Advice from a Business Lawyer on How to Take Advantage of the SBA’s New Program to Keep Your Workers Happy and Turn a Loan Into a Grant
Some very good news from Washington today. Everyone has been pretty focused on the stimulus checks to individuals within the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that passed the House of Representatives a few minutes ago. More importantly to my clietns, there is a program that savvy small businesses can use to maintain their workforce, inject liquidity, and ultimately receive loan forgiveness. It’s called the Payroll Protection Act, and it fundamentally changes the nature of Small Business Administration (“SBA”) 7(a) lending related to this crisis from a loan program to an incentivized grant program. The full text of the CARES Act is available here. https://www.documentcloud.org/documents/6819239-FINAL-FINAL-CARES-ACT.html. The act has not yet been signed by President Trump and final regulations are not out, but I wanted to again interpret the actual text of the law for everyone.
I want to get this knowledge out to as many business owners as possible quickly. My last two articles on COVID-19 related law changes had amazing readership online. I am not charging anyone for writing these. Please share this with any small business owners or self-employed people you know, as there are lots of news outlets reporting only about the checks and not about what business owners need to know to keep their workers and receive help to stay afloat. This is the most impactful stimulus program for small business I’ve seen in twelve years of being a business attorney. I believe the $350 Billion in funding will run out fast and business owners need to get their applications to a SBA lender quickly.
1. What is the Payroll Protection Program?
The Paycheck Protection Program modifies the SBA’s 7(a) loan program. That program has the SBA partially guaranteeing loans made by banks to qualifying small businesses. There are many lenders that can do SBA loans and your business may already have one. The Paycheck Protection Program modifies the 7(a) loan program in four important ways: (1) it expands the eligible businesses, (2) it modifies loan terms, including elimination of guarantees and collateral requirements, (3) it allows a portion of the loan to be forgiven if payroll criteria are met, and (4) it modifies a number of provisions to incentivize banks to make loans quickly.
Lenders under the Payroll Protection Program will be any financial institution that currently handles SBA lending. Those lenders will be authorized to make what is known as a Payroll Protection Loan under the new rules.
2. What Small Businesses are Eligible?
Eligible Small Businesses are those with less than five hundred (500) employees. They must meet the SBA’s definition of “business concern.” This basically means that it is organized for profit and operates primarily in the United States. Generally, related companies or subsidiaries are part of the same business concern. Non-profits qualified under IRS code 501(c)(3) may also be eligible. Some restaurants and hotels with more than 500 employees are also qualified.
The CARES Act importantly waives the “credit available elsewhere” test. This test typically applies to SBA 7(a) lending and requires a business to show that they sought other sources of capital and capital injections from their owners. So a lot more small businesses hit by this crisis are eligible, even if their owners have liquid assets or they could raise capital elsewhere.
3. What are the Terms of a Payroll Protection Loan?
Payroll protection loans have defined and modified terms including the following:
- Loan Amount: Small Businesses are eligible for loans up to 2.5 times their monthly payroll costs, usually measured over the prior twelve months. Payroll costs mean salaries, certain employee benefits, state and local taxes, and some compensation to sole proprietors. Seasonal employers and businesses in operation less than a year have different calculations.
- Use of Proceeds: Paycheck Protection Loans may be used to pay payroll costs, group healthcare benefits, insurance premiums, interest on pre-existing debt, rent and utility payments.
- Collateral: Payment Protection Loans do not require collateral. (*GASP*)
- Guarantee: Payment Protection Loans to note require personal guarantees. (*DOUBLE GASP*)
- Interest: Not to exceed four percent (4%).
- Maturity: Any portions of notes not forgiven as described below will have a term up to 10 years amortized the same as other 7(a) loans.
- Deferment: The CARES Act defers loans automatically for at least six months and up to a year.
- SBA Disaster Loans: After the date Payroll Protection Loans are available, you may not receive both a Payroll Protection Loan and an SBA disaster Loan.
Notably, these loans can be given to any size business except the largest ones with more than 500 employees. It is refreshing to see a stimulus package that can benefit sole proprietorships instead of only huge corporations. If you have questions about whether you are eligible feel free to get ahold of our office or your friendly neighborhood business law firm.
4. How is the Loan Forgiven?
The crucially important aspect of Payroll Protection Loans is that they are eligible for loan forgiveness equal to the amounts spent by the borrower during the eight (8) week period after the loan originates. The loan forgiveness applies to amounts spent on payroll costs, interest on pre-existing debt, payments on pre-existing leases and utility payments.
The loan forgiveness will be reduced proportionately by any reduction in employees during the covered period. So businesses are incentivized to keep their employees on staff and receiving paychecks. Forgiveness is also reduced if pay is cut so employers are incentivized to keep pay levels consistent. Tipped workers may also qualify for additional forgiveness.
To incentivize re-hiring, employers are not penalized if they re-hire employees who are laid off at the beginning of the period. All the above information will need to be verified by employers via documentation and certification. Still, if the employer carefully follows all the rules, their loan is forgiven, and it basically becomes a government grant.
5. How is Lending Incentivized?
To incentivize these loans, the CARES Act is increasing the SBA’s guarantee of these loans only to One Hundred Percent (100%). The SBA guarantee functions as a bank’s backstop if a loan is not paid and is repurchased in the event of default. Lenders are responsible for ensuring the business was operational on February 15, 2020 and that payroll and quarterly 941 returns were being filed. However, most other eligibility requirements are waived.
Borrowers are required to make certifications regarding the impact of COVID-19 on their business and their intentions to use the Paycheck Protection Loan. The CARES Act further grants the Department of Treasury discretion to approve new SBA lenders. Finally, the act references incentivized lenders. While final guidance and regulations are not out (technically this isn’t even law until Trump signs later this afternoon), this probably will be in the form of fees to the lenders underwriting these loans.
I’ve worked with several great SBA lenders over the years and we can point you in the right direction if your bank doesn’t handle those loans. We will also try to release information as each lending institution starts taking applications.
UPDATE 4/1/2020: The SBA has released the application forms and more guidance. For copies of the application and a step by step guide on how to apply please check out my new blog post. https://lakesidelegal.net/coronavirus/payroll-protection-loan-application/
These write ups are not a substitute for individualized advice from an experienced attorney. If you have questions, feel free to contact us by live chat, by phone, or using the contact us form. If you need help and are not in our area, I would recommend reaching out to a qualified local attorney. As mentioned before, we will be working to release further information as we know more, so please feel free to stop back as more programs become available.
Atty. Jeremy Vanderloop
Lakeside Legal, Owner