What is the Paycheck Protection Program?
The Paycheck Protection Program (PPP) is a new loan program under the Small Business Association (SBA). It was enacted as part of the recent CARES ACT and will allow certain businesses such as banks and current SBA lenders, in addition to new or nontraditional lenders approved by the Treasury Department, to provide PPP loans on behalf of the SBA to small businesses affected by COVID-19. These loans can be used for payroll costs, group health insurance premiums, mortgage, rent and utilities costs. These loans are eligible for payment forgiveness if the debtor meets the conditions and rules.
Who Can Apply?
The following entities affected by Coronavirus (COVID-19) may be eligible:
- Small businesses with fewer than 500 employees.
- Businesses with 500 or more employees that meet the SBA industry-based sized standard or the alternative size standard.
- Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location.
- Sole proprietors, independent contractors, and self-employed persons
- Some other non-profit, veteran organizations and tribal business, regardless of size.
How Much Can Be Borrowed?
For the Paycheck Protection Program, the maximum amount that can be borrowed is the lesser of:
- 2.5 times the average monthly payroll costs; or
- $10 million
What Are the Terms of The Loan?
Payment terms for Paycheck Protection Program loans are as follows:
- Interest rates for these loans will have a fixed rate interest of 1%
- The lender cannot charge a guarantee fee, a yearly fee, a prepayment penalty, or request a personal guarantee or collateral for the loan.
- The lender has to provide payment deferment for at least six months (but not more than one year) for borrowers who were in operation as of Feb 15, 2020 and adversely affected by COVID-19 (which is presumed).
How Does the Loan Forgiveness Work?
Under the CARES Act, Paycheck Protection loans are eligible for “forgiveness”, in which the lender releases the borrower’s obligation of repaying the balance. The amount that can be forgiven is limited to the amount the lender reasonably expects the borrower to spend during the covered period on:
- Payroll costs (capped at $100,000 on an annualized basis per employee).
- Interest for mortgages signed prior to February 15, 2020.
- Rent obligations from a lease agreement signed prior to February 15, 2020.
- Utility payments.
- Additional wages to account for the reduction in tips for tipped employees.
What Are Included in Payroll Costs?
Under the CARES Act, payroll costs include salary, wages, cash tips or equivalents, costs for employee vacation, holiday, parental, family, medical, and sick leaves, dismissal or separation compensation, group health insurance payments, retirement benefits payments, and some state & local payroll taxes.
However, the CARES Act does exclude from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000.
Does the Exclusion Apply to all Employee Benefits of Monetary Value?
No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation. It does not apply to not to non-cash benefits, including:
- Employer contributions to defined-benefit or defined-contribution retirement plans.
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums.
- Payment of state and local taxes assessed on compensation of employees.
What About Those Portions of the Loan Not Forgiven?
Those loan payments will be deferred for six months. This loan has a maturity of 2 years and an interest rate of 1%.
Where Do I Apply?
Small business owners can apply through an existing U.S. Small Business Administration (SBA) lender or through any federally insured deposit institution. A list of SBA lenders can be found on the SBA’s website at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.
What Else Should I Know?
Some other important points to consider are:
- The amount of forgiveness depends on the borrower’s payroll costs over an eight-week period that begins on the date the lender makes the first disbursement of the PPP loan to the borrower.
- The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
- The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities. However, at least 75% of the forgiven amount must have been used for payroll.
- And importantly, forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be proportionately reduced by a decrease in headcount or wages compared to an earlier lookback period, unless the employer reverses that reduction of headcount or wages by June 30, 2020.
- Businesses who contract with a third-party payer such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes are also eligible for the loan.
- Since the PPP opened for applications Friday, some banks have already found themselves overwhelmed by businesses seeking funding. Wells Fargo WFC, for example, has already stopped taking new loan requests after reaching its $10 billion limit. The Federal Reserve is now stepping in to help support the PPP program by making it easier for banks to lend money.
- Although the program is open until June 30, the Treasury says small business owners should “apply as quickly as you can” due to funding caps and the time needed to process loans. There have already been some roadblocks, including banks requiring applicants to be previous loan customers, but some are now easing those requirements.
Navigating your small business through these difficult days can be a scary and complicated matter, which is why it’s important that you have a knowledgeable attorney on your side. Our attorneys are here to assist with your needs. If you’re unsure about whether you can qualify for the SBA Paycheck Protection Program or how to apply, call our office today at (503) 227-0200 to discuss your options.