CARES Act Forgivable Paycheck Protection Loans to Small Businesses

Last night, the U.S. Senate unanimously approved the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act.” The House of Representatives is expected to pass this Act tomorrow and the President is expected to sign it upon the completion of the House vote. This $2 trillion relief package will quickly inject money into the economy to help stabilize businesses and families affected by the virus outbreak. 

A vital component of this package is the “Paycheck Protection Program” that promises to help small businesses and nonprofits affected by the pandemic. Many of our clients, both small business owners and nonprofit organizations are eligible to take advantage of these loans. A benefit of this program is a forgiveness provision at no cost to the borrower.

This Paycheck Protection Program is designed to help keep workers on payroll and continue economic activity across the nation. It allows small businesses and nonprofit organizations the ability to retain employees with government subsidized payroll expenses for two months. We recommend applying for this program as opposed to SBA’s Economic Injury Disaster Loan program. This program is the quickest, easiest, and lowest risk solution to help small businesses and nonprofit organizations weather this storm.

Paycheck Protection Program Summary

Eligibility

• Businesses and nonprofit organizations with fewer than 500 employees (based on location) are eligible to receive covered loans.
• Sole proprietors and independent contractors are eligible to receive covered loans.

Loan Terms and Usage

• Covered loan period begins on February 15, 2020 and ends on June 30, 2020.
• The maximum loan amount is equal to the average total monthly payments for payroll costs during the one-year period before the date the loan is made at 2.5 times or $10 million (whichever is less).
• Covered loans can be used for payroll support, such as employee salaries or commissions, paid sick or medical leave, insurance premiums, and mortgage payments, rent, utilities, and interest on any other debt obligations incurred before the covered period.
• Loan interest rates cannot exceed 4%.
• Loans shall have a maximum maturity of 10 years.
• No prepayment penalty for any payment made on the loan before December 31, 2020.

Forgiveness Provisions

• The borrower is eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
• Borrowers who re-hire workers who have been previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
• For tax purposes, loan forgiveness is excluded from gross income.

Application

• This program waives the typical loan requirement, that the borrower is unable to obtain credit elsewhere for loans under the program.
• Personal guarantees of owners are not required, and no collateral is required to be posted, loans are guaranteed by the SBA.
• The SBA pays processing costs for loans to the lender.

Assistance Navigating the Entire Loan Process

We are in this together and available to help you:

• Understand eligibility requirements, loan provisions including forgiveness clauses, and the possible impact on your business.
• Mitigate risk.
• Make loan calculations.
• Work through employment issues with your HR staff.
• File your application.
• Establish relationships with lending institutions if you do not have a relationship with a banker.
• Evaluate the best options for loan repayment or loan forgiveness.

Whittlesey remains fully operational with teams working remotely. Please reach out to your Whittlesey advisor with questions and assistance applying for this program.

Stay current with Whittlesey’s COVID-19 Resource Center

Disclaimer: Our content, comments, and answers to questions should not be construed as specific advice for your particular situation. The statutes and rules related to the SBA lending provisions and other programs are complex and you should consult with your financial and tax advisors for guidance regarding the application of the law to your particular facts and circumstances.