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COVID-19

Quick Guide to Loans Available Due to the Coronavirus Pandemic

Paycheck Protection Program (PPP) Under the CARES Act:

Provides Loans to:

  • an individual who is a sole-proprietor, independent contractor, and self-employed;
  • a business with less than 500 full or part time employees or otherwise meets SBA size standard;
  • 501(c)(3) nonprofit with less than 500 full or part time employees, as well as 501(c)(19) veteran’s organizations or Tribal businesses, in each case which satisfies the SBA size standard.
  • Certain businesses, such as food service employers and certain franchisees, will not be subject to SBA affiliate rules, meaning each location will be allowed to be viewed as a standalone for purposes of determining if the 500 full or part time employee threshold was exceeded.

In an Amount Equal to the:

  • Lesser of $10 Million or 2.5 x the borrower’s average monthly payroll for the preceding 12 months.
    • Applicants not operating for the prior year use their average payroll for January and February of 2020.
    • Seasonal businesses will have their average payroll based on February-June of the prior year.
    • Only the first $100,000 of pay for any employee whose pay exceeds $100,000 annually is included.
    • Pay includes ordinary wages and salaries, commissions, tips, paid leave and vacation, required insurance premiums, retirement benefits, and state or local taxes assessed on the employees’ compensation, but not payroll or income taxes, pay to non-US residents, or leave qualifying under the Families First Coronavirus Response Act.
  • The available loan amount is reduced in proportion to the amount by which the applicant has reduced its work force unless the applicant rehires those laid off employees.

Approval is Based on:

  • On February 15, 2020, the applicant must have been self-employed, an independent contractor and have been paying salaries and payroll taxes on employees.
  • The applicant must make a good faith certification that:
    • the loan is necessary to continue its operations given the current economic conditions,
    • the applicant will use the loan proceeds to pay payroll expenses, as well as mortgage interest, lease payments and utilities for which the applicant was already obligated prior to February 15, 2020,
    • the applicant isn’t seeking and hasn’t received other loans to cover the same expenses.
  • Although guidance on what is required, it is anticipated that applicants should be prepared to provide payroll tax reports for the prior year and 2020 to date, information showing retirement plan payments, paid time off, vacation, family medical pay and other items that will be included what can be used to pay with the loan proceeds, 1099-MISC forms for independent contractors, income and expense reports, tax returns, and a list of beneficial owners in the business.
  • Things not required: collateral, personal guarantee, evidence that the applicant unsuccessfully sought credit elsewhere for these purposes, evidence of ability to repay.

How Much of the Loan is Forgiven?

Loan forgiveness for the amount spent during the eight weeks after the loan origination date on payroll costs, as well as mortgage interest, rent and utilities for which mortgages, leases or service that existed before February 15, 2020, is paid within 90 days of verification of satisfaction of terms.

The forgiveness amount is reduced proportionately to any reduction in workforce or pay cut of more than 25% of any employee making less than $100,000 per year when compared, in each case, to the year prior. Amount not forgiven will be a loan with interest fixed at 0.50% for a term of 2 years, with payments deferred for the first 6 months. Forgiveness amount is not taxable. The Treasury Department stated that it is likely that no more than 25% of the amount forgiven will be comprised of non-payroll costs.

Key Notables:

The loans can be made through June 30th, 2020, and are 100% guaranteed by the US Government. No fees by SBA but lenders charge a fee up to 5% depending on the size of the loan. Deferred payments for up to 12 months.

Applications are open April 3, 2020 for small businesses and non-profits and April 10, 2020 for self-employed and independent contractors. Contact your lender for further details.

SBA Disaster Loan Program:

This is a true loan program administered through the SBA, not your local lender. The application is online at www.sba.gov/disaster.

These loans are subject to underwriting, acceptable credit scores, personal guarantees and, if loan is for over $25,000, collateral is also required. Loans will have a fixed rate for 30 year terms of 3.75% for businesses. Payments are able to be deferred for the first 12 months. Businesses may qualify for up to a $2 million loan.

For most businesses, the maximum loan amount will be limited to 50% of gross profit from the last completed fiscal year, as evidenced by the prior year’s tax returns. If a business needs more than $500,000, additional documentation will be required.

These loans are intended as a means of providing working capital for things that are included in the PPP program, as well as materials, supplies, debt payment and other costs of operation. You cannot recover for the same items under both the PPP program and this program, however. As a rule of thumb, the expenses you can use these funds for are those that you were incurring over the past year, but not new expenses, such as renovations, capital purchases and expansion.

Some non-profits are eligible, but not all types are eligible.

Approval takes approximately one week with a target closing of 30 days.

Businesses should keep receipts and other suitable records of how they spent the proceeds for 3 years in the event they are audited by the SBA.

Allen & Gooch is providing this legal update for informational purposes only and is based on information available as of the date this document was prepared. It is anticipated that there will be changes as further information on these programs is provided by the SBA. We urge you to check back periodically for updates. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your an attorney concerning your particular situation and any specific legal questions you may have.

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.