The Coronavirus Aid Relief and Economic Security Act (CARES Act) includes a number of programs to help small business owners. There are still details being worked out, but our goal here is to answer common questions about the Paycheck Protection Program Loans that will be made available soon under that law. These loans are a modification of the popular SBA 7(a) loan program for the specific purposes of assisting small businesses affected by coronavirus.
by Gerri Detweiler
This article is published courtesy of Nav, a Clover partner that provides financial tools and resources for small business owners.
This article has been updated on April 3, 2020 with information from the final interim rule.
Please keep in mind:
To qualify for SBA funding under this new program, you must be a small business as defined by the SBA. This includes:
Businesses in the food or hospitality industry (NAICS codes beginning in (72) may be eligible on a per location basis.
In addition the normal affiliation rules are waived for franchises or businesses receiving financial assistance from a Small Business Investment Company.
In determining eligibility for these loans, the lender must consider whether the business was in operation on February 15, 2020; and had employees for whom the borrower paid salaries and payroll taxes; or paid independent contractors, as reported on a Form 1099–MISC. An ‘employee’ includes individuals employed on a full-time, part-time, or other basis. (Read further for more information about independent contractors.)
Yes you may. The CARES Act states: “…individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible. Applicants who fall in this category will need to provide documentation such as “payroll tax filings reported to the Internal Revenue Service, Forms 1099–MISC, and income and expenses from the sole proprietorship, as determined by the (SBA) Administrator and the (Treasury) Secretary.”
Franchises and hospitality businesses (NAICS code 72) with multiple locations, even if they have more than 500 employees, may be eligible on a per location basis as well as any businesses receiving financial assistance from a Small Business Investment Company (SBIC).
The basic answer is that the maximum loan amount is 2.5 times the average monthly payroll for the 12 months preceding the date the loan is made, up to a maximum of $10 million.
Use our free CARES Act SBA Calculator to see how much you may be able to borrow. Access the calculator through the Nav app from your Clover Dashboard.
However, if you are a seasonal business, you can apply to borrow 2.5 times your payroll for either the 12-week period beginning February 15, 2019 and ending May 10, 2019, or the period of March 1, 2019 through June 30, 2019.
What if you are a newer business? If you were not in business for the time period beginning on February 15, 2019 and ending on June 30, 2019, then you can use your average total monthly payroll costs incurred from January 1, 2020 to February 29, 2020 and multiply that by 2.5.
Payroll does not include salaries above $100,000 or qualified sick leave pay under the Families First Coronavirus Response Act. (See What Does Payroll Include? below.)
No. The $10,000 advance is part of the Economic Injury Disaster Loan program, not Paycheck Protection Program Loans. Read about Disaster Loans here.
Individual lenders, including many banks, credit unions and some online lenders will make these loans.
Nav will be helping match small business owners to lenders making SBA loans and we’ll notify you when these loans become available through our lending partners.
You can use the loan proceeds for:
This legislation was specifically designed to make these loans faster and easier for lenders to approve and fund. (Traditionally SBA 7(a) loans can take anywhere from a few weeks to a couple of months.) The relaxed standards are designed for fast approval, but keep in mind there will be unprecedented demand and lenders must implement the new rules.
These loans have a maximum term of two years. You can prepay at any time without penalty.
The interest rate for these loans will be 1% for all lenders that make them. Normal 7(a) loan fees are waived.
None is required.
No. There is no personal guarantee required. In addition, these will be non-recourse loans as long as proceeds are used for covered purposes. (Non-resource means the government won’t be able to collect if you default.)
No. Normally SBA loans for more than $25,000 require collateral. That requirement is waived for these loans.
Payments will be deferred for six months (though interest will accrue).
No. Normally SBA loans require a “credit elsewhere” test to determine whether the borrower can get similar credit at another financial institution. This is waived here.
If you get one of these loans, you can request forgiveness of the principal portion of the loan for the eight week period after you get the loan that covers:
However, no more than 25% of the forgiven amount can be attributed to non-payroll costs.
Your loan forgiveness will be reduced if you decrease your full-time employee headcount. It will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annually in 2019. You may also receive forgiveness for additional wages paid to tipped workers.
Please note: there are specific and technical calculations included in this section of the law, and you should not rely on this description to determine whether to keep employees, reduce employee wages or to determine your eligibility for loan forgiveness.
No. Independent contractors can apply for a PPP loan on their own so they do not qualify for purposes of a borrower’s PPP loan forgiveness.
If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
Keep good records of how you use these funds. Sloppy record keeping may prove costly!
If you have already laid off workers, you have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Again, you should not rely on this description to determine whether to lay off or hire employees.
The CARES Act states that payroll includes:
It does not include:
*For annual salaries above $100,000, use $100,000 for the salary of that individual when calculating payroll.
Utilities include electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.
You must submit such documentation such as payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Yes. You are ineligible for a PPP loan if, for example:
The CARES Act includes a number of relief programs for small businesses. The one we are focusing on in this article is the Paycheck Protection Program Loans. As part of the new law, businesses will be able to more easily get certain SBA guaranteed 7(a) loans. Borrowers will then be able to apply for forgiveness of certain portions of the loan if they meet requirements by keeping employees on payroll.
The Economic Injury Disaster Loan is a separate loan altogether and you apply directly to the SBA, not to individual lenders.
Yes, but you cannot “double dip” and get funds from both loan programs for the same purpose. Furthermore, according to the Interim Rules, “If you received an SBA EIDL loan from January 31, 2020 16 through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.”
This guidance does not address what happens if you applied for an EIDL before April 3, 2020 but received one after that date.
There is a payroll tax credit of up to 50% of qualified wages for certain businesses whose operations have been fully or partially suspended by a government order or whose gross receipts in a quarter have fallen by at least half compared to a similar quarter the year before.
Your business cannot receive both the Employee Retention Payroll Tax Credit and a Paycheck Protection Program Loan, so if you are considering both make sure you consult with your legal or financial advisor.
While you wait for these loans to become available there are several things you can do right now:
Paycheck Protection Program Loans may prove to be a crucial tool helping some small businesses survive this crisis. Although this may seem overwhelming, it’s worth taking the time to find out how they may help your business.
This article originally appeared on Nav.com.
About the Author
Credit expert Gerri Detweiler is education director for Nav. She has more than three decades of experience in consumer credit education, has been interviewed in more than 3500 news stories, and answered over 10,000 credit questions online. Her articles have been widely syndicated on sites such as MSN, Forbes, and MarketWatch. She is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track. She has testified before Congress on consumer credit legislation.