Paycheck Protection Program Offers Lifeline to Small Businesses, Employees

Unquestionably, these are extraordinary times for small businesses and their employees with concerns over the impact of COVID-19 induced business closures and restrictions. With many businesses and their employees facing an existential threat, Congress has extended a lifeline with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

A central provision of the CARES Act is the Paycheck Protection Program which offers cash flow assistance to most small businesses.

Paycheck Protection Program Overview

The PPP makes available to businesses and non-profits with fewer than 500 employees about $300 billion to cash flow assistance to cover payroll costs, rent or mortgage payments, healthcare premiums, paid time off, utilities and interest on debt service. Businesses that were operational on February 15, 2020 can request a one-time loan of up to $10 million to cover costs between February 15 and June 30. Sole-proprietors, independent contractors, and self-employed individuals are also eligible for PPP loans.

The loans are administered by the SBA and offered through SBA-designated banks. Unlike typical SBA loans, PPP loans are non-recourse and require no collateral or personal guarantees. PPP loans are issued with a 4% interest rate and a term of 10 years.

PPP Loan Forgiveness

Loan forgiveness is available for businesses up to the amount spent on covered costs during the eight weeks following the loan origination. However, the amount forgiven is reduced proportionately by any reduction in Average Full-Time Equivalent (FTE) employees retained as compared to the prior year (February 15, 2019, through June 30, 2019). The forgiven amount can also be reduced if any reduction in employee pay exceeds 25% of their earnings in the fourth quarter of 2019.

For loan amounts that are not forgiven after one year, the loan terms of 4% over ten years will apply.

Businesses can apply for loan forgiveness through their lender with documentation that verifies payroll costs and other covered expenses.

PPP Frequently Asked Questions

How much can I borrow through PPP?

You can borrow an amount equal to 250% of your average monthly payroll costs you incurred during the period February 15 to June 30, 2019. Payroll costs include wages, paid leave, health care premiums, and retirement benefits up to $100,000 per employee.

If you were not in business between February 15, 2019 – June 30, 2019: Your max loan is equal to 250% of your average monthly payroll costs between January 1 and February 15, 2020.

What other costs can the loan cover?

Businesses can use PPP loan proceeds to cover many operational costs, including their mortgage payment (interest only), rent payment, utility costs, and interest on other debt in existence on February 15, 2020.

What are the loan terms?

The maximum interest rate is 4% with a 10-year term. There are no prepayment fees Borrower and lender fees are waived as are any collateral and personal guarantee requirements.

Principal and interest payments may be deferred for six months to one year.

What are the tax implications of loan forgiveness?

Any loan amount that is forgiven will not be included as taxable income. It is essentially a tax-free grant.

Where do businesses apply for a PPP loan?

PPP loans can be obtained through any SBA-designated lender. To meet the high demand for PPP loans, the Treasury Department may authorize additional lenders, including nonbank lenders, soon.

While this covers the key highlights of the Paycheck Protection Program, many other details may apply in a given situation. Contact your SBA lender bank for more information as it may apply to your business.