Latimer LeVay Fyock, LLCLatimer LeVay Fyock, LLC

Paycheck Protection Program Loans Available For Small Businesses

Paycheck Protection Program Loans Available For Small Businesses, Including Sole Proprietors, Independent Contractors, and Self-Employed Individuals

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, recently signed into law, establishes several programs and resources designed to support small businesses impacted by COVID-19. One of these, the Paycheck Protection Program (PPP), sets aside almost $350 billion in funds for emergency Small Business Association (SBA) loans to qualifying businesses, including sole proprietorships, independent contractors, and self-employed persons.

These loans, which lenders can begin processing as soon as Friday, April 3, can help small business owners cover payroll for their workforce as well as pay other operational costs such as rent, mortgage payments, and utilities. Importantly, some or all of the loan may be forgiven when a business uses the proceeds for paycheck continuity to the company’s employees. Loan payments will also be deferred for six months, and business owners will not need to provide any collateral or personal guarantees to qualify.

If your small business needs financial assistance during this challenging time, here is what you need to know about obtaining critical funds through the Paycheck Protection Program:

Applying for a Paycheck Protection Program Loan

Complete the SBA PPP Application Form to begin the process. You should also be ready to provide documentation verifying the number of full-time equivalent employees on your payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following the loan.

You can then apply for a PPP loan at any existing SBA 7(a) lender, through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating, as well as at any additional lenders approved by the U.S. Department of the Treasury.

Contact your bank to see if they are participating in the PPP loan program. You can also find SBA-approved lenders in your area through SBA’s online Lender Match tool.

Eligible businesses can apply for a PPP loan until June 30, 2020.

Businesses Eligible For PPP Loans

If you are a small business that employs 500 or fewer employees, you are potentially eligible for a PPP loan. Companies with more than 500 employees may also qualify if the borrower is in an industry that has an employee-based size standard through SBA that is higher than 500 employees.

Additionally, eligible borrowers include:

  • Restaurants, hotels, or businesses that fall within the North American Industry Classification System (NAICS) code 72, “Accommodation and Food Services,” so long as each of the borrower’s locations has 500 employees or fewer
  • Independent contractors
  • Self-employed individuals
  • Sole proprietorships
  • Gig workers
  • Tribal businesses
  • 501(c)(19) veteran organizations
  • 501(c)(3) nonprofits, including religious organizations, subject to SBA’s affiliation standards
  • SBA-approved independently owned franchises with under 500 employees.

PPP Loan Amounts

The total amount any small business may borrow is 2.5 times its average monthly payroll costs incurred during the one-year period prior to the loan date, up to a maximum of $10 million. For businesses that were not operational in 2019, they can borrow up to 2.5 times their average total monthly payroll costs incurred for January and February 2020.

These funds are intended to cover eight weeks of payroll expenses and any additional amounts needed to make payments towards debt and certain other specified obligations.

Calculating Payroll Costs

For purposes of determining PPP loan amounts, payroll costs for employers include:

  • Salaries
  • Wages
  • Commissions
  • Tips
  • Paid time off
  • Health insurance premiums,
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowances for dismissal or separation
  • Payment of any retirement benefits
  • Payment of state or local tax assessed on the compensation of employees
  • retirement benefits and local employment taxes for U.S.-based service providers, capped at $100,000 annualized paid to such service provider. 

Payroll costs do NOT include compensation to employees residing outside the U.S. and qualified sick leave and family leave wages that are creditable under the Families First Coronavirus Response Act.

For self-employed individuals, sole proprietors, and independent contractors, payroll costs equal the sum of payments of any compensation to or income that is a wage, commission, income, net earnings from self-employment, or similar compensation and  is in an amount that is $100,000 or less in one year, pro-rated for the covered period.

Loan Forgiveness

A company receiving a loan will have the amount of potential forgiveness of the loan reduced if the company does not maintain the same number of employees or reduces its employees’ compensation during the covered period, as discussed below. It is important to calculate the percentage of forgiveness that a company can receive – up to 100% if the number of employees and their compensation remains consistent – before assuming that the loan will be completely forgiven.

In addition, the amount of loan principal eligible for forgiveness is equal to the amount of proceeds used during the eight-week period beginning on the loan origination date for:

  • payroll costs
  • existing interest payments on mortgages
  • rent payments
  • utility payments
  • For businesses with tipped employees, additional wages paid to those employees

While you can use the Paycheck Protection Program loan for other business-related expenses, including inventory, such portions of the loan will not be forgiven. The SBA further instructs that 75% of the forgiven amount must have been used exclusively for payroll. As noted above, if a business reduces the number of employees (or their compensation) during the covered period of the loan, the amount of forgiveness the business could receive will be commensurately reduced.

Forgiveness, if applicable, will be received at the end of the eight-week period after you borrow the proceeds. Borrowers must work with their lenders to verify covered expenses and determine the proper amount of forgiveness.  As noted above, while business owners can use PPP loan proceeds for a range of business-related expenses, forgiveness is only available for those funds used for payroll expenses, and existing interest, rent, lease, and utility payments, and forgiveness is reduced by reductions in number of employees and/or their compensation.

The covered period during which incurred expenses are eligible for forgiveness extends from February 15, 2020 to June 30, 2020. Borrowers can choose which eight weeks within that period they want to count towards the covered period, which can start as early as February 15, 2020.

Retention and Layoff of Employees

The underlying purpose of the Paycheck Protection Program is to help borrowers retain employees at their current base pay during the current crisis. If a borrower keeps all of its employees and does not reduce their compensation more than 25%, the entire loan may be forgiven if used for the above-described purposes.  There is no requirement that the employer have actual work for the employees to perform in order to pay them.

If the borrower does lay off employees, the forgiveness will be reduced by the percent decrease in the number of employees compared to the prior year’s headcount. The lender will further reduce the forgiveness by the amount of any reduction in total salary or wages of any employee making less than $100,000 annually during the covered period that is more than 25% of the total salary or wages for that employee during the most recent full quarter during which the employee was employed before the covered period. If your business has already laid off some employees, you can still be forgiven for the total amount of your payroll costs if you rehire your employees by June 30, 2020.

Interest Rates and Terms On Unforgiven Loan Amounts

If the full principal of your PPP loan is forgiven, you are not responsible for the interest accrued during the covered eight-week period.

The terms agreed upon by the lender and borrower will govern interest on any unforgiven portion of the loan. However, PPP loans have a maximum 10-year term, a four percent interest cap, and a 100 percent SBA loan guarantee. The SBA currently has the maturity set at 2 years and interest at .5%.

Additionally, there are no loan fees, either from the government or the lender, and the SBA is waiving any collateral and personal guarantee requirements. Borrowers will be able to defer loan payments for at least six months, and up to one year, from the loan origination date.

We’re Here For Your Small Business During These Challenging Times

This crisis is both unprecedented and unpredictable. We know the worry and uncertainty the pandemic is causing for business owners and their employees alike. Throughout this period, the lawyers of LLF remain committed to helping our small business clients navigate these uncharted waters and obtain the financial assistance they need to weather the storm.

If you have questions about or need assistance with a Paycheck Protection Program loan, please contact us.