As part of the $2 trillion dollar stimulus package, The CARES Act includes provisions for small employers to obtain loans to help continue and maintain payroll and other critical expenses for their employees and companies. The Paycheck Protection Program (PPP) is the program that provides this relief.
We have received a number of inquiries about the details of this program, who qualifies, what can the money be used for, and how quickly will funds be received. This is a big issue as it is the lifeline that will keep many smaller companies afloat. What follows is merely a summary review of the Act but does hit the highlights.
IF YOU HAVE EXISTING CREDIT FACILITIES, please carefully read the last section which is entitled “CAUTION.” Anyone who has an existing commercial loan may need a waiver to apply for a PPP loan. Please call us at (619) 696-0520 if you have questions about how this applies to you or if you need help with a waiver.
Paycheck Protection Program (PPP)
What is the PPP?
This is a federal loan program to help small businesses (generally 500 employees or less) keep their employees on the payroll and to provide funds to operate their businesses. Small businesses can get a PPP loan from their bank and use it to pay payroll, health care benefits, rent, interest on an existing mortgage, utilities and interest on debts incurred before February 15, 2020.
Do I Qualify?
Of particular import is that if the business meets certain requirements, a portion of the loan can be forgiven with no tax consequences. In other words, the government will pick up a significant portion of the business’ payroll expense and rent for up to eight weeks. Here are some of the specifics:
- The loans are capped at the lesser of 2.5 times the prior 12 months average “payroll expense” or $10 million.
- The loans are term loans with up to 10-year maturity. (NOTE: The Department of the Treasury guidance is limiting loans to 2 years. And all loan terms will be the same for everyone.)
- The loans will carry a 4% fixed interest rate. NOTE: The Department of the Treasury guidance is reporting interest at .50% fixed.)
- Payments are deferred from 6 to 12 months.
- No origination fees will be charged to borrowers
- No collateral or personal guarantees will be required.
- Loans which were made under SBA’s Disaster Loan Program on or after January 31, 2020 may be folded into the PPP Loan.
- The PPP Loan forgiveness amount for “payroll expense” includes state and local (not federal) payroll taxes, commissions and tips, leave, group health costs, paid retirement benefits, salary (wages but not to exceed $100,000 for any single employee) and independent contractor costs. Utility payments include electricity, gas, water, transportation, telephone and internet.
- Loans will be available through SBA approved lenders.
What Is Forgiven:
Forgiveness of the loan balance is limited to principal only. It does not include accrued interest which will need to be paid, even if the principal is forgiven. Also, appropriate documentation will be required to qualify for the forgiveness of any of the principal indebtedness.
The maximum forgivable portion is the amount equal to 8 weeks of:
- post loan closing “payroll expense,”
- mortgage interest on real estate or equipment loans,
- rent, and
- utility payments
The Department of the Treasury guidance anticipates that not more than 25% of the forgiven amount may be for non-payroll costs.
Not only is the principal forgiven, but the forgiveness is without tax consequences to the borrower. Usually when debt is forgiven the forgiven portion carries an income tax consequence. All of this is, of course, subject to the employer maintaining certain employee and compensation thresholds.
The SBA needs to provide guidance on the forgiveness program. The CARES Act provides relief, even to businesses that reduce their compensation or employment rolls between February 15 and April 26. These businesses may still be eligible for loan forgiveness without reduction in the forgiveness amount if they get back to their compensation and employment levels by June 30, 2019.
The details on this requirement will be forthcoming in the next few weeks. This guidance will be critical for many of our clients who have been forced to reduce staff in the past few weeks, but need a PPP loan to continue to keep their doors open and employ the employees who are still on payroll.
The SBA / How to Apply:
The PPP loans will be administered through the SBA. It has been reported that the SBA application will be available as early as April 3rd or April 6th. The SBA is continuing to work on additional guidance for the PPP loans. The SBA has about 4,000 employees nationwide who are working on this issue and who will need to approve these loans. Considering that not all of these employees are underwriters, this is going to be a monumental task for this agency considering how many small businesses will need to apply.
The good news is that some of our clients have reported that there are community banks who are already prepared to accept, approve and fund loan applications, immediately.
One resource to find a local bank that can handle a PPP Loan is the Independent Community Bankers Association’s website – www.icba.org/about/find-a-community-bank
Preovolos Lewin, ALC is here to guide you through this process. Please call us at (619) 696-0520 to discuss your options.
Those business borrowers with existing commercial financing facilities considering PPP Loans – be sure to review your existing loan agreement restrictions on additional debt. In fact, any business borrowers with existing financing agreements will need to review their agreements to determine if they are restricted from taking a PPP loan or have the ability to comply with the financial covenants of their agreements as a consequence of the current business disruptions. We anticipate that many businesses will need to reach out to their current lenders to obtain appropriate compliance waivers for either, or both, the new PPP Loans and/or their impaired financial performance. This is something that is absolutely critical and should not be ignored. If you need assistance reviewing these agreements or applying for waivers or permission to apply for your PPP loan, please let us know.