The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed. This section of the bill, known as the Paycheck Protection Program, provides 100% federally guaranteed loans to small businesses. These loans may be forgiven if borrowers keep their payrolls during the crisis or restore their payrolls afterward.
Congress has directed the Small Business Administration to rapidly release additional guidance regarding how to apply for these loans. Keep an eye on the Small Business Administration’s website for the latest. In the meantime, below are answers to some frequently asked questions you may have.
On April 3, 2020, the Small Business Administration announced all churches are eligible for the Paycheck Protection Program and can apply as a 501(c)(3), regardless of filing status. Funding for the PPP was extended on April 23, 2020.
Guidance from the U.S. Department of Treasury can be found here.
III. Application Process and Requirements
IV. Loan Forgiveness
V. Other Provisions
Q. What is the Payment Protection Program?
A. The Payment Protection Program provides $350 billion for 100% federally-guaranteed loans for 8 weeks of assistance to small businesses and 501(c)(3) nonprofits with fewer than 500 employees. Sole-proprietors, independent contractors, and other self-employed individuals are also eligible for these loans. Loans can be forgiven when used for payroll costs, interest on mortgage obligations, rent and utilities. The loan has an interest rate of 4% and the maximum amount is the lesser of $10 million or 2.5 times the average monthly payroll based on the prior year’s payroll. Principal, interest and fees will be automatically deferred for six months. All borrower and lenders fees have been waived.
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Q. Am I eligible?
A. You are eligible if you are:
- A small business with fewer than 500 employees (including full-time, part-time and any other status)
- A small business that otherwise meets the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- An individual who operates as a sole proprietor
- An individual who operates as an independent contractor
- An individual who is self-employed who regularly carries on any trade or business
- A tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
- An accommodation and food sector business where your physical location meets the 500-employee rule, even if your parent company or franchisor does not
- All churches
Q. I am an independent contractor or gig economy worker, am I eligible?
A. Yes. Sole proprietors, independent contractors, gig economy workers, and self-employed individuals are all eligible for the Paycheck Protection Program.
Q. Are small businesses in the hospitality and food industry with more than one location eligible (ex. franchisees)?
A. Small businesses in the hospitality and food industry with more than one location could be eligible at the store and location level if the individual store employs less than 500 workers. That means that each store location could be eligible even if the overall company employs more than 500 individuals. Additionally, if your franchisor appears in the Small Business Administration’s National Franchise Directory, assistance will extend down to the franchisee at the store or location level.
Q. Will 501(c)(6) organizations receive assistance under this bill?
A. No, the bill expands eligibility to 501(c)(3) nonprofits only.
Q. Are non-profits, churches, chambers of commerce or physician practices eligible?
A. Non-profits designated as 501(c)(3) qualify. All churches are eligible and is not required to fill out a Form 990 or have formal recognition from the IRS but should make sure to check the "501 (c)(3) nonprofit" box in the top left corner of the SBA form. Physician practices are eligible regardless of how they are structured. Most trade associations, including Chambers of Commerce, are organized as 501(c)(6)s and are there ineligible.
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III. Application Process and Requirements
Q. Where can I apply for the Paycheck Protection Program?
A. You can apply for the Paycheck Protection Program at any lending institution that is approved to participate in the program through the existing U.S. Small Business Administration (SBA) 7(a) lending program and additional lenders approved by the Department of Treasury. This could be the bank you already use, or a nearby bank. There are thousands of banks that already participate in the SBA’s lending programs, including numerous community banks. You do not have to visit any government institution to apply for the program. You can call your bank or find SBA-approved lenders in your area through SBA’s online Lender Match tool. You can call your local Small Business Development Center or Women’s Business Center and they will provide free assistance and guide you to lenders. For the application, click here.
Q. When is the application deadline for the Paycheck Protection Program?
A. Applicants are eligible to apply for the PPP loan until June 30th, 2020.
Q. How quickly will businesses be able to access loans?
A. The Credit Elsewhere Test, collateral requirements and all requirements for personal guarantees under the Paycheck Protection loans have been waived in order to speed up the process. Additionally, Congress has given the Small Business Administration extra resources to increase capacity and conduct onboarding of new lenders. I will continue pushing the SBA to move as quickly as possible, but I do not have a specific time frame yet. Please keep an eye on the SBA website for the most up to date information.
Q. What will lenders consider in their evaluation?
A. In evaluating eligibility, lenders must determine whether you were in operation before February 15, 2020 and had employees for whom you paid salaries and payroll taxes or paid independent contractors.
Lenders will also ask you for a good faith certification that:
- The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
- You will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
- You do not have an application pending for a loan duplicative of the purpose and amounts applied for
- From Feb. 15, 2020 to Dec. 31, 2020, you had not received a loan duplicative of the purpose and amounts applied for here (Note: There is an opportunity to fold emergency loans made between Jan. 31, 2020 and the date this loan program becomes available into a new loan)
If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for certain documents such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.
Unlike other SBA products, lenders will not consider:
- Whether you sought and were able to obtain credit elsewhere
- Whether there is a personal guarantee for the loan
- Whether there is collateral for the loan
Q. How much can I borrow?
A. Loans can be made up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million. Average monthly payroll costs are calculated as the sum of included payroll costs minus the sum of excluded payroll costs. For businesses not operational in 2019, the calculation is the average total monthly payroll costs incurred for January and February 2020. For seasonal employers, the calculation is the average total monthly payroll costs for the 12-week period beginning February 15, 2019 or March 1, 2019 (decided by the loan recipient) and ending June 30, 2019.
Q. What are “included payroll costs”?
A. For Employers, included payroll costs are the sum of payments of any compensation with respect to employees that is a:
- salary, wage, commission, or similar compensation;
- payment of cash tip or equivalent;
- payment for vacation, parental, family, medical, or sick leave
- allowance for dismissal or separation
- payment required for the provisions of group health care benefits, including insurance premiums
- payment of any retirement benefit
- payment of state or local tax assessed on the compensation of the employee
For Sole Proprietors, Independent Contractors, and Self-Employed Individuals, included payroll costs are the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a:
- wage, commission, income, net earnings from self-employment, or similar compensation, and
- that is in an amount that is not more than $100,000 in one year, as pro-rated for the covered period.
Q. The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?
A. The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
Q. What are “excluded payroll costs”?
A. Excluded payroll costs are:
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15, to June 30, 2020
- Payroll taxes, railroad retirement taxes, and income taxes
- Any compensation of an employee whose principal place of residence is outside of the United States
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act
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IV. Loan Forgiveness
Q. Will this loan be forgiven?
A. Businesses that maintain payroll continuity from February 15, 2020 through June 30, 2020 as defined by headcount, are able to request forgiveness on a paycheck protection loan used on payroll costs, mortgage interest, rent on a leasing agreement, utility pay, and for borrowers with tipped employees, additional wages paid to those employees, over an 8-week period. The amount forgiven may not exceed the total principal of the loan and will be reduced proportionally by any reduction in employees retained compared to the prior year and reduction in pay of any employee beyond 25% of their prior year compensation. To receive loan forgiveness, a business will have to work with a lender to justify their payroll was maintained through documentation.
Q. Can small businesses hire back employees that they already laid off and still have the loans forgiven?
A. Yes. They simply need to have been in business before February 15th, show the lender that they have had the employees on the payroll and eliminate the reduction in employees or reduction in wage by June 30, 2020.
Q. When is the loan forgiven?
A. The loan is forgiven at the end of the 8-week period after you take out the loan. Borrowers will work with lenders to verify covered expenses and the proper amount of forgiveness.
Q. What is the covered period of the loan?
A. The covered period during which expenses can be forgiven extends from February 15, 2020 to June 30, 2020. Borrowers can choose which 8 weeks they want to count towards the covered period, which can start as early as February 15, 2020.
Q. Am I responsible for interest on the forgiven loan amount?
A. No, if the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by you and the lender.
Q. What are the interest rate and terms for the loan amount that is not forgiven?
A. The terms of the loan not forgiven may differ on a case-by-case basis. However, the maximum terms of the loan feature a 10-year term with interest capped at 4 percent and a 100 percent loan guarantee by the SBA. You will not have to pay any fees on the loan, and collateral requirements and personal guarantees are waived. Loan payments will be deferred for at least six months and up to one year starting at the origination of the loan.
Q. What other expenses can I use the loan for?
A. In addition to the expenses discussed above that are able to be forgiven, if you would like to use the Paycheck Protection Program for other business-related expenses, like inventory, you can, but that portion of the loan will not be forgiven.
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V. Other Provisions
Q. Are there any changes to SBA Express Loans?
A. The maximum amount for SBA Express Loans, which require less documentation and less paperwork, is temporarily increased from $350,000 to $1 million through December 31, 2020.
Q. Are there any changes to Emergency Economic Injury Disaster Loans?
A. The bill expedites access to capital for small businesses that have applied for an EIDL. Businesses can request an advance of up to $10,000 on the loan to provide covered leave, maintain payroll and pay debt obligations.
Q. Can a borrower “double dip” between an Economic Injury Disaster Loan and a new Paycheck Protection Loan?
A. Businesses will be able to receive an EIDL and a Paycheck Protection Loan as long as they are used for different expenses. For example, a business can receive an EIDL for working capital and a Paycheck Protection Loan for payroll assistance. Additional flexibility is also granted through no prepayment penalties on EIDLs and on Payment Protection loans, as well as a refinancing option.
Q. If I have applied for, or received, an Economic Injury Disaster Loan (EIDL) related to COVID-19 before the Paycheck Protection Program became available, will I be able to refinance into a PPP loan?
A. Yes. If you received an EIDL loan related to COVID-19 between January 31, 2020 and the date at which the PPP becomes available, you would be able to refinance the EIDL into the PPP for loan forgiveness purposes. However, you may not take out an EIDL and a PPP for the same purposes. Remaining portions of the EIDL, for purposes other than those laid out in loan forgiveness terms for a PPP loan, would remain a loan. If you took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under PPP.
Q. What if I have an existing SBA loan product?
A. If you have an existing SBA loan product you will receive an automatic deferral of payments for six months where the SBA will pay the principal, interest and fees on the loan.
Q. I took out a bridge loan through the State of Florida, am I eligible to apply for the Paycheck Protection Program?
A. Yes, you can take out a state bridge loan and are still be eligible for the PPP loan.
Q. What other assistance is available in the bill for small businesses?
A. The bill provides grants and funding to offer training, counseling and assistance to small businesses. For example, the bill includes:
- $240 million in grants to SBA resource partners, including Small Business Development Centers and Women’s Business Centers
- $25 million in grants for resource partner associations to provide online information and training.
- $10 million in funding for the Department of Commerce Minority Business Development Agency’s Minority Business Centers.
- Allows State Trade Expansion Program participants to be reimbursed for events cancelled due to coronavirus.
Additional guidance on these items will be published in the coming days by the Small Business Administration.
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This Question and Answer was prepared with materials used courtesy of the House of Representatives Small Business Committee, the U.S. Senate Committee on Small Business and Entrepreneurship, and the U.S. Chamber of Commerce. If you have any questions, please do not hesitate to call our office at 202-225-2706. I encourage you to follow the Small Business Administration’s website for the latest guidance.