Updated 4/24, 1:00pm EST
Update: Congress has allocated an additional $310 billion to replenish the SBA’s Paycheck Protection Program effective 4/24. This can be accessed through the same banks as the prior round of funding. In some cases, banks are approving and funding applications received during the prior round and in other cases businesses need to reapply. Businesses should follow up with their bank to confirm.
As part of the Industrious COVID-19 response program, Continuous, we’ve compiled a list of resources to help businesses navigate assistance programs that may be available to them.
On Friday March 27, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion economic stimulus package that includes assistance programs designed for American businesses. We’ve updated this content as of April 3, to reflect both the Treasury guidance issued March 31 and the Treasury guidance issued April 2. While the CARES Act is the largest stimulus package in US history, many speculate that additional business relief will be required. We will continue to monitor for any additional assistance that the Federal government makes available to businesses, for more information please refer to our government assistance page.
The following information is intended to serve only as a starting point. As always, you should consult with your advisors, supplement the below with your own research and treat it as subject to change with further clarification from Treasury, SBA and banks.
Paycheck Protection Program Loans
Applications for the loan will go live on Friday, April 3rd for small businesses and sole proprietorships and on Friday, April 10 for independent contractors and self-employed individuals. Note that some banks have announced that they will not open applications until after April 3rd, to ensure that they are properly set up to administer the loans. Applications will be open until June 30, though we encourage you to apply as quickly as possible because there is a funding cap. For small businesses, these loans are likely going to be the fastest form of financial assistance in the CARES Act.
Only you and your advisors can make the decision whether to apply for the Paycheck Protection Program loans, but if you anticipate your business running into cash flow issues over the coming months, then these loans could be a good option to consider. Here are the basics:
- $349 billion is available to small businesses.
- 1% fixed interest rate initially that may rise (capped at 4%).
- No loan payments required until 6 months from the loan issue date.
- Loan will need to be paid back in 2 years.
- No personal guarantees required, no requirement to prove that you cannot obtain credit elsewhere, and will be low fee.
- Most importantly, a portion of this loan could be forgiven by the government if you retain your staff and use the funds toward covered purposes – in this sense, this is essentially a grant, from the government to your business.
Eligibility: The law is intended to impact as many companies as possible, so there are relatively few restrictions regarding eligibility. What we know:
- You must be a business with less than 500 employees.
- You must have business expenses that are covered by the loan (these including payroll, rent, mortgages, utilities, and debt obligations. These obligations must have been made before February 15th so anything signed after February 15th would not be considered an eligible expense).
Employees of affiliated businesses might be counted in your total employee count if these affiliates are deemed to control your business by the SBA, which may make companies backed by PE funds or VC investors ineligible. If this is a concern for your business, we recommend that you speak with your advisors and consult additional information. One resource we found helpful on the SBA site is linked here, and the SBA might issue further guidance on this issue.
Total loan amount: the loan size that your business is eligible for is equal to two times your average monthly payroll costs from the last year plus an additional 25% to cover other eligible expenses (based on the March 31 Treasury Guidance). The maximum loan amount is $10 million. Payroll costs include:
- Salary, wages, commissions, or tips capped at $100,000 annually per employee. This excludes compensation of any employees whose principal place of residence is outside of the United States, and excludes independent contractors.
- Cost of employee benefits including costs of vacation, parental, family, medical, or sick leave
- Cost of group health care and retirement benefits
- State and local taxes assessed on compensation.
Here are instructions on how to calculate your total loan amount from the SBA guidance.
- Step 1: Aggregate payroll costs (per from the last twelve months for employees whose principal place of residence is the United States).
- Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
- Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
- Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
- Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
The government will forgive a portion of the loan equal to payroll costs, mortgages, rent and utilities for the eight weeks following loan origination if you retain your workforce. How this will work:
- When the loan is due, you’ll owe anything above and beyond what you spent on payroll, mortgage interest, rent and utilities for the 8 weeks after getting the loan. However, 75% of that must be payroll expenses.
- This forgiven amount will be decreased proportionately to any headcount reductions you make that are not reversed before June 30. Current headcount will be compared to the average number of people employed for each pay period over the last 12 calendar months, regardless of hours worked or temporary status. This calculation is different for new and seasonal businesses.
- Additionally, it will be decreased dollar for dollar by any salary decrease greater than a 25% reduction in compensation for employees that make up to $100,000.
How the application will work: Businesses will be able to apply for these loans through approved SBA lenders beginning on April 3rd, 2020 (the application form is available here). Many commercial banks are already approved SBA lenders, including ones that you might work with already for bank accounts or credit cards. Please note that some approved SBA lenders have not yet decided if they will be accepting new customers or simply servicing existing customers (our belief is that they will but will start with existing customers. So, applying via your existing bank if they are an approved SBA lender already may be the best place to start, but we recommend consulting your advisors to make this determination.). In addition to existing approved SBA lenders, the SBA has indicated that it is working to approve new banks in order to speed up loan deployments. This program increases the normal SBA loan program ten-fold, and demand will be high for these loans. Banks are aggressively working to digitize as much of the process as possible, and, as mentioned, the SBA Secretary is going to expedite both the addition of new lenders and other enhancements to the loan process. We encourage you to consult with your own advisors before making an application, and for more detailed information to refer to our Resources for Applying blog post.
In addition to your application, banks may require businesses to self-certify their eligibility (i.e., that they meet the criteria for these loans). You will have to determine eligibility with your advisors, including your counsel, and sign a document verifying that you’re eligible, which will be subject to audit later. Below is what you will need to certify:
- The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors.
- The loan is necessary to support business continuity given economic uncertainty.
- You’ll use the funds to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
- You have not and will not receive another loan under this program.
- Information you have provided in the application and supporting documents is accurate.
- You affirm that the tax documents are identical to those you submitted to the IRS, and acknowledge that these can be shared with the SBA.
How to request loan forgiveness: Submit a request to your lender including documentation of the number of full-time equivalent employees on payroll and payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting the loan. You’ll need to certify that you’re using the funds for eligible expenses and to retain employees. The lender must make a decision on the forgiveness within 60 days.
The government is working to get funds out as quickly as possible, but given confusion around key provisions, the scale of the program and limited bank direction to date, the exact timeline is still evolving. What we know:
- Businesses will be able to apply for loans beginning April 3rd, 2020 with some existing SBA lenders. Other lenders will likely come online later, including new SBA lenders.
- The loan officer review of applications could be as quick as the same day, according to the Treasury department. Note that some banks have cited issues with meeting this timeline.
- Decision will be made on your application, and sign the loan closing documents if approved.
What should I do if I’m interested in applying?
If you’re ready to apply, we recommend consulting your advisors and reviewing our Resources for Applying blog post.
If you’re considering applying, here are a few recommended next steps. Note that access to the funds is first come first serve, so we recommend making a determination of what is right for your business as soon as possible.
- Connect with your financial and legal advisors to discuss your eligibility and whether this assistance will benefit your business, and prepare to self-certify.
- Get in touch with your existing bank to confirm if they are an approved SBA lender (note that many have built robust resource pages online, as branches are closed and phone wait times are long), and if so when they have or will be beginning to take applications.
- Review the application and begin to prepare: financial information, payroll documentation (costs and employees by month), required IRS filings (including Form 1099-MISC), and the certification required above.
- Get in touch with the insurer for your business, if you have one, to confirm if you have any coverage for business interruption.
- Get informed. Links to key resources are below.
- Visit the SBA website as well as your local SBA page (as these pages will include state-level funding, as well as Payment Protection Program information. You can find your local SBA here.)
What other assistance to businesses is available
The CARES Act includes a number of other provisions that are of interest to businesses:
- $27 billion in funding for emergency grants, to aid in servicing existing SBA loans.
Tax relief and write-offs are available to businesses, including the deferral of certain payroll tax payments until 2021.
- $454 billion is set aside for business relief through the Treasury department. Note, the process to obtain these funds and eligibility is more opaque than the process to obtain the SBA loans. Much of this fund is allocated to specific industries such as airlines. In addition to industry-specific funds, one program to obtain this funding will be the mid-sized company loan program, for those with 500-10,000 employees, to get low-interest (less than 2%) loans, with no payments due for six months. These loans do have some restrictions – you must retain 90% of your workforce, and there are limitations after you’ve received the loan requiring companies to not offshore jobs, and restrictions around collective bargaining and union activities. A second program will be the Main Street Lending Program, details of which are not known, but are expected to target small and medium-sized businesses. Other programs might be launched as well, and the Treasury should be providing further guidance on many of its programs by April 6th. If you are curious to learn more you should discuss with your financial advisor.
Links that we found helpful (but are not affiliated with and have not verified):