Late last week, Congress passed, and President Trump signed, an historic $2 trillion stimulus bill. One of the goals of the stimulus package is to help businesses adversely effected by the COVID-19 pandemic survive while keeping the majority of their employees on board.
If you are a small business, here is what you need to do to apply and qualify for a CARES Act Payroll Protection Plan (“PPP”) loan.
First: Call your Bank and “get in line”!
Any SBA-approved bank or credit union (generally speaking, any FDIC insured bank or credit union) will be authorized to make PPP loans, and presumably most, if not all, will. (It is easy, federally insured fee money for them with virtually no corresponding underwriting risk.) On the other hand, since Congress has authorized only $350 billion to fund such loans, we expect this $350 billion to be eaten up quickly (possibly even within the first week) once banks and credit unions start taking applications.
Based on what we’ve already confirmed with Bank of America, Wells Fargo, First Republic and BBVA, they are already creating a “queue” of prospective applicants. They expect to start taking applications as early as this Thursday or Friday. They expect the PPP loan money will hit their customers accounts within 30 days.
Second: Add up your “Payroll Expenses”
As explained in this online article, the CARES Act allows businesses with (generally speaking, but not absolutely) less than 500 employees to borrow up to two-and-a-half times their “average total monthly payments … for payroll costs incurred during the 1-year period before the date on which the loan is made.” No PPP loan, however, can exceed $10 million.
“Payroll Costs” include:
- salary, wages, commissions or similar compensation;
- payment of cash tips or the equivalent;
- payment for vacation, parental, family, medical or sick leave;
- allowance for dismissal or separation;
- payment required for the provisions of group health care benefits, including insurance premiums;
- payment of any retirement benefits; and
- payment of state or local (but not federal, e.g., FICA) tax assessed on the compensation of employees.
MAKE SURE to include, as applicable, all payments for compensation “or income of a sole proprietor or independent contractor that amounts to a wage, commission, income, net earnings from self-employment, or similar compensation.” As we read the CARES Act (and subject to how the forthcoming SBA regulations interpret it) this includes payments made to sole proprietorships, professional corporations and the like.
DO NOT include:
- compensation “in excess of an annual salary of $100,000” for any given employee, owner, partner, sole proprietor or independent contractor;
- (again) federal withholding;
- compensation for any employee whose principal place of residence is outside of the United States;
- qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116-127); or
- qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Rsponse Act (Public Law 116–127).
Third: Do the math
Although the SBA is now (reportedly frantically) preparing “regulations” all the banks and credit unions expect to have later this week, the CARES Act says each COVID-19 “impacted” employer can apply for a “maximum” PPP loan equivalent to its “average total monthly payments” for all the above-listed payroll costs times 2.5.
To calculate your “average total monthly payments,” simply add up all your company’s eligible Payroll Costs (as listed above) over the past year and divide by 12.
To calculate your maximum PPP loan eligibility, multiply the result by 2.5.
Employers who already took out an SBA disaster loan (under subsection (b)(2) of the Small Business Act (15 U.S.C. 636(b)(2))) can add that “outstanding” loan balance to this maximum PPP loan eligibility as a means of refinancing the same. Obviously, the benefit of “wrapping” a pre-existing disaster loan inside a PPP loan is to make the entire balance potentially forgivable.
Fourth: Keep your paperwork
Although it is presently unclear whether, and to what extent, banks and credit unions will ask for it, make sure to print (or electronically store) and be prepared to provide proof of your payroll costs and foregoing computations. Although the CARES Act grants banks and credit unions broad immunity for making improper PPP loans, there is already some talk of the SBA forming nationwide “strike teams” to aggressively investigate instances of PPP loan application fraud. Hence, also make sure to store this important information in a safe place for possible later retrieval.
Fifth: Be prepared to sign a “certificate”
To apply for a PPP loan, you must make a good faith certification:
- that the uncertainty of current economic conditions makes necessary the loan request to support your business’ ongoing operations;
- acknowledging the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments;
- your business does not have another pending application for a duplicative Small Business Administration (“SBA”) loan; and
- beginning February 15, 2020 and ending December 31, 2020, the business did not receive another SBA loan for the same purpose.
If you make this certification, a participating SBA lender must assume (presume) that your business has sustained COVID-19 “impact” defined as any of the following:
- supply chain disruptions, including changes in quantity and lead time, including the number of shipments of components and delays in shipments;
- quality, including shortages in supply for quality control reasons; and
- technology, including a compromised payment network;
- staffing challenges;
- a decrease in gross receipts or customers; or
- a closure.
Given the current economic environment, it is hard to imagine any business that has not suffered one of more such impacts (particularly staffing challenges given “work remotely” requirements and drop offs in receipts or customers).
- What you DO NOT have to do.
Unlike a typical SBA loan, you will not need to prove you could not have borrowed the money elsewhere. Likewise, no collateral or personal guarantees will be required. Principals will not be liable for repayment, except to the extent they divert the funds for an unauthorized purpose. All loan payments — principal and interest — will be deferred for a minimum of six months up to a maximum of a year. After that, to the extent not forgiven, the loan balance will bear interest at no more than 4 percent.
Sixth: Make sure to use the PPP loan proceeds only for “authorized” purposes
On a mainstream network news show, I watched two reports stating PPP loans can only be used to fund payroll. THIS IS FALSE. The CARES Act allows impacted employer/PPP loan borrowers to also use such funds to:
- pay costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- make payments of interest (but not principal or prepayment of principal) on any mortgage obligation;
- pay rent (including rent under a lease agreement);
- pay utilities; and
- pay interest on any other debt obligations incurred before the PPP loan goes into effect.
Make sure to track your company’s use of the PPP loan funds to later prove you used them only for these purposes (and, of course, to pay any of the above-listed payroll costs.) If you do, you will stand a much better chance of having your PPP loan totally forgiven (paid for by the federal government).
Seventh and finally: Understand the impact of your past and possible future firings or layoffs of employees, or reductions in their salaries
The whole point of the CARES Act is to encourage employee retention and discourage wage cuts. To this end, businesses who from February 15, 2020 through April 27, 2020, reduce their “full-time equivalent employees” as compared to their “full-time equivalent employees” on February 15, 2020, and “not later than [by] June 30, 2020” fail to restore that number to its February 15, 2020 level, will have their PPP loan forgiveness proportionally reduced. Similarly, businesses who during this same time period reduce the wages of any their employees earning $100,000 or less by more than 25 percent, and fail to restore those wages to their February 15, 2020 levels “not later than [by] June 30, 2020” will have part of their loan forgiveness reduced.
As you might imagine, the overall CARES Act is vastly more detailed, and addresses many other subjects. For now, however, the foregoing seven steps should be all you need to secure a PPP loan before “the money runs out.”
This article was provided by the Enterprise Counsel Group, a law firm located in Irvine, CA.