As the coronavirus outbreak continues to significantly impact small businesses, the CARES Act paves the way for the Small Business Administration (SBA) to add and expand existing small business loan products.
The stimulus money for small businesses -$384 billion – will fund several different programs: the newly created Paycheck Protection Program, Economic Injury Disaster Loans (EIDL) and Emergency EIDL Grants, and the small business loan forgiveness and debt relief programs .
Starting Friday, April 3, 2020, small businesses and sole proprietorships can apply under the Paycheck Protection Program for loans to cover their payroll and certain other expenses through SBA lenders. In light of the imminent filing deadline, please review the following information about the Paycheck Protection Program. Further information and updates will be available on the SBA website.
Listen to our podcast with the top five takeaways from the Coronavirus Aid Relief and Economic Security Act (CARES Act), explained by James Venable and Sue Woods from ReedGroup’s legal/compliance team.
What the Paycheck Protection Program covers
The majority of jobs in the American economy are generated by small to midsize businesses, which is why the “Paycheck Protection Program” is such an important cornerstone of the CARES Act legislation. The CARES Act seeks to shore up payroll in those businesses by leveraging the Small Business Administration’s Section 7(a) loan program.
As a result, the maximum 7(a) loan amount is increased to $10 million, and allowable uses of 7(a) loans are expanded to include “payroll support,” which includes paid sick or medical leave, employee salaries, mortgage payments, insurance premiums, and any other business-related debt obligations. The loan period for this program starts on February 15, 2020, and ends on June 30, 2020.
While healthcare premiums are clearly covered, it is not clear if group ancillary coverages, such as dental, vision, life, disability and supplemental health, also fall under the 7(a) loan expansion. Guardian is working hard with trade associations and other carriers to have this issue favorably resolved. We will keep our planholders updated as this issue progresses.
Paycheck Protection Program Eligiblity
To determine whether a business is eligible for this program, the CARES Act require lenders to ascertain if:
- The business was operational on February 15, 2020
- The business had employees to whom it paid salaries and payroll taxes, or paid independent contractors
- The business was substantially impacted by COVID-19.
The legislation also gives more authority to lenders regarding eligibility determinations without having to run them through the normal SBA approval channels.
Businesses eligible for the expanded 7(a) loans under the CARES Act include small businesses, nonprofits and veterans organizations with 500 or fewer employees. Individuals operating as sole proprietors, independent contractors and self-employed individuals between January 31, 2020, and December 31, 2020 may also be eligible to receive a 7(a) loan.
Businesses with greater than 500 employees must take the additional step of consulting the SBA size standards and should refer to the SBA guidelines to view additional types of businesses that may qualify.
Allowable 7(a) loan uses
The CARES Act says that 7(a) loans can be used for:
- Annual salaries and hourly wages
- commissions and tips
- paid leave
- healthcare payments
- retirement benefit payments.
Loan amounts are based on employee salary, retention costs, and qualified business expenses. Full or partial loan forgiveness is available if the small business retains its employees.
Allowable payroll costs do not include compensation to an individual employee in excess of an annual salary of $100,000 as prorated for the covered period. Qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (FFCRA) are not included in the allowable uses. It also does not include any compensation of an employee whose principal place of residence is outside of the United States.
One of the most important aspects of the CARES Act is that the 7(a) loans are nonrecourse, except if the proceeds are used for an unauthorized purpose. In addition, no personal guarantee or collateral are required. That said, “Good Faith” certification is required, and certification has
the following elements:
- The current uncertainty makes the loan necessary to support ongoing operations
- The funds will be used to retain works and maintain payroll or make mortgage payments, lease payments, and utility payments
- There are no duplicative amounts
7(a) loan terms
- Interest Rate: During the covered period, a covered loan shall bear an interest rate not to exceed 4 percent
- Payment Deferment: 6-12 month of deferment including principal, interest and fees
- Origination Fees: Lender reimbursed by the SBA
7(a) loan principal forgiveness
One of the most important aspects of the Paycheck Protection Program is the way in which loan principal can be forgiven. Under the terms of the legislation, principal can be forgiven in an amount equal to the following costs incurred during the covered period of February 15, 2020 through June 30, 2020:
- Payroll costs
- Mortgage interest
Any amounts forgiven will be reduced proportionally based on:
- any reduction in the number of retained employees as compared to the prior year
- the reduction in pay of any employee beyond 25 percent of their prior year compensation.
Borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period. Most importantly, indebtedness cancelled will not be included in the borrower’s taxable income.
Note: entities that take advantage of loan forgiveness are excluded from receiving the payroll tax deferment provided by the stimulus packages.
Preparing your 7 (a) loan forgiveness application
Collect the documents you need, such as EIN, revenue, and sales information. You will also need:
- Payroll documentation that shows the number of employees you have and what you pay them
- Statements that show payments for employer contributions to employee retirement accounts and health insurance premiums
- Statements that show the amount you spend on other business expenses, such as lease payments or utility bills
To apply, you must contact a bank registered to make a 7(a) loans before June 30, 2020. Before applying for your loan, calculate your average monthly payroll costs for the year. You can work with your lender to determine the exact amount. The SBA provides a list of the 100 most active 7(a) lenders.
If you believe you qualify for full or partial loan forgiveness, contact your lender and tell them you think you qualify once you have signed your loan documents. You can request loan forgiveness for up to eight weeks of payroll and operational costs. For support you must have your calculated payroll costs, interest on mortgage obligation, and utility payments. The deadline to apply for a loan forgiveness is July 30, 2020.
Guardian continues to stay on top of all new and evolving legislation. For additional updates, please visit our resource center, which includes frequently asked questions about Guardian’s response to the COVID-19 pandemic.