CARES Business Loans – What’s Changed – What’s Gone Wrong

April 9, 2020 | from AdminBerenson No Comments

The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) provided, among other things, $349 billion in “Paycheck Protection Program” loans. The PPP loans were to give immediate relief by funneling money directly to small businesses through Small Business Administration–approved lenders.The Department of Treasury said money would be flowing as of April 3.  That didn’t actually happen.

Why Have Things Changed?

As we have noted many times in the past, what Washington passes into law and what actually gets out onto the street are almost always very different things.  Why?  Let’s say you and I agree to a beautiful new $40,000 kitchen, and we shake hands.  Done Deal!  Yes, but it’s not a done deal, is it?  Because none of the real details have been worked out.  Layout, cabinetry, countertops – someone needs to sit down and really get into the details of our new kitchen.  And if we need to move plumbing?  Uh oh – things can really change.

In this instance, the details were left to the Small Business Administration to figure out how to shoehorn a humungous new loan product (the PPP) into an existing loan program (the 7(a) program), without a great deal of guidance other than some large 30,000-foot concepts.  That is why we kept advising clients that this was going to be a fluid and moving target – things would change.


What’s Changed?

THE TERMS.  We were expecting a loan maturity of 10 years at 4%.  But those were maximums, and the SBA has decided these will be loans with 2-year terms at a 1% interest rate.  There is also a 6-month deferral period before the loan will need to begin being repaid – although interest will accrue during this deferral period.

THE LOOKBACK. You were going to be able to borrow 2.5 times your average monthly “payroll costs” during the 1-year period before the loan is issued, up to $10 million.  You can now figure your average monthly payroll costs using all of 2019, or using a 12-month current lookback period, such as April, 2019 to April, 2020.

INDEPENDENT CONTRACTORS. The wording of the CARES Act strongly implied that “payroll costs” would include not only all your employee compensation and insurance costs, but also compensation payments made to independent contractors! Not too surprisingly, that’s been changed.  The SBA decided that since an independent contractor can apply for his or her own PPP loan, that would be double dipping, so employers are no longer able to use payments to independent contractor in calculating their overall average monthly payroll costs. That goes for §3508 sales representatives receiving a 1099-MISC. as well.

LOAN FORGIVENESS. The amount of the loan that can be forgiven was equal to the total of four items.  If the loan was used for these four items during the 8-week period starting with the origination date of the loan, 100% of the loan would be forgiven:

  • Payroll costs
  • Interest on business debts prior to February 15, 2020
  • Rent, and
  • Utilities

However, the SBA decided this wouldn’t really serve the true intent of the PPP, so to receive 100% loan forgiveness, at least 75% of the loan has to be used for payroll costs, and no more than 25% can be used for the other three items.  Of course, even if you do miss some of the loan forgiveness, an unsecured 2-year loan at a 1% interest rate is still nothing to sneeze at.

STAFFING REQUIREMENTS.  This is one item where we should expect continued changes.  As of right now, it appears that loan forgiveness will be tied to bringing  your staffing in line (by June 30) with the same full-time headcount and level of payroll you had before the impact of COVID-19.  More specifically, before any changes between February 15, 2020 and April 26, 2020.

STAFFING CHANGES.  Can you move employees around – bonus one person, fire someone else and hire a third person?  As of now, it looks like you should be able to do all those things.  Could some lenders look for detailed employee names and compensation amounts when they go to process the loan forgiveness certifications?  Yes, we don’t expect that but we simply do not have enough guidance yet to understand exactly how this will work.  It does appear that while you could fire Bob and hire Sally, if you decide to keep Bob on, you can not decrease his wages by more than 25% if he made less than $100,000 in 2019.  In other words, it appears you are not supposed to cut wages so you can bring on more part-time or lower-compensated workers.

AFFILIATED COMPANIES.  One PPP loan per company.  That’s the rule. In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP. Under existing SBA rules, companies can be considered affiliates based on various factors including stock ownership, overlapping management, and use of common names or management.  We are expecting further guidance on how the affiliation rules will apply to the PPP.


What’s Gone Wrong? Is It Being Fixed?

Quite a bit has gone wrong, actually, and none of it is a surprise.  If you reconsider our new kitchen example at the start of this Alert, you can understand the problem.  The SBA is a well-run and efficient organization, but it has never been considered the poster child for speed.  The details needed to implement the PPP, plus the virus-reduced staffing levels at both the SBA and the SBA-approved lenders, plus the overwhelming interest in the program, and the fact that it was a brand-new, untested and mostly undefined program, has created a logjam of applications, errors, delays and misinformation across the spectrum, especially at the banking end of this process.  All of which is just now leading to increased negative publicity and finger-pointing – and all of which was easily anticipated by anyone with an understanding of the business world outside of Washington, D.C.

The banks can set some of their own requirements in accepting and processing PPP loans, but there were reports of large banks declining applications unless the business owner was a prior customer. Due to backlash and some stern warnings from Congress, those policies appear to have been reversed. FinTechs, including PayPal and other online lenders, are now ready to process PPP loans and a nonbank lender application will be out soon from the SBA to increase available lenders for small businesses to contact.

Moreover, hours ago the Federal Reserve approved an additional $600 billion in loans for small businesses impacted by COVID-19, as well as $75 billion in funding from the Treasury Department to further stimulate the programs under the CARES Act – specifically increasing liquidity to those SBA-approved lenders issuing PPP loans.  We will have to wait and see if this helps the situation. We also still expect Congress to renew funding for the PPP come June 30, and extend the deadlines, but take that with a grain of salt, of course


Other Things To Consider

LOAN USE TRACKING. If you use PPP funds for unauthorized purposes, you will have to repay those amounts, but if you knowingly use the funds for unauthorized purposes, the SBA can come after you for  loan fraud – and they can come after you personally, so don’t get too creative.  BLLP suggests the PPP funds be placed into a seperated bank account and clearly tracked and used for the approved purposes mentioned above.  If you commingle the funds with your operating account, be prepared to have to clearly demonstrate how the funds were used.

SCAMMERS.  You don’t need a broker or “loan helper” to apply for the PPP – you just need to find an SBA-approved lender that is taking applications.  A list is available on the SBA’s website.  Be careful about filling out anything but the officially-approved PPP loan application (it should say “SBA Form 2483 (04/20)” in the bottom left corner.  There are a number of shady companies out there trying to sell unnecessary services to “help” you get a PPP loan.

$100,000 LIMITATIONS.  Payroll costs exclude employee compensation in excess of an annual salary of $100,000.  But keep in mind that exclusion does not apply to non-cash benefits, such as employer contributions to defined-benefit or defined-contribution retirement plans or payment of state and local taxes assessed on the employee’s compensation.

OWNER COMPENSATION.  The payroll costs paid to an owner, to the extent they don’t exceed $100,000 a year, are includable in figuring your average monthly payroll costs.  But that only applies (at least as of now) to W2-based payroll and guaranteed payments, not to K1 and other 1099-based distributions to owners.

INDEPENDENT CONTRACTORS ON UNEMPLOYMENT?  Although not directly related to the PPP, keep in mind that one of the less-mentioned provisions of the CARES Act was – for the first time ever – allowing self-employed workers and independent contractors (along with sole proprietors, part-time workers, and those with limited work histories) who are out of work due to COVID-19 – to apply for and obtain state unemployment benefits.  With the extended 13 weeks of unemployment and the $600 a week kicker, that means even independent contractors can, in most states, potentially receive unemployment benefits of up to $1000 a week for 30+ weeks.