PAYCHECK PROTECTION PROGRAM: COVID-19 SBA 7(a) Relief Loan
PAYCHECK PROTECTION PROGRAM
The Paycheck Protection Program (commonly referred to as a PPP) provides funding for small businesses to survive during the COVID crisis, as well as an incentive to maintain employment levels and lower unemployment. In effect through June 30, this program would provide eligible small businesses with government-backed interruption loans via the Small Business Administration (SBA 7(a) loans), which could then be forgiven based on the borrower keeping its employees on payroll. The benefits of this program include:
PAYCHECK PROTECTION PROGRAM F.A.Q.
How do companies participate in the program?
The Paycheck Protection Program operates via the Small Business Administration’s existing 7(a) lending program, through which SBA offers guarantees on loans originated by participating banks and financial institutions. Applicants apply for a 7(a) guarantee directly through a participating bank or other approved SBA lender, and, if approved, receive an SBA guarantee on their loan.
Under the program, approved lenders will be directly delegated the ability to approve loans on behalf of the SBA as well as forgiveness applications. This program is normally run through a select group of SBA lenders, but the SBA is looking to dramatically increase the number of lenders in its pool. Currently, there isn’t a lot of detail on what the SBA is looking for with this loan, but you can take some insight based on the old SBA 7(a) loans—which requires several dozen pieces of documentation ranging from resumes to financial statements and can take several months. The current SBA loan process is quite cumbersome, and it looks like the SBA and federal government is going to reduce the requirements significantly, streamlining the process, and getting money into the hands of small businesses faster.
For this reason, it’s hard to estimate exactly what the mechanics of the process will be until the SBA issues guidance. As of right now, borrowers have to “certify” that the current public health crisis makes the loan necessary for their continued operations, and that they will use the loan to maintain their previous average number of monthly full-time equivalent employees. This good faith certification is in contrast with any specific demonstration of need, which could have slowed down the application process.
The legislation does have several measures that would speed up the rollout of the program, including:
We’ve also included two free resources for you to use to help you calculate everything. The first document here, helps you determine what the maximum amount you can apply for, and what the maximum forgiveness could potentially be. Note: this spreadsheet does not work with seasonal businesses. The second free resource will help you calculate the cost of your employees for both Emergency Paid Sick Leave and Expanded Family and Medical Leave. This second spreadsheet also helps you weigh your options against the Paycheck Protection program.
What documents are needed for the loan?
Borrowers should expect to submit documentation such as payroll numbers demonstrating their eligibility to participate in the program. Additionally, the legislation explicitly requires contractors and sole proprietors to establish their eligibility with payroll tax filings, Form 1099-MISC, and documentation of income and expenses.
Which businesses are eligible?
Participation in the Paycheck Protection Program is open to businesses, 501(c)3 nonprofits, and veterans’ organizations that have fewer than 500 employees or meet one of SBA’s industry-specific small business thresholds – found here. Sole proprietors, independent contractors, and some other self-employed individuals are also eligible. Additionally, restaurants and hospitality businesses with multiple locations are eligible, so long as they have fewer than 500 employees per location. Affiliation rules are waived for restaurants and hospitality locations with fewer than 500 employees, franchises, and businesses financed by small business investment companies.
What much can you apply for?
SBA will offer a 100 percent guarantee on a loan amounting to the recipient’s average monthly payroll costs over the previous year, times 2.5. In other words, this loan amounts to two and a half months of payroll costs. The maximum loan amount is $10 million.
What expenses are covered?
For the purposes of loan amount and forgiveness (see below), payroll is defined as consisting of:
The calculation of payroll costs excludes compensation to employees exceeding $100,000 on an annualized basis, federal payroll taxes, compensation to employees residing outside the United States, and leave for which the employer is receiving a tax credit under the FFCRA coronavirus response. This is important: If you are receiving a tax credit, you cannot also double dip and get the expense forgiven.
While loan amount is calculated based on payroll costs, the loan itself can be used for a variety of essential business expenses including payroll, rent, mortgage interest, interest on debts, and utilities.
How does the loan forgiveness system work?
Loans made under the program can be forgiven for the total amount that the borrower spent on payroll (excluding annualized compensation over $100,000,) mortgage interest, rent, and utilities in the eight weeks following their loan’s origination. Employers are additionally allowed to make extra payments to tipped employees to account for their loss of tips. Forgiven expenses are generally restricted to obligations undertaken before February 15 of this year.
Importantly, the forgiven debt is not counted in taxable income.
The amount of forgiveness is reduced proportionally to any reduction in the borrower’s workforce, as well as any reduction in employee salary beyond 25 percent. Borrowers that have already taken action to reduce their workforce and eliminate any reduction in staff or salary through this program, however, will not be penalized. In essence, if you have already furloughed or laid off your employees, you can bring them back and place them on payroll. The amount of the loan forgiven is related to the amount of the workforce you bring back. It has not yet been determined what the exact relationship between workforce and forgiveness will be.
To calculate the portion of the borrower’s covered costs that will be forgiven, participants should multiply their eligible operating costs by the quotient of:
To achieve forgiveness, a borrower submits to their lender documents including:
The lender will then have 60 days to determine the appropriate level of forgiveness, at which point SBA would purchase and forgive the relevant amount of the initial loan.
Any portion of the loan not forgiven will remain guaranteed by SBA and have a 2-year maturity and a half of a percent interest rate (per SBA guidance on March 30, 2020). Lenders will be required to defer payment of that loan for between six months and one year, with the ultimate deferral period set by SBA.
How does this program interact with SBA’s Economic Injury Disaster Loans (EIDL)?
Borrowers who have received a COVID-19-related EIDL loan are allowed to apply for a Paycheck Protection loan but must refinance their EIDL into a Paycheck Protection loan. Any EIDL grant award provided under the bill (outlined in the following section of this post) is subtracted from a borrower’s loan forgiveness. However, a borrower cannot receive an EIDL loan and a Paycheck Protection Loan for the same reason (meaning you cannot receive a EIDL and PPP loan for COVID-19). You can receive a EIDL grant and never receive a Paycheck Protection loan.
Jacob Schroeder | 03/30/2020