The $2 trillion coronavirus stimulus bill, Coronavirus Aid, Relief, and Economic Security Relief Act (CARES Act), signed into law last week, is the largest emergency aid package in U.S. history. The CARES Act includes $349 billion in federally guaranteed Small Business Administration (SBA) 7(a) loans through the Paycheck Protection Program (PPP). The PPP also includes $10 billion for SBA grants of up to $10,000 to provide immediate relief for operating costs and $17 billion to cover six months of payments for businesses with existing SBA loans.
Small businesses—defined as businesses with 500 employees or less—in operation as of February 15 can apply for federally-insured, partially forgivable loans that can cover operating expenses. Borrowers can apply for loans up to 2.5 times the company’s monthly payroll costs for the period between February 15, 2019, and June 30, 2019, or $10 million, whichever amount is smaller. The PPP defines payroll costs as expenses including wages, salaries, retirement contributions, and healthcare benefits. However, eligible payroll costs do not include individuals with an annual compensation of $100,000 or greater.
Under the PPP program, loan payments will be deferred for six months and loans include a forgiveness policy that turns a portion of the loan into a grant that does not need to be repaid. Businesses must apply for forgiveness on their loan. In their application, they must include the number of employees on payroll and their pay rates, and verify payments on covered mortgage obligations, lease obligations, and utilities.
The portion of the loan proceeds used to cover the first eight weeks of payroll and certain other expenses can be fully forgiven if certain criteria are met by the borrower. Forgiveness will be granted if funds are used for payroll costs, interest on mortgages, rent, and utilities. Forgiveness under the PPP is contingent on employers maintaining or quickly rehiring employees and maintaining salary levels. Loan forgiveness will be reduced if a company’s full-time headcount declines or if salaries and wages for any employee decrease by more than 25%. Businesses that have already been forced to make staffing reductions are still eligible to qualify for loan forgiveness if they re-hire and reach pre-crisis employment levels by June 30, 2020.
For amounts not forgiven, the maximum loan term is 10 years and the maximum interest rate is 4%, with no loan fees or prepayment fees.
To qualify for loans, businesses do not need to show economic harm, but do need to certify that the current economic conditions caused by COVID-19 necessitate a loan to support ongoing business operations. Borrowers can apply for PPP loans at more than 1,800 banks that already offer SBA loans. The SBA offers Lender Match, a free referral service tool, to help businesses find a nearby eligible lender.
The PPP has specified it will prioritize businesses and entities operating in rural and underserved markets. Small businesses and sole proprietorships may begin to apply for PPP loans beginning April 3. Funding for the program will be administered on a first-come, first-served basis. SBA lenders will be working at an expedited rate compared with typical application processes to ensure businesses receive funds as quickly as possible. Further information about the PPP is available at the SBA’s website.
In addition to PPP loans, the SBA also offers Economic Injury Disaster Loans (EIDL) and Grants. These are always offered by the SBA, but the administration has increased disaster assistance programs in lieu of COVID-19. Businesses can receive a $10,000 cash advance within three days of applying for an EIDL of up to $2 million. According to the government, the advance under this program does not need to be repaid “under any circumstance,” and may be used to keep employees on payroll, pay sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations. Applications for EIDLs are available on the SBA’s website and are currently being accepted.
