Making payroll is one of the most stressful issues on every business owner’s mind, and thankfully, the Paycheck Protection Program (PPP) section of the CARES Act provides significant aid to provide some financial relief. The final PPP loan application is now available here.
Who Can Apply? According to the Dept of Treasury’s Information Sheet, all businesses with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards. Business types that qualify for PPP loans include independent contractors, LLCs, S corporations, C corporations, sole proprietorships, as well as other types of businesses including certain nonprofits, veterans’ organizations, and tribal business concerns. Businesses who have received Economic Injury Disaster Loans (EIDLs) through the SBA between January 31, 2020 and April 3, 2020 are not prohibited from obtaining a PPP loan so long as the EIDL was executed for purposes other than the permitted uses of a PPP (see below for discussion of PPP permitted uses).
The SBA’s affiliation standards have been waived for this Program for companies that are (a) in the hotel or food services industries; (b) franchises in the SBA’s Franchise Directory; and (c) receiving financial assistance from small-business investment companies licensed by the SBA. The affiliation standards have been the source of much confusion in the venture-backed startup community; and we explore those considerations in more detail here and will be monitoring for expected new guidance in that area and updating as that becomes available.
What Do I Need to Do to Apply? A business owner must apply through an approved SBA 7(a) Lender, or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Applications are open as of April 3, 2020 for small businesses and sole proprietors. Independent contractors can begin the application process as of April 10, 2020. All applications must be submitted to an approved lender by June 30, 2020.
Applicants will need to certify that the business is suffering from economic hardship due to the current COVID-19. In addition to the certification in good faith that the funds will be used to maintain payroll and make mortgage, lease or utility payments, the applicant will need to provide:
- Documentation that demonstrates the number of full-time employees on payroll, total payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan. Independent contractors (1099 workers) engaged by an applicant are not included for this analysis, but note that the PPP does provide opportunities for independent contractors to apply for their own PPP loan.
- Certification that the business owner has not and will not receive any other loan assistance under the CARES Act.
How Much Can You Apply For? The amount of the loan is for up to 2.5 times a business’s average monthly payroll costs from the last year plus any outstanding amounts owed on an EIDL executed between January 31, 2020 and April 3, 2020, if any, and less any emergency advance amounts obtained through the EIDL program, if any. Note, this amount cannot exceed $10 million. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Individual employee payroll costs are capped at $100,000 annualized, so anything above that is not considered for determining average payroll costs.
What Are the Permitted Uses of a PPP? A PPP loan can be used for “payroll costs” and other specific operating expenses.
Payroll costs include salary, wages, commissions, payment of vacation, sick, parental/family/medical leave, payment of retirement contributions, group health coverage premiums and state and local taxes assessed on payroll. Payroll costs do not include Federal Payroll Tax, compensation paid to employees in excess of $100,000, or compensation paid to employees outside the U.S.
In addition to payroll costs, PPP loans can be used to cover interest on mortgage obligations, rent, and utilities that were in use before February 15, 2020, and interest on other debt obligations incurred before February 15, 2020.
Loan Terms. PPP loans will be executed at an interest rate of 1% with a maturity date of two years.
When Do I Have to Pay it Back? A business’s loan repayment term is two years, with the first 6 months of payments deferred with interest accruing during deferment. There is no pre-payment penalty if paid back within that two-year period.
Is the Loan Forgivable? A business owner is eligible for loan forgiveness for the amounts they spend over the eight weeks after receiving the loan disbursement on the qualifying expenses named above (aside from interest on debt obligations incurred before February 15, 2020), provided that at least 75% of the forgiven amount must have been used for payroll costs.
If the number of full-time employees is reduced over the eight weeks or if the salary or wages of employees who earned $100,000 or less in 2019 are reduced by 25% or more, then the amount of the loan eligible for forgiveness will be reduced. However, depending on the timing of any such workforce or salary/wage reductions, reduced loan forgiveness can be avoided if the reductions are undone by June 30, 2020.
The lending bank will determine a business’s eligibility for loan forgiveness based on the criteria mentioned and has 60 days to render a decision.
Can I Still Qualify if I Already Have an SBA Loan? A business owner can have more than one SBA loan as long as the total combined amount of the loans does not exceed the maximum amount set by the SBA, and in the case of EIDL and PPP loans, a borrower cannot take out both types of loans unless they are for different purposes. EIDL loans executed before a PPP loan can be rolled into a PPP loan. In other words, the principal of an EIDL could later become part of a PPP loan, likely resulting in lower interest rates.
What are the similarities and differences between PPP loans and EIDL? Can I get both? As mentioned, you can receive both loans as long as the amount doesn’t exceed the maximum amount allowed by the SBA, and the proceeds are used for different things. EIDL can be used for payroll, paid sick leave, costs incurred due to supply chain disruption, rent or mortgage payments, and repayment of amounts owed that cannot be paid due to loss of revenue from a disaster’s (i.e. COVID-19) impact. Further, EIDL applicants can receive up to a $10,000 emergency advance, which does not have to be repaid even if the loan application is later denied but will reduce the principal of a PPP loan if such applicant subsequently executes one.
As addressed above, PPP can be used for payroll costs, group health care benefits, mortgage interest costs, rent, utilities and interest on debt incurred before February 15, 2020. Because the PPP is forgivable in certain cases, and forgiveness is tied to usage of the PPP loan on payroll specifically, borrowers should carefully evaluate which loan to use for which expenses where an expense is eligible to be paid by either type of loan. We have provided a useful flow chart, available at: PPE: EIDL Comparison Chart.
For more information on PPP, EIDL and other SBA benefits, please contact us at firstname.lastname@example.org