Cares Act Outline for SMB

COVID-19 (C19) has halted the economy overnight leaving businesses desperate to keep the lights on. The Act, among other things, provides SMBs with immediate funds through its Paycheck Protection Program (PPP) to retain employees and make ends meet until business activity resumes. The following provides simple, practical answers to common questions SMBs may have.

What's in the Act?

A collection of programs designed to immediately inject money into businesses to prevent further layoffs and, more broadly, an economic downward spiral.

Is it worth my time to apply?

Almost certainly. The obstacles that have previously stood in the way of obtaining SBA loans have been removed in the PPP. This loan is designed to be issued quickly and, importantly, forgiven. Yes, forgiven.

Will I qualify for the loan?

Most likely, if you are a business with fewer than 500 employees. The Act has waived the standard requirements for SBA loans, such as the inability to get credit elsewhere and the ability to repay. Instead, the Act lists two requirements: whether (1) the applicant was in operation on February 15, 2020; and (2) if it incurred payroll costs for those employees.

Why do the requirements seem so easy to satisfy?

Because they are intended to be easy. The Act’s purpose is to put money in the hands of businesses to stop the free fall. Congress wants funds to your account immediately so you can pay rent and make payroll.

Is this loan different from SBA 7(a) loans?

Yes. While the SBA oversees the PPP, it is different from the SBA 7(a) loan program. The critical difference is that the PPP is designed to be forgiven if the business maintains its workforce. The loan effectively becomes a grant—one for which practically all legitimate businesses will qualify.

1Exceptions to the 500 employee rule may be made for some businesses, including those in the food industry. Seek expert advice for more information. 2 Payroll costs include (1) salary, wages, commission, payment of cash/tips (2) paid vacation, sick, medical, family leave (3) severance pay (4) health benefits (5) retirement benefits (6) state and local tax on compensation. The Act excludes payments (1) of annual salary in excess of $100,000 (prorated for the period between February 15 -  June 30, 2020 (2) to employees outside of the US and (3) leave payments under the Families First Coronavirus Response Act.

How much will I qualify for?

2.5 times your average monthly payroll costs up to $10,000,000.

What are the terms of the loan?

The interest rate will depend on the lending bank but will be no more than 4%. Neither collateral nor personal guarantees are required. All payments on the loan (principal and interest) are deferred for between 6 and 12 months. PPP loans have a maximum term of 10 years.

Where do I apply?

At any institution approved to participate in the program under the SBA 7(a) lending program. The bank where you do your usual banking most likely offers PPP loans.

When is the best time to apply?

Now. Although $349 billion has been allocated to the PPP, the number of applications for PPP loans will likely exceed the processing bandwidth of SBA approved banks. To avoid long processing times, best to get in line now. 

When will I see the money?

The Act has not set firm timelines but estimates are early April.

What can I use the loan for?

  • Payroll costs

  • Health benefits

  • Sick/medical/family leave

  • Insurance premiums

  • Interest (not principal) on loans incurred before February 15, 2020

  • Rent

  • Utilities

Can this loan be forgiven?

Yes. It is designed to be forgiven for businesses that retain its workforce.

 3 Calculated by averaging your monthly payroll costs (previously defined in footnote 2) during the 1-year period before the loan is made.

How much of the loan will be forgiven?

Potentially all of it, how many full-time employees you retain between 2/15/20 - 6/30/20. If, for example, you manage to retain all of your full-time employees and the remaining loan proceeds have been spent on permitted expenses during the 8 weeks following the loan, then 100% of the loan may be forgiven.

What should I do right now to ensure the loan is forgiven?

Do not layoff your workforce, especially the full-time employees. Also, ensure that the loan proceeds are spent on permitted expenses (payroll, utilities, rent...etc.).

What happens to the portion of the loan that isn’t forgiven?

The loan originator will set the terms but the unforgiven portion of the loan will be paid back within a maximum of 10 years and up to 4% interest rate.

What’s the difference between an Economic Injury Disaster Loan (EIDL) and a PPP loan?

They are different loans. An EIDL has a maximum term length of 30 years, cannot be forgiven, requires personal guarantees from the business owners, and, among other things, can be used for a wider range of expenses.

Where can I go for more information?

You can find information online but a loan officer at a participating bank will be more likely to offer clearer guidance on PPP loans.

4 To calculate the percentage of the loan that can be forgiven, divide the monthly average number of full-time employees between 2/15/20 - 6/20/20 by your choice of either (1) the monthly average number of full-time employees between 1/29/20 - 1/29/20 or (2) the monthly average number of full-time employees between 2/15/2019 - 6/30/2019.

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