On Friday, March 27, 2020, the U.S. government passed a historic relief package to help Americans through the COVID-19 pandemic. The economic stimulus package, coming in at a record-setting $2 trillion, is the largest emergency appropriations bill ever passed. Packed in the monumental piece of legislation are provisions to assist homeowners, regular Americans, and businesses — with over $349 billion specifically designated for loans to small businesses that need relief.
That last provision is the one that we’ll be focusing on in this report. Small businesses have been hit incredibly hard by this pandemic. Many are dealing with quarantines and forced closures that have left them unable to operate. Those that are still open are having to contend with limited inventory and major disruptions to global supply chains. And on top of everything else, uncertainty about the future course of the outbreak and an unprecedented level of job losses has left consumer spending depressed on everything except the bare essentials like food, cleaning supplies, and (inexplicably) toilet paper.
But getting access to the money made available in the Coronavirus Aid, Relief, and Economic Security Act (CARES) isn’t as straightforward as just calling your local bank and asking for a loan. There are conditions on who qualifies, what the money can be used for, how much is available, and how it will be repaid. This guide will help business owners understand what the CARES act means for them and how they can take advantage of this opportunity.
If you need help with your PPP applications, we’ve partnered with Womply to help you fast-track your Paycheck Protection loan:
If you have any additional questions, check out this comprehensive FAQ from Womply.
What Is the CARES Act?
The Coronavirus Aid, Relief, and Economic Security Act (CARES) is a bill passed by the United States Congress and signed into law by President Trump on March 27, 2020. The bill is a $2 trillion package of assorted relief measures meant to support the American people and the economy of the United States during the worst effects of the COVID-19 pandemic.
The CARES act includes a wide range of provisions that seek to support the American economy from top to bottom. Included in the act are:
- Additional unemployment benefits of up to $600 a week added to the unemployment checks received by furloughed workers for a limited time; an extension of the time workers can receive benefits by up to 13 weeks; and opening up the program to gig economy workers for the first time ever.
- A direct payment of up to $1,200 for individuals earning less than $99,000 per year, plus payments of up to an additional $500 for each of their dependents.
- $500 billion in funds set aside to assist distressed companies through special loans, grants, and other economic injection programs overseen by an inspector general and a congressional panel.
- $349 billion in guaranteed Small Business Administration (SBA) payroll assistance loans.
- Miscellaneous additional appropriations for hospitals and healthcare workers, state governments, etc.
The $349 billion in guaranteed loans are designated the Paycheck Protection Program loans. They are similar, but not identical, to the SBA 7(a) program (more on the differences later). These loans are especially interesting because they are able to be converted to grants if certain conditions are met by businesses that take advantage of them. That makes them a very powerful tool for companies trying to wait out the crisis — if used correctly, up to the entire loan amount can be forgiven.
There are a number of caveats that go along with these loans, however. Not every company will qualify, and the amount that can be borrowed is strictly controlled. Additionally, if conditions aren’t met, then businesses may be on the hook for the entire borrowed amount.
What Is the Paycheck Protection Program (PPP)?
The Paycheck Protection Program (PPP) is a $349 billion program authorized by the CARES Act to provide small businesses with the money they need to continue paying employees during the COVID-19 crisis. The goal of the program is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls.
There are some key differences between traditional SBA loans and the PPP program, however. The biggest one is that paycheck protection program loans are forgivable up to the total amount of the loan. That means that if borrowers meet all of the conditions, they won’t have to pay back any of the loan they receive. This alone makes the PPP an incredibly powerful option for small businesses.
In addition to loan forgiveness, the PPP has some additional benefits over other SBA loans. Some of the key benefits include:
- If you don’t qualify for loan forgiveness, payments on the loan are deferred for six months. Businesses that take out these loans won’t have to begin repayment on them until six months after they receive the money. Note, however, that deferment doesn’t eliminate interest, which will continue to add up over these six months.
- The interest rates on these loans will be capped at a fixed 1%, significantly lower than the interest on standard SBA loans or conventional loans which currently start at about 5.5%.
- The term of the loan is capped at two years, beginning with when the money was received. Keep in mind that even though the first payment isn’t due until six months from receiving the money, the loan term is already in effect at that point per the latest available guidance from the treasury department. However, this can change as the program evolves.
- For loans that are not forgiven within the forgiveness period, the term will be extended to up to 10 years, and the interest rate will reset to up to 4%. These terms are still significantly more favorable than most SBA and conventional loans, so this shouldn’t be seen as a disincentive to apply for the program.
- There are no prepayment penalties, so businesses that end up paying the loan back early will not be charged any additional fees. There are also zero loan fees from the SBA itself, in contrast to traditional SBA loans.
- Unlike conventional SBA loans that require collateral and personal guarantees from business owners and executives, the PPP waives these requirements.
How Does Forgiveness Work for PPPs?
The most standout feature of the PPP is the ability for borrowers to get their loans forgiven. Up to the full amount of the loan can be converted to a grant, if certain conditions are met. Because this program was specifically created to help small businesses avoid layoffs, most of the conditions for loan forgiveness are geared around maintaining payrolls and keeping businesses operational during the crisis and any resulting quarantines.
To understand how loan forgiveness works for the PPP, it’s important to understand what the loans are supposed to be used for. These loans are meant to cover operating overhead during the coronavirus pandemic. Specifically, businesses that receive these loans are supposed to use this money on:
- Payroll and related costs. This covers the checks employees receive, as well as most benefits including sick leave, vacation time, insurance premiums, and retirement benefits. It also includes state and local taxes paid on compensation, and also covers separation compensation like severance pay.
- Of particular note, compensation for purposes of the PPP includes tips, commission payments, and similar incentive compensation.
- Mortgage interest payments on commercial real estate. Note that payments towards the principal are not included here — this program specifically only covers the interest.
- Rent, which includes lease agreements and other kinds of commercial rental agreements.
- Utility costs. This category has the least information, so it’s unclear exactly what would be covered under utility costs.
- Finally, the PPP loan can be used to pay interest on any debts your business held before the start of the PPP coverage period.
In order for the loan to be forgiven, businesses have to spend the loan money on these qualifying expenses. This will be verified by examining financial information during the eight-week period covered under PPP, as well as by comparing payroll figures during the covered period to an earlier period. Additionally, there are a number of exceptions that can reduce the forgiven amount. These include:
- Any reduction in headcount over the covered period.
- Any reduction in pay for employees earning less than $100,000 per year of over 25%.
Companies will have until June 30 to return their payroll to where it was before February 15 in order to avoid any of these forgiveness penalties. In simple terms, companies will need to have the same payroll on July 1 as they did on February 14 in order to qualify for the maximum forgiveness. Due to the nature of the program and the limited resources available, the SBA expects that at least 75% of the loan amount will be used for payroll, though it’s unclear at this time if using less will result in a penalty.
The process for loan forgiveness is relatively straightforward. Companies need to submit a request for forgiveness, as well as all supporting documents, to the lender servicing their loan. These documents will include proof of payroll and an employee headcount like federal, state, and local tax fillings; documents showing any payments on rent, utilities, mortgage, or other qualifying non-payroll expenses; and a certification from a company representative that all submitted documents are accurate and true. Once this request has been submitted, lenders will have up to 60 days to make a decision on forgiveness.
It may seem, in fact, that for all intents and purposes these loans are actually grants. Businesses should avoid thinking of them as such, however. This is an unprecedented program that was rushed through legislation, before the mechanisms for supporting it were fully planned or put in place. That means that even businesses that fully meet the qualifying criteria for loan forgiveness may be on the hook for some payments as the forgiveness process is ironed out.
Qualifying for the PPP
The PPP loan follows similar qualification rules as standard Small Business Administration (SBA) loans, but with several important caveats and exemptions. The key criteria for being eligible for a Paycheck Protection Program loan are:
- The business must have been in operation at least as of February 15, 2020. Organizations formed after that date will not be eligible.
- The organization must be a small business as defined by the SBA, a non-profit or veterans organization [either a 501(c)(3) or a 501(c)(19)], or a tribal business concern. Additionally, other business types may also qualify, provided they meet the employee and revenue maximum outlined in the requirements.
- Sole proprietors, individual independent contractors, and the self-employed are also eligible for this loan.
- The organization must have fewer than 500 employees, with some exceptions. For example, Accommodation and Food Service businesses — those that fall under the North American Industry Classification System (NAICS) code 72 — will be eligible if none of their individual locations employ more than 500 people.
- Revenues must not exceed the revenue maximums outlined in the Table of Small Business Size Standards.
- Affiliate rules will be put on hold for certain classifications of businesses. These rules are typically in place to prevent subsidiary companies that are majority owned by larger companies from taking advantage of SBA services. However, for this program, certain franchises will be eligible that would otherwise not be.
The eligibility rules may seem like a mouthful, and there has been significant confusion on who exactly is eligible, but the shorthand seems to be: any registered business or non-profit with fewer than 500 employees (or fewer than 500 employees per location) that was operational on or before Feb. 15, 2020 qualifies for a Paycheck Protection Program loan.
However, keep in mind that this program is being assembled hastily and is subject to change suddenly and with little warning. This means that for many businesses, the best option is simply to apply and see if their application is accepted.
Applying for the PPP and How Much Can Be Borrowed
Applying for the PPP loan was designed to be a straightforward process. Small businesses and sole proprietors can apply through an authorized SBA lender beginning on April 3, 2020. Independent contractors and the self-employed can start applying on April 10, 2020. While all participating lenders need to be approved, the approval process will remain open throughout the program period — companies that currently have relationships with banks that are not approved should consult with their representatives to see if they are planning on seeking authorization.
For most businesses, the loans will be made through their primary bank, as almost all major banking institutions in the U.S. are authorized to make SBA loans. In fact, going through an existing banking relationship will likely be the easiest route for getting approved quickly.
The maximum amount of the loan will be determined via a straight-forward formula: 2.5 times a company’s average monthly payroll from 2019. As with every other component of this program, there are a few important caveats:
- Salaries are capped at $100,000 per year for calculating payroll expenses. That doesn’t mean employees making over $100,000 will be excluded — just that only the first $100,000 of their salary will count.
- There is a hard cap of $10 million for the maximum loan amount, though that should be easy to avoid as that assumes the maximum number of employees (500) at about the maximum counted salary ($96,000 per year).
- Temporary employees, part-time employees, and other similar costs are included in this calculation. Independent contractors, however, are not included.
- Companies that operate on a seasonal basis or that were not open for all of 2019 will have a modified period from which to draw an average payroll. Seasonal companies will be able to optionally use a time period between February 15, 2019 and June 30, 2019. New companies will have the option of using January 1, 2020 through February 29, 2020 as their period.
So for a company that averaged $50,000 per month in payroll costs across 2019, the maximum loan amount that they would qualify for under this program would be $125,000. However, if one of those employees was the CEO who earned $200,000 per year, the monthly average would be reduced by about $8,333 since only the first $100,000 annually would count. They would then qualify for a loan of only $104,167. In short, only about the first $8,000 per employee counts towards this monthly average.
Applications, samples of which can be found here, will be required to be submitted with documents showing payroll for 2019 and potentially all the way through Q1 of 2020. For most companies, this will be federal, state, and local tax filings, as well as any unemployment insurance filings. However, it would not be a bad idea to also gather any paperwork showing employee compensation, including offer letters or employment contracts, as well as a P&L statement for the period in question.
Finally, applicants will need to make a series of certifications, found on the form linked above. These attest, under penalty of fraud, that the business has been affected by the COVID-19 pandemic and needs the loan in order to maintain payroll or cover the other qualifying expenses, that funds spent on qualifying expenses will be forgiven (again, noting that only 25% of the funds may be used on non-payroll expenses,) that the business will not seek to get another loan under this program, and that all tax documents provided are accurate and the same ones submitted to the IRS.
If you need help with your PPP applications, we’ve partnered with Womply to help you fast-track your Paycheck Protection loan.
Note: Sources indicate that the PPP program has already run out of funding after approving over a million loans, but congress is working to appropriate additional funding for the program. We will be sure to update this guide as soon as new information comes out.
For any other COVID-19-related questions for small businesses:
Peter is the CFO at AdRoll.