Paycheck Protection Program (Loans)
The CARES Act bill includes language to provide small businesses the 'Paycheck Protection Program', which would provide cash-flow assistance to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. during this emergency. This would be accomplished through a government-guaranteed small business (SBA) loan program with relaxed terms and the possibility of loan forgiveness according to stipulated criteria.
Under this provision, a small business, 501(c)(3) nonprofit, or a 501(c)(19) veteran's organization could qualify, provided it does not have more than 500 employees, or has a number of employees consistent with the applicable size standard for the industry per the Small Business Act. The provision includes sole-proprietors, independent contractors, and other self-employed individuals as parties eligible for the loan program. Businesses in the hospitality and dining industries with more than one physical location that employ no more than 500 employees per physical location in the "accommodation and food services" sector are eligible, but must not exceed a gross annual receipts threshold. Organizations must make a good faith certification that the uncertainty of current economic conditions makes it necessary for the loan request to support ongoing operations. Furthermore, the organization must acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.
What is the covered loan period?
The covered loan period is February 15, 2020 through June 30, 2020.
What are the loan terms and amounts?
The provision establishes the loan amount based on a formula of the average total monthly payments for payroll costs incurred during the 1-year period before the date on which the loan is made multiplied by 2.5, up to a maximum amount of $10 million. Repayment of the loan is up to 10 years; however lenders are required to defer payment of principal, interest and fees for a period of at least 6 months, but not exceeding one year. The government guarantee of loans made is increased to 100 percent through December 31, 2020, at which point the guarantee percentage returns to 75 percent for loans exceeding $150,000 and 85 percent for loans equal to or less than $150,000.
What are the allowable uses?
Under the provision, loans are eligible to be used for payroll support, including employee salaries (which includes compensation to sole proprietors and independent contractors), paid sick or medical leave, insurance premiums, mortgage, rent and utility payments. Employee salaries, commissions and tips may not exceed $100,000 on an annual basis per employee or $45,000 for the covered period.
What are the associated costs?
There is no fee to the borrower and the provision sets a maximum interest rate of four percent. In addition, the provision ensures borrowers are not charged any prepayment fees. No collateral or personal guarantee is permitted to be required for a loan.
What is the loan forgiveness?
Recipients are eligible for forgiveness of the loan in an amount equal to the sum of payroll costs, interest payments on mortgage obligations, rent and utilities incurred during the covered period. Forgiveness will not exceed the loan principal amount. The amount of loan forgiveness will be reduced in accordance with any reduction in the number of employees or employee salaries during the covered period.