SPECIAL REPORT: COVID-19 and Guidance on Small Business Loans
A major part of the recently passed stimulus bill called the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), involves extending Small Business Administration (the “Administration”) loans to small businesses under its Paycheck Protection Program (“PPP”) component. Here is what potential applicants need to know:
Is my business eligible?
A small business with fewer than 500 employees
A small business that otherwise meets the size standard established by the Administration for a particular industry (SBA Size Standards can be determined by using this tool on the SBA’s website: https://www.sba.gov/size-standards/)
A 501(c)(3) with fewer than 500 employee
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 size standard established by the Administration
A 501(c)(19) Veterans Organization that meets the size standard established by the Administration
If you are in the accommodation and food services sector (NAICS 72), the 500 employee rule is applied on a per physical location basis
If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply.
Note: The 500-employee threshold includes all employees, including full-time, part-time, and any other status.
What will Lenders be looking for?
When evaluating eligibility, Lenders are directed to consider only whether the borrower was in operation before February 15, 2020 and had employees for whom they paid salaries and payroll taxes or paid independent contractors.
In addition, Lenders will ask applications for a good faith certification that:
The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here
From February 15, 2020 to December 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here
(Note: Emergency loans made between January 31, 2020 and the date this loan program becomes available may be refinanced into PPP loans.)
If you are an independent contractor, sole proprietor, or self-employed individual, you will also need to submit additional documents as is necessary to establish such individual as eligible, including, payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.
How much can my business borrow?
Loan amounts can be up to 2.5 times the borrower’s average monthly payroll costs incurred during the 1-year period before the date on which the loan is made. For businesses not operational in 2019, loan amounts can be 2.5 times the average total monthly payroll costs incurred for January and February of 2020. For seasonal employers, the loan amounts can be up to 2.5 times the average total monthly payroll costs for the 12-week period beginning February 15, 2019 or March 1, 2019 (as decided by the loan recipient) and ending June 30, 2019. In no case, shall any loan amount exceed $10 million.
The term ‘payroll costs’ for Employers means:
Payments of any compensation (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 employees
The term ‘payroll costs’ for Sole Proprietors, Independent Contracts, and Self-Employed Individuals:
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 1 year, as prorated for the covered period
The term ‘payroll costs’ does not include:
The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period of February 15, 2020 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 or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act
Is there any loan forgiveness and, if so, how much?
A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:
Payroll costs (using the same definition described above)
Interest on a mortgage obligation incurred in the ordinary course of business
Rent on a leasing agreement
Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
For borrowers with tipped employees, additional wages paid to those employees
What are triggers for reducing the loan forgiveness?
The amount of loan forgiveness is reduced proportionally by any reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Reduction in employment or wages that occur during the period beginning on February 15, 2020 and ending 30 days after the enactment of the CARES Act will not reduce the amount of loan forgiveness if by June 30, 2020 the borrower eliminates the reduction in employees or reduction of wages.
How do I apply for loan forgiveness?
A recipient seeking loan forgiveness will need to submit an application to the lender. The application should include various documentation including verification of the number of full-time employees and pay rates; payments made during the period; and any other documentation the Administrator deems necessary. Not later than 60 days after the date on which a lender receives an application for loan forgiveness the lender will issue a decision on an application, and a safe harbor protects the lenders from liability. Lastly, any amount of forgiveness will be excluded from gross income of the recipient.
What’s next?
Guidance from the Administration should be released soon, including a list of lenders offering loans under this program. As soon as this information is available, we will provide an update. In the meantime, if immediate relief is necessary, an Economic Injury Disaster Loan (“EIDL”) is available today directly through the SBA website: https://www.sba.gov/funding-programs/disaster-assistance.
Please note, we urge those considering an EIDL to take caution and be aware that only those EIDL’s made between the period of January 31, 2020 and the date PPP loans become available may be refinanced into a PPP loan. In addition, businesses cannot get both EIDL and PPP loans at the same time. You can apply for the EIDL loan now and the PPP loan when it becomes available. If you qualify and accept the EIDL loan, and you subsequently qualify for the PPP loan, you can re-finance the EIDL loan with the PPP loan.
CONTACT:
Andrew J. Annes, Esquire
aannes@satclaw.com
mobile: (312) 246-3110
John W. Campbell, Jr., Esquire
jcampbell@satclaw.com
mobile: (312) 391-3126
Websites:
https://satclaw.com/
https://www.satcsolutions.com/