The President has signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and we want clients and friends to understand how this relates to our industry.
You have less than 500 employees. You go to your bank and tell them you want to sign up for the Paycheck Protection Program loan. If your bank is a Small Business Administration lender (most banks are) they should know this is going to come under the SBA’s §7(a) loan program. If your bank has no idea what you are talking about, go find an SBA-approved bank.
You will want to be able to verify in detail your 2019 payroll (all payroll – to employees AND to independent contractors, including insurance costs, retirement plan costs, etc.). You will have to exclude compensation over $100,000. You can borrow 2.5 months of payroll costs up to $10 million. The loan will be forgiven if you use it for payroll, rent, utilities and interest payments – to the extent you maintain full employment at your 2019 levels. Otherwise, the loan will have to be repaid on a 10-year term at 4% interest, but with no collateral and no personal guarantee.
What Is It? $349 billion is going to Small Business Administration (SBA) to guarantee loans to small businesses – referred to as “7(a) Loans”. These loans will be fee-free and non-recourse – meaning no personal guarantees or liens – and the repayment can be deferred and forgiven.
Who Can Apply? Any business with 500 or fewer employees that was in existence on February 15, 2020, and had employees for whom it paid salaries and payroll taxes. This includes self-employed installers and sales representatives.
What is the Maximum Loan Amount? 2.5 times your average “payroll costs” during the 1-year period before the loan is issued, up to $10 million.
How is Payroll Cost Defined? Your payroll cost will be the total of all salaries, wages and commissions to employees AND independent contractors (up to $100,000 per year or $8,333.33 per month max per individual). This includes payments for vacation, parental, family, medical or sick leave, severance payments, payments for group health care benefits, including insurance premiums, retirement plan contributions and payment of state and local (but not federal) payroll taxes.
Payroll costs do not include the two weeks paid sick leave and 10 weeks paid family leave provided by the new Families First Coronavirus Response Act (because those costs are supposed to be handled by the new tax credits).
How Do You Apply? Start with your existing business bank – it is probably already an SBA-approved lender. This is going to require a fairly extensive loan application – be prepared – because you are going to have to provide detailed records to establish your payroll costs, as discussed above, for the prior 12-month period.
Do I Have To Maintain Full Staffing? No. If you have laid off or furloughed your staff so they can get unemployment, you can still get the loan, but the amount of loan forgiveness will be reduced to the extent that staff is laid off or their pay is dramatically reduced – keep reading.
How Long Will It Take to Get the Money? This is unclear, but the Treasury Department has optimistically indicated money should be available for disbursement starting the first week of April. We’ll see.
What Can the Loan Proceeds be Used For?
- Payroll costs
- Interest (not principal) payments on mortgages
- Interest (not principal) on any debts that were incurred before February 15, 2020
How Long Can You Defer Repayment?
You can completely defer repayment of principal and interest for at least six months but not more than one year. This will need to be negotiated with your lender.
How Much of the Loan Can be Forgiven? The amount of the loan that can be forgiven is equal to the total of the following four items, for the 8-week period starting with the origination date of the loan:
- Payroll costs (as broadly defined above)
- Interest (not principal) on any business debts that were incurred prior to February 15, 2020
- Utilities, including electricity, gas, water, transportation, telephone and internet access . . .
However, the purpose of these 7(a) loans is to encourage employers to keep their staffing in place. So, the amount of loan forgiveness is going to correspond to the amount of reduction in your full-time employees, or “FTEs” between February 15 and June 30 of this year compared to the prior year.
For example, if you had 50 FTEs in 2019 between February 15 and June 30, 2019, and then you had 25 FTEs for that same period in 2020, the loan forgiveness would be reduced by 50%. It will be further reduced for FTEs that take pay cuts of more than 25%. If you re-staff and restore salaries to your 2019 levels by June 30, 2020, then there should not be any reduction in your loan forgiveness.
How to Get the Loan Forgiveness?
You will need to prove that you used the loan money for some or all of the loan forgiveness purposes mentioned above.
Are You Taxed on the Forgiven Debt?
There will not be any cancellation of indebtedness income – so no tax impact on the forgiven debt.
What Happens to the Portion of the Loan that is Not Forgiven?
The remaining balance will continue to be guaranteed by the SBA, have a maximum maturity of 10 years and bear interest at the rate of 4% or less. There are no prepayment penalties.
What To Do Now? Well, that is really the question. There are a number of ways to consider how this can best work for you.
Of course, the most obvious direction would be to apply for the 7(a) loan as soon as you can, while the funds are available, and consider it as a gift of money for 8 weeks of your payroll costs, utilities, rent, etc. It is, essentially and quite literally, free money from the government.
But, if you wanted to get a bit more creative, especially if you have already started trimming staff and laying off workers, or have closed up shop entirely – your best bet may be to keep running as you have been. Your terminated staff will be seeking unemployment benefits, and they will be getting a $600 a week unemployment bonus under the CARES Act as well. You could even reach out to your terminated employees and promise them a “return bonus” if they come back to you when you are ready to rehire.
Then, once the dust settles down and the economy begins to return to some semblance of normalcy, you apply for the 7(a) loan. At that point, you use the loan proceeds to fund your re-opening and re-hiring, and then you obtain forgiveness of the loan for the first 8 weeks of your start up period, which should carry you through much of the hard time of starting back up.
A few points you want to be aware of. First, the loan application deadline is currently June 30. That means that right now you will be betting on a re-start of your business by that time. And, your loan forgiveness should then carry you through to the end of August. Second, there is no guaranty the CARES program will still have funds for the 7(a) loans through the end of June. Yes, we would expect Congress to renew funding if the program is that popular, and perhaps even extend the deadlines, but it is never a good idea to rely on Congress.