With the passage and signing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law on March 27, 2020, approximately $350 billion will be used to guarantee loans to small businesses. Called the “Paycheck Protection Program (PPP),” these loans will be issued by banks and credit unions, and guaranteed by the Small Business Administration (SBA). The Paycheck Protection Program is a separate program from the SBA Economic Injury Disaster Loan program (detailed below), and businesses should evaluate which program will best suit their individual needs.
- The SBA has announced that small businesses and sole proprietorships can apply for PPP funds beginning on April 3rd. Independent contractors and self-employed individuals can apply beginning on April 10th.
- People’s United Bank is committed to participating in, and lending to, companies under the CARES Act. Additional program information is available from the Small Business Administration and may be accessed here: sba.gov
As with any loan or financing, business owners should consult with their tax and legal professionals to ensure any relief programs for which they apply are right for their situation and needs. All program details that follow are subject to requirements, and may change without notice based on updates and revisions by the SBA:
Eligibility for Paycheck Protection Program Loans
- All businesses – including non-profits, veterans’ organizations, Tribal businesses, sole proprietorships, self-employed individuals, and independent contractors with 500 or fewer employees can apply for the program. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
- Loan amount is based on the average monthly payroll cost multiplied by 2.5. Certain income levels are excluded from payroll costs. The loan is subject to a $10 million cap and features a two year term.
- The SBA is finalizing document requirements, but borrowers should begin collecting documentation such as payroll details.
- The program will require borrowers to make a good faith certification that their business has been impacted by the COVID-19 crisis, that funds will be used to retain workers, and that the applicant has no other applications pending under other SBA programs.
- Program is open through June 30, 2020 and subject to SBA funds availability. Loan application and approval is required.
Loan Features and Use of Proceeds
- No personal guarantees or collateral are required.
- Maximum loan amount of $10 million.
- Loan term of two years.
- Proceeds may be used for payroll, group health benefits, salary and employee commissions, interest on mortgages, rent, utilities, and interest on debt incurred before February 15, 2020.
- While the SBA will need to provide guidance to lenders as to how these provisions will apply and be implemented, the CARES Act requires the SBA to pay the principal, interest, and any associated fees owed on all 7(a) loans in regular servicing relief for up to 6 months for the following types of borrowers: existing borrowers not on deferment, existing borrowers on deferment, and new borrowers until September 27, 2020. Additional information on this component of the CARES Act will be forthcoming from the SBA.
- Per the most recent SBA guidance, the program features provisions for loan forgiveness. Borrowers will owe money when their loan is due if the loan amount is used for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Borrowers will also owe money if they do not maintain staff and payroll.
- Number of Staff: The loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: The loan forgiveness will also be reduced if salaries and wages are decreased by more than 25% for any employee that earned less than $100,000 annualized in 2019.
- Re-Hiring: Borrowers have until June 30, 2020, to restore their full-time employment and salary levels for any changes made between February 15, 2020, and April 26, 2020.
Additional Support from the SBA: Economic Injury Disaster Loans (EIDL)
- Borrowers may apply directly to the SBA for Economic Injury Disaster Loans. Refer to sba.gov and https://covid19relief.sba.gov/#/ for additional information.
Borrowers should discuss with their financial advisors if an EIDL loan or PPP loan is best suited for their individual situation.
- The EIDL program is designed for businesses impacted by COVID-19 and allows for the borrowing of up to $2MM @ 3.75% for for-profit, and 2.75% for non-profit entities, with a maximum loan term up to 30 years.
- The EIDL program includes an option for a $10,000 cash advance within three days of a successful application that does not have to be paid back even if the borrower’s application is subsequently rejected.
- Borrowers that subsequently apply for a PPP loan will have the $10,000 cash advance deducted from their PPP loan.
The information above is intended as an overview of the CARES Act with regard to the Paycheck Protection Program. It does not encompass all components or requirements of the Paycheck Protection Program. Please go to sba.gov for complete information.