How the Paycheck Protection Program Can Stimulate Your Small Business

CARE's Act Paycheck Protection Program

Though COVID-19 has turned our world upside down, there is still an upside to the situation. While we have experienced major shifts in how we work and many are out of work, there is relief in sight for some who may be on the verge of economic hardship. As of March 27, 2020 the federal government implemented the Coronavirus Aid, Relief, and Economic Security (CARES) Act that has been designed to provide financial assistance to individuals, families, healthcare entities, educational entities, non-profit organizations, small businesses, and the like.

In this post, I am going to focus on the parts of the act that specifically apply to the Paycheck Protection Program that was implemented to stimulate small businesses and a number of other individuals and entities that employee 500 or fewer employees at one physical location including:

  • Sole proprietors
  • Independent contractors
  • Self-employed individuals
  • Nonprofit organizations
  • Veterans organizations
  • Tribal businesses

These businesses and entities are eligible to receive covered loans as long as they were in operation during the covered period between February 15, 2020 and June 30, 2020. This ultimately means that the business, individual, or entity must have been in operation by February 15, 2020 and must continue to operate based on the provisions of the covered loan through June 30, 2020. Certain loans that were acquired on or after January 31, 2020 may be refinanced under the Paycheck Protection Program and receive the covered benefits.

Loan Coverage

Loans covered under this program are meant to ensure that these businesses, individuals, or entities are able to meet payroll demands throughout COVID-19 quarantine and business activity suspension periods. The loan was created to ensure that businesses are able to cover salaries, wages, commissions, and tips. It also covers vacation, maternal and paternal, family, medical, and sick leave pay and separation allowances. Additionally, employers can use the loans to cover group health benefits, insurance premiums, and retirement benefits.

Each of these payroll costs extend to all employees as long as an individual employee’s salary doesn’t exceed $100,000 annually. Also, only U.S. based employees may be compensated under the stipulations of the loan. In addition to payroll costs, the loan may also be used to cover costs related to:

  • Mortgage payments
  • Rent payments
  • Utilities
  • Interest on debt obligations

Loan Stipulations

The benefit of these covered loans is that they are readily available to small businesses. Typical small business administration (SBA) loan requirements such as personal guarantee or collateral, fees, and the inability to procure other small business loans do not apply.

A personal guarantee requires a business owner or executive to guarantee that their personal assets may be used to pay loan debt in the event that the business is unable to do so. Collateral loans require the borrower to guarantee valuable assets such as property, equipment, inventory, future earnings, etc. to secure a loan. Personal guarantees and collateral are standard measures used to secure small business loans, especially for new businesses or for business owners who have less-than-stellar credit. Neither of these measures are necessary to qualify for Paycheck Protection Program loans under the CARES Act.

Participating lenders cannot charge loan application, origination, guaranty, monthly administration, annual, or other fees that are usually incurred when procuring a small business loan. Additionally, SBA loans often come with the stipulation that borrowers must not be able to procure other types of business loans in order to qualify for a SBA loan. This requirement has also been removed from the Paycheck Protection Program eligibility criteria.

Loans made under this program have a maximum maturity of 10 years from the date of the loan application. Loan interest rates are guaranteed to be 4% or less. Impacted borrowers may also have their loan payments deferred for 6-12 months.

Loan Forgiveness

Impacted borrowers may only apply for this program under one lender. They can only receive the benefits of covered loans once. In order for the loan to be forgiven in full or part, the borrower must acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Borrowers must likewise ensure that loan funds are used for these purposes.

How to Apply for the Program

Small business owners who wish to avail the benefits of this program should apply for it directly through an SBA-approved lender. There are about 1,800 SBA lenders so chances are your current financial institution is on the list. At this time, the SBA has not published a comprehensive list of lenders but are encouraging small business owners to contact their financial institutions directly to determine if the institution is a qualifying lender.

Prospective borrowers are encouraged to begin the application process by completing the Paycheck Protection Program Application available through the U.S. Department of Treasury. This form will assist borrowers with gathering the information that they need to apply through their financial institutions.

Many lenders are currently in the process of developing internal policies, procedures, and processes for this program. The SBA indicates that lenders may begin processing applications as early as April 3, 2020. A number of lenders are set to present information about the roll-out of their programs in the coming days.

Need help preparing for COVID-19 loan, grant, and other financial assistance applications? Contact us so that we can help you navigate through the process.