With the CARES Act signed, a weekend to process it, speaking with our Chamber’s banking investors, and the opportunity to speak with Congressional staff, here’s what we know:
What’s in the bill?
For businesses, the biggest thing is that the new Paycheck Protection Loans will give a business a loan to fund 6 weeks of pay for all small businesses under 50 employees.
How quickly can it get to businesses?
One thing businesses are concerned about is how quickly will it get out there since we all have payroll to meet. Congress’ interest was to streamline the process and get the money out the door as quickly as possible. Two things to note:
- Requirements that you try to get a loan elsewhere first have been waived.
- The Requirement to put up collateral has been waived.
The SBA is also expanding availability of lenders to offer this product. They’ll start with preferred lenders already in the system. The Treasury Department is taking a very broad approach and will be designating new banks.
Who is eligible?
As a small business if you would you normally qualify for an SBA program – if you have fewer than 500 or more than 500 but meet one of the traditional exemptions – you automatically qualify. 501(c)3 organizations with fewer than 500 employees also qualify.
Most importantly in the “gig” economy: Sole proprietors, the self-employed, and 1099 employees also qualify for this program. It is very expansive.
In addition, rules on “affiliate” locations for hotels and food service have been relaxed. Traditionally, rules state that you have to affiliate all the employees in all of your locations to count toward headcount. However, the bill changes that to per-premise headcount, so hotels and small restaurant chains may now qualify. Don’t assume you don’t qualify based on the old rules.
If you’re a franchisee or if you’re in food service or accommodation, don’t assume that if you don’t qualify because of traditional affiliate rules you won’t qualify under this program. You want to pay close attention to guidance and consider applying anyway.
What is the flexibility for terms of loans?
The maximum loan value is based on your payroll costs – your average monthly payroll costs. That includes salaries, healthcare, and other benefits including sick leave. You can get 2½ times your monthly payroll costs for a maximum loan of $10 million.
The loan will be forgiven if you meet criteria (see below). If you don’t meet those criteria, then after one year, it converts to a 10-year note with not more than a 4 percent interest rate.
The US Chamber has said the process doesn’t even qualify as traditional underwriting in the way we’d normally describe it. Small businesses in existence before Feb. 15, 2020 are eligible. With the hope that banks can begin lending as early as later this week, begin pulling together your monthly average payroll costs so you know how much you can borrow.
If you’re an independent contractor or sole proprietor… you’ll probably have more documentation to show that you have traditionally have income before qualifying. You need to be sure you can show the impact to your contracts. Businesses that use 1099 employees should reach out to those employees and let them know they qualify for these loans. That would help those contractors immensely.
Beyond that, banks and the government will not looking for a whole lot of things other than to determine the total loan amount.
How do these loans get switched to grants?
As a general rule, it starts with the assumption that they’re going to look at eight-week period after the origination of the loan. Again, look at your expenses: payroll, utilities, rent, and interest on mortgage debt. Add that up and dollar-for-dollar you can get that forgiven under the terms of the bill.
The only caveat is that the federal government will want to see if you were able to keep your employees. If you reduce headcount, they’ll reduce the loan forgiveness. If you cut wages of people who make less than $100,000 by more than 25 percent, they will reduce the loan forgiveness. If you’ve already let employees go, and you bring them back, you will qualify for more forgiveness.
What options are there for companies with more than 550 employees?
Under this loan program, there are not a lot of options, but there are other benefits in the bill:
- There are some tax changes. Payroll taxes paid on behalf of employer can be deferred for 50 percent for up to a year. The other 50 percent can be deferred up to 2 years.
- There are changes to net operating losses so you can accelerate those to get cash now.
- There are changes to business interest deductibility changes.
- Another provision allows new loan facilities directly through the Federal Reserve. There is up to $4 Trillion available there to employers of all sizes.
- Contact your accountant or tax attorney for more information on these provisions.
Economic Disaster (EIDL) loans
The CARES legislation also modified the SBA Disaster (or EIDL) loans. They changed underwriting requirements to cut the personal guarantee. Small businesses can request an immediate advance of $10,000 on an EIDL loan and the SBA needs to give it within three days of the application. We understand that if the initial grant is issued used for payroll, never has to be repaid, even if you are ultimately denied the EIDL loan.
You can’t take out an EIDL and Paycheck Protection Loan for the same purpose. You might be able to roll the disaster into the PPL loan if they qualify. Check with your bank, since our guidance has been that it might wind up being a loan-by-loan decision.
If you can’t maintain your headcount, this extends unemployment up to four months and waives the one-week waiting period. The bill also expands unemployment who would not normally qualify – if job loss is tied to the coronavirus, and it changes some of the job search requirements. Check with the Department of Employment and Workforce for the requirements for your specific situation.
One of the most important changes is the amount you may be paid. In South Carolina, the limit has traditionally been $326. The CARES Act adds an additional $600 per week to that.
If it takes longer than June 30, can I let people go without jeopardizing the forgiveness?
Obviously, we don’t know how this will all play out by then. Right now, in the statute the only time period mentioned is the origination and June 30, 2020 date.
Hope we’re not in a position to have to consider that.