processing loans applications for small businesses on April 3rd (past Friday), and independent contractors and self-employed professionals can start dropping applications on April 10th.
Applicants have until June 30th to apply, but there will likely be a backlog of applications, so getting your application in as quickly as possible is a smart move.
Businesses can make applications through an SBA 7(a) lender or other institutions who are participating in the program. In the near future, it is likely that more lenders will be added to the program to help process and deliver these important loans.
Who is Eligible for the Paycheck Protection Program?
While there is other legislation for larger companies, this program is available specifically for small businesses. To be eligible for the loans, a business must have fewer than 500 employees, but restaurants, caterers, and similar organizations that may have more than 500, but don’t employ 500 total at a specific location, can still utilize this program as long as they meet a specific classification. Franchises approved through the SBA’s directory are also eligible for the financing.
The program also removes the “Credit Elsewhere Test” which calls for an extensive analysis of the borrower’s ability to borrow funds from other sources. Under normal circumstances, the SBA essentially looks to see if a business can get funding without the administration’s help; if so, SBA loans are not available. In this unique time, that requirement is lifted.
No personal guarantee or property for collateral will be required, which is often the case with SBA-backed loans. For this program, the loans can be unattached to your personal finances, individual credit, or physical property.
Potential Uses for the Loan Money
Only certain purposes are eligible for the loan funding. First and foremost is salary and wages, as well as the equivalent of cash tips. Leave payments, including vacation and medical leave are also acceptable uses of the money.
Payments for retirement benefits, healthcare benefits, and state or local taxes are also eligible ways to use the money delivered through the small business administration. It can also be used to help with your financial responsibilities, including mortgage payments and interest on other debts.
Loan Forgiveness is a Significant Possibility
These are being described as “loans,” and for many borrowers they will be. However, many small businesses will have portions of their loans forgiven if they meet a specific set of requirements. Again, loan forgiveness is not guaranteed, so it may be wise to proceed as if you will have to repay.
Loan recipients may be eligible for forgiveness of an amount equal to the total amount paid for expenses accumulated over an eight-week period, but certainly not more than the principle amount.
Some payroll costs are eligible for forgiveness, and money equaling the mortgage interest, rent, utilities, and other services may be eligible for loan forgiveness. For example, if you pay $500 in mortgage interest on the property for your company, $500 of the loan may be eligible for forgiveness.
However, the act does include a possible reduction in the forgivable amount if there is a reduction in employees or in employment pay compared to the amount paid in 2019. Basically, the money is there to ensure businesses can pay their employees.
How Much Can You “Borrow?”
While some or all of these loans may be forgivable, you should still treat this financing with cautious care and only borrow for what you need to get through this temporary health crisis.
The maximum, however, appears to be the lesser of two numbers: either 2.5 months worth of eligible payroll or $10 million. So if 2.5 months of payroll equals $800,000, you can borrow up to $800,000. But if 2.5 months of payroll equals $12 million, you can only borrow $10 million.
Learn More about the Paycheck Protection Program
If you need help keeping your employees paid through this temporary crisis, a loans through the Paycheck Protection Program may be right for you. Contact our staff today to see if your business is eligible for this important government legislation.
