Spent the day understanding the Paycheck Protection Plan (PPP) portion of the CARES Act stimulus bill and wrote this as simply as possible. Here’s a FAQ for startups and small businesses which are hurting, but not badly enough to qualify for SBA disaster loan. Corrections welcome!
Q: What is this document?
A: This is a short summary of the Paycheck Protection Plan (PPP) program that was just included in the CARES Act (Coronavirus Aid, Relief, and Economic Security Act”) passed on Friday, March 27th, 2020.
Here’s the FAQ that was published by the Treasury.
Q: What is the Paycheck Protection Plan?
A: The plan is a forgivable loan program from the federal government for small businesses affected by the Coronavirus crisis.
Q: Why is this interesting?
A: While this program is structured as a loan, it functions in practice more like a grant provided the small business follows certain reasonable restrictions.
Q: Who is the PPP for?
A: Any business concern, nonprofit organization, veterans organization, or Tribal business concern that employs not more than the greater of 500 employees in most cases. Note there are exceptions in the law for organizations with more employees as defined by the SBA and those with more than one location. Anyone working full-time, part-time or other basis is counted as an employee under this program.
Q: Do sole proprietors qualify?
A: Yes. The detail on that is in the bill.
Q: How much can a business get?
A: For businesses that were in business for all of 2019, the lesser of:
- The average total monthly payments by the applicant for payroll costs (salaries, wages, cash tip equivalents, separation payments, payroll taxes, retirement benefits, and healthcare) incurred during the 1-year period before the date on which the loan is made MULTIPLIED by 2.5
In plain language, the maximum borrowing amount is 2.5x average monthly wages from 2019.
Note that annual compensation for employees in excess of $100,000 is not included in this payroll computation but the first $100,000 is.
There are other computations for seasonal businesses or ones that did not have a full year of operation in 2019. There are some exceptions around things like medical leave. These are covered in the bill text. Employees that reside outside of the US principally do not qualify.
Q: What can a business use the money for?
A: During the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for—
- ‘‘(I) payroll costs;
- ‘‘(II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- ‘‘(III) employee salaries, commissions, or similar compensations;
- ‘‘(IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- ‘‘(V) rent (including rent under a lease agreement);
- ‘‘(VI) utilities; and
- ‘‘(VII) interest on any other debt obligations that were incurred before the covered period.
Q: Which parts of that can be forgiven?
A: An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made:
- (1) Payroll costs.
- (2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
- (3) Any payment on any covered rent obligation.
- (4) Any covered utility payment.
The forgiveness can be up to the total amount of the original principal of the loan.
Q: What strings are attached?
A: Loan forgiveness is tied to keeping your average number of employees consistent with the period of February 15, 2019, to June 30, 2019. The same goes for wage reductions above 25%. Reduce your employees or wages year over year and the forgiveness amount gets reduced.
Your business will also need to document and certify that the money was spent correctly to get the loan forgiven.
75% or more of the money must be used for payroll expenses in order to be forgiven.
Q: When do you need to spend the money to qualify for it to be forgiven?
A: The money needs to be spent in the 8-week period after the loan is originated in order to be forgiven.
Q: What happens if I don’t spend the money on the approved uses?
A: You have to pay it back plus interest.
Q: Who administers it?
A: The program is administered by the Small Business Administration. Unlike other SBA disaster loan programs, the “retail” application of this is done through local SBA-certified banks and bankers.
Q: What businesses qualify?
A: Businesses that make a good faith certification that:
- “‘(I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
- ‘‘(II) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- The business does not have another loan in place or pending for the same purpose and amount under this program
Q: I am a VC-backed startup. I heard the affiliation rules will keep my business from qualifying?
A: Possibly. The bill is vague on this issue. The original idea of SBA rules is to keep one person from creating structures to take advantage by getting multiple loans.
The politicians speaking about it are (1) making sure during rulemaking process SBA is doing now that VC backed companies aren’t excluded and (2) even still you may be OK just given the current rules for SBA loans.
In either case, startups will very likely be OK and it’s worth applying.
Q: How does the loan forgiveness work?
A: As long as the money is used during the period for the correct type of expenses, the loan should be forgiven. Any portion of the loan not forgiven will have to be repaid with interest, however.
Q: I see information about employees making more than $100,000 are excluded. What exactly does that mean?
A: The bill is a bit confusing in this area. Most people reading it have told me that it’s the “amount in excess of $100,000” is excluded from the loan amount and forgiveness.
Q: What is the interest rate?
A: No higher than 4%. Note: Treasury on 4/2/20 set the interest rate at 1%.
Q: Other SBA loans require a business to show it can’t get credit elsewhere. Does that impact this?
A: No. To quality, businesses are not required to demonstrate an inability to obtain credit elsewhere.
Q: When do repayments start?
A: By definition, the borrower under the PPP is defined as an “impacted borrower.” This means lenders will give total payment deferrment for these loans for no less than 6 months and no more than 1 year.
Q: What are the tax ramifications?
A: Forgiveness of the loan is NOT counted as income. Provided your company spends the money on the approved uses during the time period required, it is not taxable income when the loan is forgiven.
Q: Does this require a personal guarantee or collateral?
Q: How much money is available?
A: $349 billion under this program.
Q: How do you get the process started?
A: If your company already has a banking relationship, contact your banker. Given the suddenness of this act and disaster, it’s likely they are overwhelmed or soon will be. However, it’s important to talk to them right now because there is limited money in this program.
If your company doesn’t already have a banking relationship as a borrower, start with the bank where you have your bank accounts. Most will be SBA lenders.
Q: Where can you find the text of the CARES Act?
A: Here is the actual House Bill online.
The Senate also published a FAQ on the CARES Act which has a bit more jargon than this one.