One of the new loan programs launched by the Coronavirus Aid, Relief, and Economic Security (CARES) Act -- the $2 trillion spending law approved on March 27, 2020 -- that may be of interest to Insights Association members seeking relief during the COVID-19 economic crisis is the Paycheck Protection Program (PPP).
PPP authorized about $350 billion in forgivable loans to small businesses to pay their employees during the crisis. Per the U.S. Treasury, “All loan terms will be the same for everyone. The loan amounts will be forgiven as long as: (1) The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and (2) Employee and compensation levels are maintained.”
Loan payments will be deferred for 6 months.
Application for small businesses and sole proprietor companies will be able to “apply for and receive loans to cover their payroll and other certain expenses” starting on April 3, with independent contractors and self-employed individuals able to follow suit starting on April 10. This can happen through “existing SBA lenders.”
Application can happen “through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.” IA members should consult with their local lenders on whether they participate and/or consult the Small Business Administration (SBA) list of lenders.
Companies should also note that the SBA’s affiliation rules that normally restrict who may be eligible for these kind of loans have been waived for the hotel and food service industries, franchisees in the SBA’ franchise registry, or companies that receive financial assistance from small business investment companies licensed by the SBA.
Notably absent from the waiver list of the affiliation rules? Many small businesses with venture capital and private equity investment. The Insights Association recently contacted the Treasury Department and SBA about this issue, with a particular eye on impediments to eligibility for small businesses with minority investment from venture capital.
The PPP loans may be used for:
- “Payroll costs, including benefits”;
- “Interest on mortgage obligations, incurred before February 15, 2020”;
- “Rent, under lease agreements in force before February 15, 2020”; and
- “Utilities, for which service began before February 15, 2020.”
“Payroll” in this case includes:
- “Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)”;
- “Employee benefits including costs for vacation, parental, family, medical, or sick leave”;
- “allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit”;
- “State and local taxes assessed on compensation”; and
- “For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.”
PPP loans may be for up to two months of a company’s “average monthly payroll costs from the last year plus an additional 25% of that amount,” capped at $10 million.
As discussed, if you spend the loan as designated above, it will be forgivable. Per the Treasury Department, "You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. You will also owe money if you do not maintain your staff and payroll."
Loan forgiveness will be reduced if a borrower: (1) decreases their full-time employee headcount; or (2) decreases salaries/wages more than 25 percent for any employee that made lease than $100,000 annualized in 2019. However, according to the Treasury guidance, borrowers “have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020."
PPP loan forgiveness requires the submission of a request to the borrower's lender, including "documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations." Borrowers will need to "certify that the documents are true” and that the borrowers “used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.” Lenders will be required to return a decision on the forgiveness request within 60 days.
- The SBA Form 2483 application form for PPP loans
- Application may also go through the SBA website.
- Treasury Department fact sheet on the loan program.
- PPP Interim Final Rule
- guide and checklist for the loan programs from the Chamber of Commerce
This information is not intended and should not be construed as or substituted for legal advice. It is provided for informational purposes only. It is advisable to consult with private counsel on the precise scope and interpretation of any laws/regulation/legislation and their impact on your particular business.