On Friday, March 27th, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act, (CARES Act), a $2 trillion stimulus package to mitigate the impact of the Coronavirus pandemic. For small business owners (defined as less than 500 employees) the CARES Act created the Paycheck Protection Program (PPP), a $349 billion loan program aimed at preventing job losses and small business failures related to the COVID-19 pandemic. Additionally, the CARES Act expands the already existing Economic Injury Disaster Loan Program (EIDL) with $10 billion of additional funding for the Small Business Administration (SBA).
The new PPP loan program is available for eligible small businesses, including sole proprietors and non-profits, to provide a potentially forgivable loan if proceeds are used to cover payroll and other business costs. A comparison of the PPP and EIDL, as we understand it so far, is presented below. We are awaiting addition information from Congress and the SBA regarding how these loans will be processed, approved and funded. Details may change over the coming days and weeks.
Paycheck Protection Program (PPP)
- SBA will underwrite section 7(a) loans through your local bank.
- Maximum loan is $10 million. The loan amount is figured as 2.5x the average payroll cost over the preceding twelve months. Payroll costs include salaries, wages, commissions, tips and other personnel related costs such as group health insurance premiums, retirement benefits and state payroll taxes.
- Annual interest rate cannot exceed 4%, and may be financed over 10 years. The first payment is due six months after the loan origination date, with interest accruing during the deferral period.
- Loan proceeds are to be used to cover payroll costs mentioned above, as well as insurance, utilities, rent and interest on mortgages and debts incurred prior to February 15, 2020.
- No personal guarantee or collateral is required of the business owner.
- Loan principal may be partially or fully forgiven for amounts spent during the 8-week period following the loan origination on payroll costs, group healthcare plans, insurance, utilities, rent and interest on mortgages and debts incurred prior to February 15, 2020. The purpose of the forgiveness is to encourage employers to maintain their payrolls through the end of June. The amount forgiven is reduced if employers do not maintain the average number of full-time equivalent employees or reduce compensation for an individual making less than $100,000 annually by more than 25%. Amounts forgiven are not considered taxable income for federal tax purposes.
- PPP loan applications should begin processing by the end of next week. Various websites are claiming the government wants these loans to fund quickly, perhaps even the same day as the application.
Economic Injury Disaster Loan (EIDL)
- Loans must be applied for via SBA website at https://covid19relief.sba.gov/#/
- Maximum loan is $2 million. Applicants may request an immediate advance of $10,000 payable within 3 days of the application. If the loan is subsequently denied, the advance is not required to be repaid.
- Annual interest rate is 3.75% for businesses (2.75% for non-profits) and may be financed over 30 years. The first payment is due one year after the loan origination date, with interest accruing during the deferral period.
- Loan proceeds must be used to cover business costs and operating expenses that are in doubt specifically because of the coronavirus disaster.
- The SBA will likely require a personal guarantee from the business owners and place a UCC lien against business assets.
- There is no loan forgiveness.
- EIDL loans are available now. You may apply at the SBA website above. The application process typically takes 2-3 weeks, plus an additional 5 days for funding.
What Should Business Owners Do Now
Consider applying for the EIDL now. The application process is open. The EIDL has less favorable loan terms, however, there is no obligation to accept the loan if you qualify.
Contact your bank or go to their website to see what specifically they will require. To speed up the loan process, start gathering documents and quantifying amounts spent for the following items over the last twelve months:
- 2019 Payroll Reports (including IRS Form 941 and California Form DE9)
- Payroll amounts to-date for the quarter ending March 31, 2020
- Quantify group healthcare costs
- Quantify employer contributions to the Company retirement plan
Although we do not know specifically how banks will calculate loan amounts, below is an example of how the calculation might work.
It is extremely important to examine all the options available to you to ensure the best financial business decision. As always, please contact us with any questions.