The Corona Virus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27th. The legislation provides for a new loan program – dubbed the “Paycheck Protection Program” – to be administered by the SBA. Up to $349 billion will be available to eligible businesses and non-profit organizations, which generally include those with fewer than 500 employees, but with some exceptions.
The maximum loan amount will be determined based on an entity’s monthly average prior payroll costs times 2.5, using a formula specified in the law. Payroll costs can include most types of compensation, retirement and health insurance benefits, and payroll taxes, except that salaries above $100,000 per individual will be excluded. Loan terms are favorable with no personal guarantees or collateral of any kind required. The loan will be due in 2 years, unless all or a portion is converted to a grant (see below). The interest rate is currently under negotiation between lenders and the SBA. This is because bankers have feared that the proposed rate of .5% is too low for them to be able to adequately service the loans without losing money.
To apply for such loans, eligible employers should contact their local SBA-approved banker. There will be an expedited process for loan approval, but applicants will be required to certify that the loan is necessary due to the economic impact of COVID-19, and proceeds will only be used to retain its workers and pay only eligible expenses, which include salaries and wages, paid leave and severance, health benefits, retirement benefits, payroll taxes and occupancy costs such as mortgage, rent and utilities. The loan proceeds can also be used to pay interest on other debt obligations incurred before February 15, 2020.
Maximum lending per entity will be $10 million, but a portion of the loan can be forgiven for any expenditures for payroll, mortgage interest or rent, and utilities incurred within the first 8 weeks after the loan’s origination date, at the lender’s discretion. Forgiven amounts would be adjusted downward for employees that have not been retained or to the extent employee compensation has been reduced by more than 25%. And, at least 75% of the loan proceeds must be used for payroll costs in order for the loan to be eligible for forgiveness. Any amounts forgiven will not be subject to income tax, which is another generous feature of the program.
As lenders will likely be overwhelmed with applications, businesses and non-profit organizations affected by the COVID-19 virus should begin the loan application process as soon as possible. We will have to see how this plays out and if it will help keep businesses alive and employees working as we learn to cope with the virus.
There are many other provisions in the new CARES Act, including a new refundable payroll tax credit, as well as payroll tax deferrals, which I will address in upcoming posts.
ALERT: This post as been updated with current information as of 4/4/20. For the most current information, contact your local banker for loan terms.