Has your business closed due to the coronavirus outbreak? This small business loan may help. (Photo … [+]
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In addition to including stimulus checks for individuals, the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) Act includes a $349 billion stimulus package to help small businesses make their payroll and rent payments over the next few months.
This stimulus program, called the Payroll Protection Program (PPP), is designed to help small businesses avoid laying off employees over the next few months while social distancing requirements keep many small businesses closed or operating at less than full capacity.
If your small business has fewer than 500 employees, you may be eligible for a loan of up to $10 million to keep your business running. In addition, some or all of the loan is forgivable if you use the funds for payroll, including employee salaries, paid sick or medical leave, and insurance premiums. Up to 25% of the loan amount may also be forgivable if used to cover other business expenses required to keep your business afloat, including mortgage interest, rent, utility payments, interest on loans taken out prior to February 15, 2020, and some other minor expenses.
- February 15, 2020 – your business, mortgage, rental contract, or business loan must have been in effect prior to this date.
- April 3, 2020 – the first date in which small business owners and non-profits can apply for this loan
- April 10, 2020 – the first date in which sole proprietors, independent contractors and self-employed individuals are eligible to apply for this loan
- June 30, 2020 – the final date to apply for this loan, unless funds are exhausted prior to this date.*
*The PPP Loan program has a limited amount of funds and the Small Business Administration (SBA) expects this loan program to be oversubscribed. This loan is also being provided on a first-come, first-served basis. So it will be best to apply for this loan as soon as possible.
Who is Eligible for the Payroll Protection Program?
This program is available to all businesses, non-profits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors with 500 or fewer employees.
There are limited exceptions for businesses larger than 500 employees if they meet applicable SBA employee-based size standards for those industries. This reference has more information.
Finally, certain businesses in the food or hospitality industry may be eligible if they have more than 500 employees spread out among different locations, provided each location does not have more than 500 employees. Business owners would need to make a separate application for each location.
How Much Can I Borrow with the PPP?
Businesses can borrow up to 2.5 times their average monthly payroll from the previous year. You can include U.S.-based contractors and part-time employees in your calculations. However, for the purposes of this loan, payroll is capped at $100,000 per employee.
There is a cap of $10 million dollars per business for this loan.
You can use this Payment Protection Program calculator from PTMoney.com to quickly estimate how much you may be able to borrow through this program.
What Can I Use the Loan For?
The loan can be used for the following expenses:
- 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.
Payrol costs include:
- 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 Loan Terms & Forgiveness
Loan Terms: The PPP Borrower Fact Sheet, produced by the U.S. Treasury, shows that loans will be assessed at 0.5% fixed-rate with a two year term. Some banks are listing these loans at a maximum of 4% interest with a maximum repayment term of 10 years. The specific details of this program are still being ironed out, so be sure to check with your business bank and the SBA when filling out the loan paperwork.
There is also a minimum of a 6-month grace period in which you will not be required to make payments. However, interest will continue to accrue during this period. There are no prepayment penalties or fees for this loan.
While most SBA Loans require several stipulations, including a requirement for collateral or a personal guarantee, the PPP Loan waivers those requirements. The PP Loan also waives the “credit elsewhere test” for funds, which stipulates that the borrower must have first sought out a loan through their bank or other lender before applying for an SBA Loan.
Loan Forgiveness: To be forgivable, you must use at least 75% of your loan amount to cover payroll costs (as listed above). Your loan can be forgiven if you use up to 25% of the amount on interest on mortgages, rent, and utilities. Any amount that is not forgiven will convert to a loan that is repayable under the terms of your loan agreement.
There are some exceptions for loan forgiveness for companies that have reduced the number of full-time employees, or if any salaries were reduced by more than 25% for employees who earned less than $100,000 annualized in 2019. Your company has 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. More info.
When, Where, and How to Apply
When: You can apply for the PPP Loan as soon as April 3, 2020. The program is slated to remain open through Jun 30, 2020, however, the program will close when the funds have been exhausted. This program will draw from a fund of $349 billion. However, the SBA expects these funds to go quickly. It will be best to apply as soon as possible.
Where: You can apply at any participating SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, or Farm Credit System institution. You should probably start with the bank where you have an existing business bank account. This may streamline the process.
How: The Small Business Administration has provided a sample application you can download so you can prepare the information that will be required of you when you apply for this loan. Check with your bank to determine if they have different requirements. To protect their employees, some banks are only making this loan available online. Other banks may have limited in-person applications, but may require an appointment to limit social contact. Your bank can provide further information.
Loan Forgiveness Determination
The lender that services your loan will be the determining agency for loan forgiveness. You will be required to provide documentation of payroll expenses and payments for other eligible expenses, such as mortgage, rent, or utilities. Lenders will have up to 60 days to make a decision on the loan forgiveness.
This program is still in the final phases of being rolled out. Details may still change. Be sure to check with the Small Business Administration and your bank for further details.