On April 3, 2020, the federal government unveiled the Paycheck Protection Plan (PPP), an undertaking intended to assist small businesses through the COVID-19 pandemic by providing them loans, and at the same time, incentivizing keeping employees on the payroll.
What Businesses Qualify for Loans?
The loans are available from existing SBA lenders to businesses with 500 or fewer employees starting April 3, 2020, although businesses with more than 500 employees in particular industries are potentially eligible if they meet the SBA’s size standards for those industries. Included are sole proprietorships, independent contractors, self-employed individuals (although they only can apply for loans beginning April 10, 2020), and private non-profit organizations or 501(c)(19) veterans organizations affected by COVID-19. Additionally, small businesses in the hospitality and food industry with multiple locations also might be eligible if their individual locations employ less than 500 employees.
Loan Terms and Forgiveness
The PPP loans are on a first-come, first-served basis in an amount up to two months of the average monthly payroll costs for 2019 with a $10 million cap. The interest rate is fixed at 1% for a two year term with all loan payments deferred for 6 month, though interest will continue to accrue over this period. There is no collateral or personal guarantees required and neither the government nor the lenders will charge small businesses any fees. Other terms and conditions of loans continue to be worked out between lenders and the government so it is recommended that employers continue to follow updates. So long as employees remain on the payroll for eight (8) weeks and the loan proceeds are used for payroll, rent, mortgage interest, or utilities, the SBA will forgive the loans. However, due to the likelihood of high subscription, at least 75% of the forgiven amount must have been used for payroll. If employers decrease the number of full-time employees, or decrease salaries and wages by over 25% for any employee making less than $100,000 annually in 2019, the amount of loan forgiveness will be reduced.
Basically, there is no real downside to receiving a loan through this program, but employers should be diligent in keeping accurate records of how loan proceeds are being spent over the term of the loan; specifically, the amount of the loan being used for the various payroll costs.
What Records Should Employers Collect to Apply for a Loan?
In order to seek a loan, employers should obtain records of: (i) their complete 2019 payroll; (ii) their 2019 independent contractor costs; (iii) their payroll report as of February 15, 2019 or closest date thereafter; (iv) four 2019 quarterly 941 payroll returns; (v) twelve monthly payroll summaries by employee and company totals for April 2019 through March 2020; (vi) proof of health insurance premiums and retirement plan contributions paid by the company from April 2019 through March 2020; and (vii) a fully initialed and signed federal PPP loan application.
The information provided in this alert was up-to-date at the time of publication, is provided for general purposes only and does not constitute legal advice, and the transmission and receipt of this information does not create or constitute an attorney-client relationship.