As entrepreneurs ourselves, we understand the critical value of your time right now and that you want to understand the sections of the “CARES Act” you care about most. For most of you that section is the “Paycheck Protection Program.” * The program is generally limited to small businesses, those with 500 or fewer employees (or, if higher, the standard number employees established by the SBA for certain industries) as well as sole proprietors and eligible self-employed individuals.
It creates a very simple formula to determine the maximum amount of the loan: the lesser of $10 million or 2.5 times the average total monthly payroll costs incurred during the 1-year before the loan date provided that each employee’s annualized salary is capped at $100,000. The loan proceeds are intended for more than just payroll and can be used for 1) payroll, 2) mortgage interest (no principal reduction) or rent, 3) utilities, and 4) interest on other business debt that was incurred before February 15, 2020. No personal guaranty or collateral will be required, but owners will need to guarantee loan funds will only be used for the proceeding four categories.
You apply for the loan from a bank that is in the SBA lender network. The program eliminates much of the standard SBA paperwork and provides incentives for banks to close the loans quickly. It does not need to be your current lender. Essentially, you will need to provide your banker with proof of payroll to determine the maximum loan amount and make certifications including a certification that you have not already received the funding from another source for the same purpose (you can refinance if you previously received SBA disaster relief funds). From there, the loan should close in a matter of days, although nothing is guaranteed. All SBA fees are waived and the typical SBA requirement that you cannot obtain the credit elsewhere does not apply. All loan payments for this loan are deferred at least 6 months and no more than 12 months.
The loan is forgivable to the extent the loan proceeds are used to pay the 4 categories identified above during the 8-week period following the date of the loan. The amount eligible to be forgiven is reduced if there is a reduction in the number of employees or employee wages over a threshold. There are also certain exceptions for rehired employees. You will be required to submit documentation to have any amount of the loan forgiven. The portion of the loan not forgiven is payable over 10 years at an interest rate not in excess of 4%.
In addition to the Paycheck Protection Program, the CARES Act includes an Emergency EIDL Grant that allows disbursement of up to $10,000 to certain small businesses within 3 days after the SBA receives an application. The funding is made based on a self-certification of the applicant and the funds may only be used for providing paid sick leave, maintaining payroll, meeting the increased costs of goods, making rent or mortgage payments, and repaying obligations that cannot be made due to revenue loss.
There are many other terms and programs. But we believe these programs are critical for small businesses. Please feel free to contact us if you wish to learn more or want assistance in steering your business through these difficult times.
* While the terms discussed in the summary will apply in most conditions, there are numerous exceptions and carve outs. How this program applies to your particular business may be different based on your particular circumstances, and this summary should not be construed as legal advice.