Preparing for CARES: Businesses line up for Paycheck Protection Program loans
Forgivable loans available to small companies that keep, rehire employeesApril 9th, 2020
Spokane-area small-business owners are looking into taking advantage of aid offered to them through the CARES Act, says Sheryl McGrath, Spokane-based associate state director of the Washington Small Business Development Center.
McGrath says most Spokane businesses are small enough—fewer than 500 employees—to qualify for assistance the federal government is offering through programs established by the CARES Act, which is short for the Coronavirus Aid, Relief, and Economic Security Act.
“There is such a focus on the CARES Act assisting small businesses because that … is the bulk of our economic ecosystem,” McGrath says.
McGrath says her office has received hundreds of calls from small-business owners who are interested in the relief the federal government is offering, which was made available beginning April 3.
One of the most robust measures provided for small businesses through the CARES Act is the paycheck protection program, according to Joseph Lynyak, partner at Minneapolis-based law firm Dorsey & Whitney LLP, who led a webcast regarding the act on Monday, March 30.
The paycheck protection program allows some small businesses to qualify for forgivable Small Business Administration loans, which can be used for payroll costs, medical or family leave costs, insurance premiums, and mortgage or rent payments.
It’s part of the $2.2 trillion CARES Act—the largest aid package in U.S. history—which President Trump signed into law on Friday, March 27. Much of the package includes relief for small businesses that have experienced significant disruption as a result of COVID-19, including forgivable loans and tax-deferral options.
The maximum amount a business can receive is the lesser of two options: either $10 million, or an amount equal to 250% of average monthly payroll costs, Lynyak says. The loan funds are intended to cover eight weeks of payroll expenses and any additional amounts for making payments toward debts.
However, whether the loan can be forgiven depends on whether a business owner has kept all employees, says John ReVeal, an attorney with the K&L Gates LLP law firm, who serves as Greater Spokane Incorporated’s lobbyist in Washington, D.C.
Loan forgiveness is based on salary costs during the recovery period, ReVeal says.
“The purpose of the law, in large part, is to keep folks employed and not have their salary cut,” he says.
ReVeal says many employers have laid off employees, and others that have not laid off employees have stopped paying them. But if those employees are rehired and their salaries are reinstated to pre-COVID-19 levels, the companies are eligible for loan forgiveness.
“The law says bring them back, and get their salary back to what it was by June 30, then the loans we’ve given you are forgiven, because you’re taking care of people making less than $100,000 a year,” ReVeal says. “The whole program is to try to bring them back. It’s not that you can’t fire people; it’s just that if you do, your loan is not going to be forgiven.”
For any amounts not forgiven, the maximum term of a loan through the program is 10 years, with a maximum interest rate of 4%, he says.
Qualifying small businesses include businesses that have fewer than 500 employees. That includes qualified nonprofit and veterans’ organizations and certain tribal business concerns.
Lynyak says some self-employed people and business owners who operate under a sole proprietorship or as an independent contractor also qualify for the program. The program doesn’t cover pay for employees or owners who receive more than $100,000 in annual compensation.
Borrowers who take advantage of the program are eligible for forgiveness of an amount equal to the principal. That can include costs and payments of payroll, payment of interest on any covered mortgage or rent obligation, and any covered utility payment.
The CARES Act also makes some temporary changes to emergency Economic Injury Disaster Loans. Cooperatives, tribal businesses, covered employee stock ownerships, independent contractors, and sole proprietors are eligible under the program.
McGrath says it’s important for small-business owners to have a firm grasp on their finances before applying for one of the loans.
Personal guarantee requirements for advances and loans under $200,000 are eliminated, as is the Economic Injury Disaster Loan credit-elsewhere provision, which requires borrowers to prove that they could not get credit from a different source.
Until Dec. 31, the CARES Act allows the Small Business Administration to approve such loans based solely on an applicant’s credit score. Borrowers that have applied for a loan can request an advance of up to $10,000 on the loan.
“Before you apply for these emergency funds, make sure you’ve got your financial statements in order, know what your credit score is, make sure you’ve already talked to your lenders and your bankers, so you’re prepared,” McGrath says.
Lynyak says the CARES Act appropriates $17 billion for subsidies for certain loan payments. The SBA is required to pay the principal, interest, and associated fees for six months on existing 7(a), 504, Community Advantage program, and microloans. The CARES Act also requires the SBA to encourage lenders to provide deferments.
The Act also raises the eligibility threshold for businesses that are filing Chapter 11 bankruptcy protection to $7.5 million from $2.7 million.
Under the CARES Act, employers can defer payment on Social Security taxes through 2020; half of the deferred taxes must be paid by the end of 2021, and the other half by the end of 2022, Lynyak says.
Employers forced to suspend operations because of COVID-19 and those experiencing a significant decline in gross receipts due to the pandemic also are allowed a maximum of $5,000 in refundable credit against applicable employment taxes, he says.
Additionally, the CARES Act funds entrepreneurial development. The Small Business Administration has been authorized to grant funding to Small Business Development Centers and Women’s Business Centers to provide technical training, counseling, and education to small business owners who need resources related to the pandemic, Lynyak says.
McGrath says the funding will help her office provide training programs, webinars, and business advice.
“We are going to be able to provide … one-on-one business advising and the training for businesses not only to deal with cash flow issues, reducing expenses, and reducing staffing, but also to provide assistance for those businesses that are thriving as a result of ancillary needs in communities,” McGrath says.
McGrath cautions, however, that formal regulations haven’t been issued yet. Those regulations are expected to be released by mid-April.