As part of our ongoing effort to aid your business in navigating these uncertain times, below is part 2 of our newsletter series with FAQs relating to potential relief programs for small businesses under the recently passed CARES Act.
1. Does My Business Qualify for the Paycheck Protection
A small business may apply for a Paycheck Protection Program Loan (“PPP Loan”) through June 30, 2020. The CARES Act specifically provides that each loan is nonrecourse to the shareholders, members and partners of the borrowing business. The loan is available to businesses with less than 500 employees, including 501(c)(3) charities (although not all 501(c) entities are eligible). The loan is guaranteed by the SBA and small businesses may apply for the loan through SBA approved banks. A business may qualify for a loan up to a maximum of $10,000,000 or 2.5 times the average monthly gross payroll (whichever is less), which amount includes all payroll taxes, employer-paid medical benefits, and profit sharing. When calculating monthly payroll, remember that higher compensated employees are capped at $100,000 annually.
The loan may only be used to cover the following expenses: 1) payroll; 2) employer group health care benefits; 3) interest on mortgage obligations; 4) rent; 5) utilities; and 6) interest on other debt incurred before February 15, 2020.
2. If My Business Furloughs or Layoffs Employees Does That
Affect the PPP Loan Forgiveness?
Yes, laying off employees will impact forgiveness. First, it is important to know that the PPP Loan may be forgiven in whole, or in part, as long as the funds are used for a forgivable purpose, as stated above and certain levels of employment and employee compensation are maintained. The business will have to document and prove that the proceeds were used for the allowable expenses as stated above. However, the SBA has clarified that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
Next, it is important to remember that employment and compensation levels will be a significant factor in the rate of forgiveness of the loan. The amount of forgiveness for the loans will be reduced if the business reduces its workforce or reduces the salary or wages paid to an employee by more than 25%, during the eight weeks after the origination of the loan as compared to prior periods. In other words, layoffs of your employees will reduce the amount of loan forgiveness, as well as reducing salaries by more than 25%. However, these reductions may be avoided if the employees are rehired and the salaries are reinstated no later than June 30, 2020.
3. Are There Any Other Resources for Distressed Businesses
Due to the Coronavirus Pandemic?
The CARES Act also expanded the availability of the Economic Injury Disaster Loans (“EIDLs”) to help overcome the temporary loss of revenue experienced as a result of the pandemic. The loan is available in an amount up to $2,000,000. These loans are directly from the Treasury, not from the bank. However they are SBA loans, subject to restrictions, such requiring that the business have fewer than 500 employees, with revenue that does not exceed certain caps. These loans also may be available to 501(c) entities that would not be eligible for the PPP Loans.
Loan funds can be used to pay most current expenses, such as fixed debts, payroll, accounts payable, employee sick leave, and other bills that cannot be paid due to the disaster’s impact.
The funds may not be used for things such as refinancing debts incurred prior to the disaster, paying off other loans, tax penalties, repairing physical damage, or dividends and other disbursements to owners or partners except as related to their performance of service for the business.
The loans are intended to have a 30-year term and an interest rate of about 3.75%. The interest rate will be less if the business is non-profit.
A business can apply for the loan now and later decide not to take it. At the time of the application, the applicant will be asked if it would like an initial $10,000 directly deposited immediately. If so, the money will be wired into the applicant’s account within 72 hours. The applicant can keep the $10,000 grant even if the loan application is denied. The SBA has confirmed that this grant does not have to be repaid. However, the real amount available to businesses remains unclear as the SBA has stated that the amount would be “based on the number of pre-disaster employees,” with no further guidance.
There remains much uncertainty, but we are hopeful that the federal agencies overseeing these programs will provide clarity in the near future.
RPNA attorneys Drew E. Pomerance, Gary A. Nye, Michael B. Adreani, and Trevor R. Witt are available to answer these questions and help you through these difficult times, and can be contacted at (818) 992-9999.