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COVID-19: What you need to know about the federal Small Business Administration loans available under the CARES Act’s Paycheck Protection Program

By: Laurie A. McCarthy, Esquire

What’s the purpose?

  • To provide small businesses with an incentive to keep their workers on the payroll during this COVID-19 crisis.

Who can apply?

  • All businesses–including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors–with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.

When can you apply?

  • The program is open from April 3, 2020 until June 30, 2020. There is a funding cap and lenders need time to process loans so you should apply as quickly as you can. 
    • Starting on April 3, 2020 – Small businesses and sole proprietorships can apply
    • Starting on April 10, 2020, independent contractors and self-employed individuals can apply

How much can you borrow?

  • Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.

What can you use the loan for?

  • You should use the proceeds from these loans on your:
    • Payroll costs, including benefits;
    • Interest on mortgage obligations, incurred before February 15, 2020;
    • Rent, under lease agreements in force before February 15, 2020; and 
    • Utilities, for which service began before February 15, 2020.

What qualifies as payroll costs?

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
  • State and local taxes assessed on compensation; and
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

How much of the loan will be forgiven?

  • SBA will forgive the loan if:
    • the loan proceeds are used to cover payroll costs, mortgage interest, rent and utility costs for the 8 week period after the loan is made; and  
    • employee and compensation levels are maintained.
  • You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. (Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.)
  • You will also owe money if you do not maintain your staff and payroll.
    • Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
    • Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.     
    • Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.  

How do you request loan forgiveness?

You can submit a request to the lender that is servicing the loan.

  • The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.
  • You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.
  • The lender must make a decision on the forgiveness within 60 days.

What is the interest rate?

  • 1% fixed rate

When is the loan due?

  • In 2 years
  • All payments are deferred for the first 6 months
  • There is no prepayment penalty
  • No collateral is required
  • No personal guarantee required

Where can you apply?

  • You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.

What do you need to apply?

  • You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click on the link for the application. https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
  • You will need to provide your lender with payroll documentation
  • As part of your application, you will need to certify in good faith that:
    • Current economic uncertainty makes the loan necessary to support your ongoing operations.
    • The funds will be used 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.
    • You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
    • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities.  Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount maybe for non-payroll costs.
    • All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.
    • You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS.  And you also understand, acknowledge ,and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews

Do you need to look for other funds before applying?

  • No. The usual SBA requirement that you try to obtain some or all of the loan funds from other sources is waived.

The Law Firm of DiOrio & Sereni, LLP is a full-service law firm in Media, Delaware County, Pennsylvania. We strive to help people, businesses and institutions throughout Southeastern Pennsylvania solve legal problems – and even prevent legal problems before they occur.  To learn more about the full range of our specific practice areas, please visit www.dioriosereni.com or contact Laurie A. McCarthy, Esquire at 610-565-5700 or at [email protected]

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