New Federal Law Offers Small Businesses Emergency Payroll Loans Featuring Loan Forgiveness
Last week, Congress passed the Coronavirus Aid, Relief, and Economic Security Act. The purpose of the CARES Act is to provide immediate relief to small businesses and non-profits to incentivize them to keep existing employees on payroll until a broader economic recovery can begin.
For small businesses and non-profit organizations struggling with the impact of COVID-19, quarantines, and stay home orders, the CARES Act includes a critical component: The Paycheck Protection Program. The recently enacted Paycheck Protection Program devotes nearly 350 billion dollars in loans for small businesses. These emergency business loans will be administered by the Small Business Administration, and can be for up to 2.5 months of a business or non-profit organizations’ payroll. Emergency loans can be forgiven when used by small businesses to keep employees on payroll through June 30, 2020.
The SBA is tasked with drafting regulations to implement these emergency loans within 15 days. These regulations will provide small businesses and their legal counsel with additional guidance to determine qualifications. In the meantime, small businesses impacted by COVID-19 should begin evaluating the Payroll Protection Program and preparing for its implementation.
To be eligible for a Payroll Protection Program loan, the applicant must be a small business with 500 or fewer full- and part-time employees, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, tribal business. Certain exceptions apply to grant additional eligibility for larger businesses that are not more than the applicable industry size standard based on SBA publications, or for businesses that qualify under NAICS Code 72 (hotels, accommodations and food services) that employ 500 people or less per location. Sole proprietors, the self-employed, and certain freelance workers are likewise included and eligible for these emergency loans.
The eligibility determination process is streamlined, and requires only that lenders determine that a small business:
1. Was operating on February 15, 2020; and
2. Had W-2 employees for whom it paid salaries and payroll taxes; or
3. Paid independent contractors under Form 1099-MISC.
Nonbinding preferences are to be given to new businesses, minority owned businesses, and (critically for Northern Arizona), businesses in rural and underserved areas.
The loan period began retroactively to February 15, 2020, and ends on June 30, 2020.
Emergency Payroll Protection Programs loans require no personal guarantees and no collateral. Lender fees and prepayment penalties are waived. They do require the borrower to make a good faith certification that:
1. The emergency loan is necessary to support business operations because of current economic conditions;
2. Loan funds will be used to retain workers and maintain payroll, or to make business mortgage, lease, and utility payments;
3. There is no pending SBA 7(a) application for the same purpose; and
4. The borrower has not received amounts for the same purpose from the SBA’s 7(a) program.
These emergency payroll loans bear a maximum interest rate of 4.00%. For any emergency payroll loans with a remaining balance after reduction for loan forgiveness, the CARES Act imposes a maximum maturity of 10 years from the date on which the borrower applied for loan forgiveness.
The CARES Act requires participating lenders to offer payment deferment to small businesses and non-profits for a minimum of 6 months, but not more than 1 year. This includes deferring payment of principal, interest, and fees.
Unlike traditional loans, borrowers are eligible for forgiveness up to the loan amount for an 8 week period after the loan’s origination date. Loan forgiveness may be granted in the amount equal to the following costs incurred during that period:
Payroll (with individual employee compensation above $100,000 excluded);
Interest payments on mortgage obligations incurred prior to February 15, 2020;
Rent payments pursuant to a lease in force before February 15, 2020; and
Utility payments on utility services where service began before February 15.
As an incentive for small businesses and non-profits to retain their employees at current wage rates, the emergency loan reduces the available loan forgiveness if the average number of employees is reduced when compared to the same period in 2019, or if there is any reduction in total employee salary or wages of more than 25% during the covered period. Small businesses or non-profits that rehire their laid-off workers by June 30, 2020 will not be penalized for having a smaller workforce. Importantly for restaurants, bars, and hospitality companies, tipped workers may receive loan forgiveness for any additional wages paid to tipped employees.
Documenting eligibility for loan forgiveness will be key for small businesses and non-profit organizations alike. However, proper documentation will help ensure that small businesses and charities have a powerful tool in helping their employees and protecting themselves through this tumultuous period in our history.
We are deeply invested in our community, and want to see our neighbors and the businesses they own survive. Contact the Ledbetter Law Firm at (928) 649-8777 with any questions about eligibility, and other terms of the CARES Act. This post is informational only and should not be relied upon as legal advice.