Paycheck Protection Program

(Updated April 1, 2020)

This past Friday the massive $2.2 trillion stimulus bill was signed into law. This will have a major impact on you, your business, and your employees.

We're still working through the 800+ page bill but first, we wanted to break down key points for one of the most significant parts of the stimulus for small businesses — the Paycheck Protection Program. If you haven't heard, the program will provide up to $10 million in a forgivable loan through the Small Business Administration (SBA) to cover payroll and other expenses.

Given the funding cap and high demand, we recommend you reach out to your existing lender or an SBA-approved lender to get in line ASAP

Below, we've summarized key points regarding the program's operation and benefits (subject to change). Additional parts of the bill include direct payments to employees, as well as an expansion of the unemployment insurance program--adding $600 to the maximum weekly benefit and extending the time an employee can receive it. However, some of those benefits are mutually exclusive with the loan program. Also, note that Paycheck Protection Program loans are different than the SBA's Economic Loans Injury Disaster program.

Key Points

  • The program is meant to help retain workers, maintain payroll, and cover rent/mortgage/utility for an 8 week period after the loan
  • All small businesses with 500 or fewer employees are eligible, including self-employed individuals, sole proprietorships, and independent contractors
  • Maximum loan amount is the lesser of $10M or average monthly payroll costs times 250% (with some restrictions)
  • The application process and terms are favorable - no collateral or personal guarantee is required, interest is fixed at 0.50%, and payments are deferred for 6 months
  • The loan can be forgiven, essentially turning into a non-taxable grant
  • You can apply through any existing SBA 7(a) lender as early as April 3

Loan Terms

Unlike typical SBA loans, the Paycheck Protection Program promises a streamlined application and favorable loan terms.

  • Loans require a "good faith" certification that the economic conditions make the loan necessary
  • Interest rates are 1% fixed
  • All payments are deferred for 6 months (though interest accrues)
  • Loans are due in 2 years; no prepayment penalty
  • No collateral or personal guarantee is required

Loan Amount

Loans amounts can be up to 250% of your average monthly payroll costs, but not more than $10 million.

Eligible payroll costs for employers include:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee),
  • Employee benefits (vacation, parental, family, medical, or sick leave),
  • Allowance for separation or dismissal,
  • Payments for group health care benefits including insurance premiums;,
  • Payments for retirement benefit,
  • State and local taxes assessed on compensation, and

For sole proprietors or independent contractors, eligible costs include wages, commission, income, or net earnings from self-employment, again capped at $100,000 on an annualized basis.

Loan Forgiveness

Your loan is eligible for forgiveness when used to cover certain expenses over the 8 weeks after getting the loan, including:

  • Payroll and commission payments,
  • Group health care benefits/insurance premiums,
  • Mortgage interest payments (but not principal),
  • Rent and lease payments,
  • Utilities, and
  • Interest on debt obligations incurred before February 15th

However, forgiveness will be reduced if you:

  • Decrease your full-time employee headcount
  • Decrease salaries and wages by more than 25% (for any employee that made less than $100,000 annualized in 2019)

If you've already made reductions in headcount and wages, you have until June 30, 2020 to restore your full-time employment and wage levels for any changes made between February 15, 2020 and April 26, 2020. Also, given the high demand and limited funding, the Treasury anticipates that not more than 25% of the forgiven amount may be for non-payroll costs.

How to Apply

We know for certain that loans will at least be facilitated through existing SBA 7(a) lenders (see our growing list here). FDIC-insured banks and credit unions can also participate, but - since they will need to be approved and enrolled - they may be more delayed than existing SBA participants. Application dates are staggered based on borrower type:

  • Small businesses and sole proprietorships can apply starting April 3rd through existing SBA lenders
  • Independent contractors and self-employed individuals can apply starting April 10th through existing SBA lenders
  • Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the program

Although the program is open until June 30, 2020, there is a funding cap and we expect high demand, we recommend you reach out to your existing lender or an SBA-approved lender to get in line ASAP. They may not yet be ready to process applications, but you can get in the queue and start preparing your paperwork. At a minimum, start pulling together your tax and payroll documentation.

Additional Resources:

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The information contained in this post is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.