On Friday, March 27th, the President signed into law the CARES Act, a 2 trillion dollar stimulus package intended to combat the severe economic damage caused by the coronavirus pandemic. The CARES Act includes many provisions intended to help small businesses and startups. One of the most important components of the CARES Act for small businesses and startups is the Paycheck Protection Program which provides business loans through approved lenders under favorable terms and potential eligibility for loan forgiveness.
The following Frequently Asked Questions are intended to provide general information about the main programs for small businesses addressed in the CARES Act. As we continue to review the CARES Act and as more information is provided by the Small Business Administration and other agencies, we will continue to update these FAQs.
Paycheck Protection Program
Section 1102 of the CARES Act
Q: What is the Paycheck Protection Program?
A: The Paycheck Protection Program is a lending program for small businesses created by the CARES Act to enable small businesses to retain their workforce and to obtain fast relief from payroll costs and other business costs. The Act has authorized $349 billion for this program together with commitments for general Section 7(a) business loans.
Q: What is the covered period for the Paycheck Protection Program?
A: The covered period is February 15th through June 30th, 2020. During this covered period, eligible borrowers may obtain loans under this program.
Q: Who is eligible to participate in the program?
A: Eligible self-employed individuals and businesses, nonprofit organizations, veterans' organizations, or Tribal businesses with 500 employees or less (the Small Business Administration may set this number higher for certain industries).
Q: My business has more than 500 employees, but they are spread out between different physical locations and those locations have less than 500 employees. Is my business still eligible for a loan under this program?
A: Yes, but only if your business is in the accommodation or food services business (to be more specific, your business needs to have a NAICS code beginning with 72).
Q: I'm a franchisee operating a business. My own franchise only has a few employees but the total number of employees throughout the franchise has over 500 employees. Am I eligible for a loan under this program?
A: Yes. The Act has waived certain affiliation rules and regulations with respect to eligibility for a loan for businesses operating as a franchise that have been assigned a franchise identifier code by the SBA.
Q: I'm the founder and CEO of a venture-backed startup with less than 500 employees. Is my startup eligible for a loan under the program?
A: The answer to this question is complex and at this point in time uncertain, depending on the facts and the startup's ownership structure. Due to current SBA affiliation rules, startups that are majority-owned or controlled by venture capital investors may not be eligible to participate because the total number of employees of the venture capital fund and its other portfolio companies could count towards the 500 employee threshold. Until the SBA releases further guidance on the matter, each venture-backed startup should carefully analyze its structure and the rules prior to applying.
Q: Does the program apply to individuals who are self-employed, operating a sole proprietorship or as independent contractors?
A: Yes. individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals are eligible to receive a loan under this program (Some types of self-employment may not be eligible).
Q: If I'm an individual applying for a loan under this program, what documentation do I need to submit when I apply?
A: You need to submit any document which will demonstrate your eligibility, including payroll tax filings, forms 1099-MISC, and income and expenses from the sole proprietorship.
Q: What is the maximum loan amount my business can get under this program?
A: The maximum loan amount during the covered period is the lesser of: (a) $10,000,000 or (b) two and a half (2.5) times the average total monthly payments for payroll costs incurred in the 1-year period before the date of the loan plus the outstanding amount of a disaster loan already made by the SBA or in cooperation with a lending institution to the business beginning on January 31, 2020.
Q: What can I use the loan for?
A: during the covered period, you can use the loan made under this program for:
- Payroll costs;
- Costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Employee salaries, commissions, or similar compensation;
- Mortgage interest payments;
- Rent;
- Utilities; and
- Interest on any other debt obligations that were incurred before February 15th, 2020.
Q: How can I obtain a loan under this program and where can I apply?
A: The SBA has delegated authority to approved lenders who can make and approve loans directly to businesses and individuals who apply for a loan. It is expected that approved lenders will begin taking applications beginning on April 3, 2020. Check with your bank to see if it is participating in the program, or search for other banks who are publicizing their participation in the program.
Q: What are the considerations used in evaluating a borrower's eligibility for a loan and what are the borrower requirements?
A: In evaluating eligibility for a loan, a lender has to consider whether the borrower was:
- In operation on February 15, 2020;
- Had employees on its payroll or paid independent contractors;
In order to qualify for a loan, a borrower must make a good faith certification:
- That the uncertainty of the current economic conditions makes the loan requested necessary to support the ongoing operations of the borrower;
- That funds will be used to retain workers and maintain payroll or make mortgage, lease, or utility payments;
- That the borrower does not have another duplicative application pending;
- That the borrower, between February 15 and December 31, 2020, has not received other SBA loans under this subsection.
Q: What documents and information do I need to provide for my loan application?
A: Although the SBA has not released all the details yet on the application process which participating lenders will follow, based on the law's requirements, the following information should be gathered in preparation for the application (this checklist information was provided by PNC Bank):
- 2019 IRS Quarterly 940, 941 or 944 payroll tax reports.
- Payroll reports for a 12-month period (ending on your most recent payroll date).
- 1099s for independent contractors for 2019.
- Records of total health insurance premiums paid under a group health plan.
- Records of retirement plan funding paid by the company.
Q: Where can I find an application for to apply for the program?
A: Each participating lender will have its own process and application, although the application process should be fairly uniform. Additionally, the SBA has released a sample application which can be found here.
Q: Is there a fee for applying for a loan?
A: No. The SBA will not collect a fee for these loans.
Q: Will I have to show that I tried to obtain a loan elsewhere before applying for a loan under this program?
A: No. during the covered period, this requirement, which applies to other SBA loans, will not apply.
Q: Do I need to make a personal guarantee or put any collateral?
A: No. during the covered period, no personal guarantee or collateral is required for loans under this program.
Q: What are the terms of the loans under this program?
A: The loans have the following terms:
- for balances that remain after a certain loan forgiveness has been applied, the maximum maturity period on the balance is 10 years from the date the borrower applied for loan forgiveness.
- The interest rate on these loans will not exceed 4%.
- During the covered period, all loan repayments (which includes payments of principal, interest, and fees) will be deferred for at least 6 months but no more than a year.
Q: If I already obtained a disaster loan from the SBA between January 31, 2020 and the date on which this program begins, can I refinance my first disaster loan?
A: Yes, you can refinance the first disaster loan you received as part of the loan you received under this program.
Q: I'm looking to obtain an Express Loan under Section 7(a) instead of or in addition to a loan under this program. What is the maximum express loan amount I can obtain?
A: The CARES Act has increased the maximum amount from $350,000 to $1,000,000 until January 1, 2021. After that, the amount will go back down to $350,000.
Loan Forgiveness
Section 1106 of the CARES Act
Q: Does the CARES Act provide any loan forgiveness options to small businesses?
A: Yes, Under the CARES Act, eligible recipients are eligible for loan forgiveness of loans provided under the Paycheck Protection Program.
Q: I received a loan under the Paycheck Protection Program. What kind of loan forgiveness might I be eligible for?
A: You may be eligible for loan forgiveness in the amount of costs you incurred and payments you have made during the 8-week period from when your loan originated on the following:
- Payroll costs
- Mortgage interest
- Rent obligations
- Utility payments
Q: Is there a limit to the amount of loan forgiveness I may be eligible for?
A: The amount of loan forgiveness cannot exceed the principal amount of the loan made to you under the Paycheck Protection Program.
Q: Can the amount of loan forgiveness I am eligible for be reduced?
A: Yes. The total amount or loan forgiveness can be reduced if your average number of full-time equivalent employees per month has decreased or if you have decreased the total salary or wages of any employee by more than 25%.
Q: If I rehire employees that I had to let go due to this current crisis or reinstate the salary of an employee to what it was before I reduced it, will that affect the reduction in loan forgiveness I am eligible for?
A: Possibly yes. If you terminated an employee or reduced her salary at any time between February 15, 2020 and April 26, 2020 (which is 30 days after the enactment of the CARES Act), such a termination or reduction will not affect the amount of loan forgiveness you are eligible for if you rehire or reinstate the salary of the employee to what it was before the reduction by June 30, 2020.
Q: How do I apply for loan forgiveness?
A: You will need to apply for loan forgiveness directly with the lender from whom you obtained the loan under the Paycheck Protection Program.
The information provided here does not constitute legal advice and the answers to these questions are not a substitute to reading the specific provisions of the law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
