By: Benjamin Jacob
American businesses are facing historic challenges due to the disruption caused by the global COVID-19 pandemic. At Fourscore, we’ve been tracking the developments closely – including how the response of the federal government can help our clients. As part of its initial response, the federal government has enacted the CARES Act injecting a $2 trillion stimulus package into the U.S. economy with $376 billion intended for American workers and small businesses.
The CARES Act has four primary programs targeted to help small businesses. In this article, we’ll begin with an overview of key information about the newly created Paycheck Protection Program (PPP).
Under the CARES Act, Congress allocated $349 billion for the Paycheck Protection Program to be administered by the United States Small Business Administration. The PPP program provides small businesses with up to eight weeks of cash-flow assistance through 100 percent federally guaranteed loans with conditional loan forgiveness available, essentially making the loan a non-taxable grant.
The program began on April 3rd 2020 and less than two weeks later on April 16th, 2020, the SBA announced it had run out of funds and no new applications were being accepted. As of the time of this post, a deal appears imminent to approve an additional $310 billion in funding for the Paycheck Protection Program so now is a great time to familiarize yourself and to see how it could help your business. For those who have already applied, lenders have been advising that you should not need to resubmit a new application once additional funding has been approved but be sure to talk to your lender to confirm. Whether you have applied yet or not, we’ll cover critical information including what PPP loans can be used for, best practices, what counts as payroll costs, and the basics on PPP loan forgiveness.
Who is eligible and how much can I borrow?
- The PPP program is intended for American small businesses. All businesses including nonprofits, veterans organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors with fewer than 500 or fewer employees are eligible to apply. In certain industries, businesses can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries. To get more information, go to the size standards section of the SBA’s website.
- The maximum amount you can receive under a PPP loan is your monthly average payroll cost in 2019, multiplied by 2.5 and capped at $10 million.
- If you’re a seasonal business, the monthly average payroll cost will be calculated using a 12-week period beginning either February 15, 2019 or March 1, 2019 and ending June 30, 2019.
- If your business didn’t exist before June 30, 2019, your monthly average payroll cost will be based on January and February, 2020.
Four types of eligible expenses that PPP loan funds can be used for:
- Payroll costs including employee benefits,
- Mortgage interests incurred before February 15, 2020;
- Rent paid under lease agreements in force before February 15, 2020; and finally
- Utilities that were in service before February 15, 2020
It is critical to understand what constitutes “Payroll costs” and “Employee benefits”
- Payroll costs includes salary, wages, commissions, or tips
- Employee benefits including costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums, and finally payment of any retirement benefit
Best practices handling PPP funds once received:
Based on its recent experience with fraud related to the Troubled Asset Relief Program (TARP), Hurricane Katrina, and other similarly structured federal programs, the government has grown savvier to detecting fraud and exposing abuse. They will be leveraging their experience to safeguard taxpayer dollars and punish fraudulent activity or abuse. Being crystal clear on how you can use your PPP loan is necessary both to maximize your loan forgiveness but also to avoid any perception of fraud or abuse. Here are some best practices to to help ensure you receive the loan forgiveness you’re targeting and avoid problems resulting from inadvertent mishandling of funds:
- Understand from the start that ultimately it is your responsibility to ensure your business stays up to date on all rules, regulations, and guidance regarding use of funds, determining whether the funds are forgivable, and repaying the loan as applicable. More guidance is expected in the weeks ahead from the Treasury Department specifically around loan forgiveness.
- Make sure your company’s board or leadership team has discussed and carefully documented:
- Its decision on whether your company needs the funds and why
- What approved purposes the funds would be used for
- Are there any reasons not to accept funds
- Do your homework and ask questions as appropriate to verify the information on your application before you certify to the federal government that it is true.
- Recognize that applicants are required to certify that the PPP funds are “necessary to support ongoing operations” and operate accordingly.
- Some lenders recommend opening a separate bank account to hold PPP funds to avoid inadvertent misuse. We recommend talking to your lender and accountant to see if this option makes sense for you.
- Understand that only funds used within 8 weeks from the loan origination date (date the loan funds are issued to your account) will be eligible for loan forgiveness.
- Create a tracking system that enables your company to ensure funds are only used on approved purposes.
- Before reducing employee headcount or pay, think carefully about whether the move will impact loan forgiveness.
How much of my loan will be forgiven?
If you use any portion of the loan proceeds for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan, you’ll be required to pay those funds back.
One key point here is that the SBA has clarified that at least 75% of the PPP loan must be spent on payroll costs.
In addition, you will owe money if you fail to maintain your staff and payroll.
- Loan forgiveness amount will be reduced if you decrease your employee headcount
- Loan forgiveness amount will be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- If you have already made changes to employee headcount or salaries, you have until June 30, 2020 to restore your full-time employee headcount and salary levels for any changes made between February 15,2020 and April 26, 2020.
How do I request loan forgiveness?
You’ll be able to request forgiveness of all or a portion of your PPP loan anytime after the first 8 weeks of the loan origination date. You’ll need to submit your request to your lender servicing the loan. The request will need to include documents verifying the number of FT equivalent employees and pay rates, as well as the payments on all eligible claimed expenses such as eligible mortgage interest, rent, utility payments. The lender will be required to make a decision within 60 days. You’ll also need to certify that the documents you’re submitting are true and that you used the forgiveness amount to maintain employee headcount and make eligible mortgage interest, rent, and utility payments. As mentioned, be extremely careful to track and document all expenses carefully and to ensure that everything you certify as true is true!
Other key PPP information:
- Interest rate on all loans is 1.00% fixed rate. If your loan is fully forgiven, no interest will be owed
- If you don’t qualify for complete forgiveness, you have a 6 month deferral of payments although interest will continue to accrue over this period
- Any unforgiven portion of the loan is due in 2 years
- No collateral or guarantees required
- No penalty or fees if you pay loan back early
In conclusion, the PPP program is potentially a great opportunity for qualifying small businesses to use a forgivable loan to maintain their payroll and cover other key expenses. It is critical to actively stay on top of the program requirements and guidelines to both maximize your loan forgiveness and to avoid government scrutiny over your company’s handling of funds. If you have any questions about the PPP program, please contact Fourscore Business Law at [email protected] or at 919-307-5356.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, the Southeast and the Bay Area. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley and everywhere between. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.