On March 27, 2020, Congress officially passed the CARES Act which includes the SBA Paycheck Protection Program. This program offers loans to small businesses that can be forgiven if certain conditions are met. A special note, this SBA program is separate from the SBA Disaster Loan Program called the Economic Injury Disaster Loan Program.
In this article we will review:
- The terms of the Paycheck Protection Program
- How the loan amount is calculated
- Deferred Payments for 6 to 12 months
- How to apply for the loans
- The loan forgiveness process
- Restrictions on what the loans can be used for
- Other loan programs available to small businesses
Paycheck Protection Program
This is a new loan program sponsored by the SBA that was put in place to provide small business owners with access to cash to sustain normal business operations over the course of the next 8 weeks. While these are technically loans, if the guidelines of the program are followed, business owners will:
- Never have to make a loan payment
- Have the full loan amount forgiven
- There are no fees to apply for the loan
- Higher and faster approval rates compared to other lending programs
Business Expenses Covered By These Loans
This program is very specific about what the money can be used for. In order to qualify for forgiveness of the loan amount, the loan proceeds have to be used for:
- Payroll & commission payments
- Mortgage or rent payments
- Group health benefits including insurance premiums
- Vacation, medical, or sick leave payments
- Utility payments
- Interest on debt obligations previous to February 15, 2020
More specifically, it’s to cover expenses incurred between February 15, 2020 and June 30, 2020.
Who Qualifies For These SBA Loans?
Most small businesses will be eligible to apply for these loans. Here are the application requirements:
- The business has been in operation since February 15, 2020
- The business has 500 or less employees
- The business has paid salaries, payroll taxes, or Form 1099 non-employee compensation
- Ability to demonstrate that your business was economically affected by COVID-19
Sole proprietors, independent contractors, and 501(c)(3) entities are also eligible to apply.
Terms of the Loans
There are a number of unique features about this SBA loan program that will make it very appealing to small business owners:
- No fees to apply for the loan
- No collateral required
- No personal guarantees
- Maximum interest rate of 4%
- Maximum 10-year amortization
- Ability to defer payments for 6 to 12 months (depending on your lender)
- No pre-payment penalty
- Loan forgiveness if program requirements are met
There are requirements that have to be met in order for all or a portion of the loan amount to be forgiven by the SBA.
- The money has to be spent on qualified expenses (listed above)
- The expenses have to be incurred within 8 weeks after the loan is approved
- The business has to maintain the same number of employees between Feb 15th and June 30th that it did during same period in 2019 or from January 1, 2020 until February 15, 2020
- You cannot reduce employee wages by more than 25% for employee with less than $100K in compensation
Going outside of these requirements will either reduce or eliminate the amount of the loan that is forgiven by the SBA. We are still waiting for clarification on a number of business scenarios concerning employee headcount and wage calculations. The CARES Act was over 800 pages long, but it does seem as of right now, that if you rehire employees that were previously laid off at the beginning of the period, or restore wages that were previously reduced, you will not be penalized as long as you do this by either the end the initial 8 week period or June 30th. We still need clarification as to which deadline will apply.
Is The Loan Forgiveness Amount Taxable?
No. Within this program, the amount that is forgiven is considered a tax-free grant from the U.S. government.
How Is The Amount Of The SBA Loan Calculated?
Since this program was implemented to help businesses support payroll expenses, when you apply for the loan, you will need to submit payroll documentation for the previous 12 months. The calculation for these loans is very simple:
- Total payroll expenses for the previous 12 months
- DIVIDED by 12 months
- MULTIPLIED by 2.5
In the calculation of the total payroll expenses, any employees making more than $100,000, they cap their compensation at $100,000 for purposes of the maximum loan calculation. Also, the amount available in the form this SBA loan is the LESSER of:
2.5 times monthly payroll expenses OR $10 million dollars
Here is a quick example:
Company XYX has 1 owner and 3 employees with the following payroll expenses for the past 12 months:
Employee 1: $90,000
Employee 2: $60,000
Employee 3: $50,000
Since the owner’s salary is capped at $100,000, it will result in the following maximum loan amount:
$300,000 / 12 Months = $25,000
$25,000 x 2.5 = $62,500
If the company is approved for the $62,500 loan, depending on their bank, they may be able to defer making loan payments for 6 months, and as long as the company spends that money within the next 8 weeks on expenses outlined by the SBA program, maintains headcount and employee wages, they will be eligible for full forgiveness of the loan after that 8 week period without pre-payment penalty or a taxable event.
How Do You Apply For These Loans?
For the Paycheck Protection Program, these loans will be issued through banks. When you call your banker you will need to let them know that you are applying for an SBA Paycheck Protection Loan. The SBA serves as a guarantor for these loans so if the borrower meets the SBA criteria, the bank issues the loan, but if the borrower defaults on the loan, the SBA reimburses the bank for those losses.
Choose Your Bank Wisely
Not all banks will be participating in this loan program, so you first have to identify which banks in your area are participating in this SBA Paycheck Protection Program. These loans are going to be in high demand so the banks are most likely going to be overwhelmed with loan applications which could slow down the turnaround time of these loans. It is prudent to reach out to your professional network, like your accountant, investment advisor, or independent commercial broker, to determine which banks have the capacity to get these loans through quickly.
It will be extremely important for business owners to submit all of the proper documentation for the loan on the first attempt. If information is missing from the application or you submit the wrong supporting documentation, it could really slow down the process. The banks receive a fee from the government for every loan that they process so they have a big incentive to focus on the loans that all of the proper documentation so they can approve them quickly.
Start The Process Now
For our clients that we believe meet the criteria for this SBA Loan Program, our top recommendation is to start the process now otherwise you could end up in the back of a very long line. But before you do, you should consult with you accountant, financial advisor, or commercial lender to make sure this is the right program for you. There are multiple programs out there right now to help support small businesses due to the economic crisis caused by the Coronavirus. If you take a loan from one program, it could disqualify you from access to other SBA loans or tax credits that are available that could be more beneficial for your business. Here is our article on the SBA Disaster Loan Program which will be another popular option for businesses impacted by the Coronavirus containment efforts.
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.