Coronavirus emergency loans couldn’t come at a better time. And, with this legislation comes a lot of information to wade through. First, who is eligible? Second, what do lenders look for from borrowers? And, third, how much can a person borrow? The small business guide and checklist contain the information you need to know.
$350 Billion Allocated to Help Small Businesses
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic. Known as the Paycheck Protection Program, the initiative provides 100% federally guaranteed loans to small businesses.
Importantly, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. The administration will soon release more details. These details will include a list of lenders offering loans under the program. In the meantime, the U.S. Chamber of Commerce has issued this guide to help small businesses and self-employed individuals prepare to file for a loan.
Here are the questions you may be asking— and what you need to know.
Coronavirus Emergency Loan Questions
1. Am I Eligible?
You are eligible if you are:
- A small business with fewer than 500 employees
- A small business that otherwise meets the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- An individual who operates as a sole proprietor
- An individual who acts as an independent contractor
- A self-employed individual who regularly carries on any trade or business
- A Tribal business concern that meets the SBA size standard
- A 501(c)(19) Veterans Organization that meets the SBA size standard
Also, some special rules may make you eligible:
If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
- If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company, the standard affiliation rules do not apply.
- REMEMBER: The 500-employee threshold includes all employees: full-time, part-time, and any other status.
REMEMBER: The 500-employee threshold includes all employees: full-time, part-time, and any other status.
2. What will lenders LOOK FOR from borrowers?
In evaluating eligibility, lenders are directed to consider whether the borrower was in operation before February 15, 2020. They will also make sure those borrowers had employees for whom they paid salaries and payroll taxes or paid independent contractors.
Lenders will also ask you for a good faith certification that:
- The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations.
- The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments.
- The borrower does not have a duplicate application pending.
- From February 15, 2020, to December 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here. Note: There is an opportunity to fold emergency loans made between January 31, 2020, and the date this loan program becomes available into a new loan.
If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for specific documents. The government will announce final requirements such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.
What lenders will NOT LOOK FOR
- That the borrower sought and was unable to obtain credit elsewhere.
- A personal guarantee is not required for the loan.
- No collateral is required for the loan.
Coronavirus Emergency Loan Borrowing Amounts
3. How much can I BORROW?
It’s not as hard as it seems, but because time is of the essence, here’s a few calculations you’ll need to run.
Loans can be up to 2.5 x the borrower’s average monthly payroll costs, not to exceed $10 million.
NON SEASONAL EMPLOYERS: Maximum loan = 2.5 x Average total monthly payroll costs incurred during the year before the loan date. For businesses not operational in 2019: 2.5 x Average total monthly payroll costs incurred during January and February 2020.
SEASONAL EMPLOYERS: Maximum loan = 2.5 x Average total monthly payments for payroll costs for the 12 weeks beginning February 15, 2019, or March 1, 2019 (decided by the loan recipient) and ending June 30, 2019.
How do I calculate my average monthly PAYROLL COSTS?
Sum of INCLUDED (MINUS) Sum of EXCLUDED payroll costs (EQUALS) PAYROLL COSTS
INCLUDED PAYROLL COSTS
For Employers: The sum of payments of any compensation concerning employees that is a:
- Salary, wage, commission, or similar benefit
- Payment of cash tip or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation
- The payment required for the provisions of group health care benefits, including insurance premiums, of any retirement benefit, and payment of state or local tax assessed on the compensation of the employee
2. For Sole Proprietors Independent Contractors, and Self-Employed Individuals. The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment. Note, this includes similar compensation, and that is in an amount that is not more than $100,000 in one year, as prorated for the covered period.
EXCLUDED PAYROLL COSTS
- Compensation of an individual employee over an annual salary of $100,000, as prorated for the period February 15 to June 30, 2020.
- Payroll taxes, railroad retirement taxes, and income taxes.
- Any compensation of an employee whose principal place of residence is outside of the United States.
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Act.
4. Will this loan BE FORGIVEN?
Borrowers are eligible to have their loans forgiven. But, the devil is in the details. Let’s explore how this works.
A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the eight weeks beginning on the date of the origination of the loan:
- Payroll costs (using the same definition of payroll costs used to determine loan eligibility).
- Interest on the mortgage obligation incurred in the ordinary course of business.
- Rent on a leasing agreement.
- Payments on utilities (electricity, gas, water, transportation, telephone, or internet).
- For borrowers with tipped employees, additional wages paid to those employees.
Loan forgiveness cannot exceed the principal.
How could forgiveness be reduced?
The amount of loan forgiveness calculated above is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Specifically:
Reduction based on the reduction in the number of employees.
Payroll Cost x Average Number of Full-Time Equivalent Employees (FTEs) Per Month for the 8-Weeks Beginning on Loan Origination Divided By
Option 1: Average number of FTEs per Month from February 15, 2019, to June 30, 2019.
Option 2: Average number of FTEs per Month from January 1, 2020, to February 29, 2020.
For Seasonal Employers: Average number of FTEs per Month from February 15, 2019, to June 30, 2019.
Reduction based on a reduction in salaries.
Payroll Cost Minus For any employee who did not earn during any pay period in 2019 wages at an annualized rate of more than $100,000, the amount of any reduction in wages that is greater than 25% compared to their most recent full quarter.
What if I bring back employees or restore wages?
Reductions in employment or wages that occur during the period beginning on February 15, 2020. The ending date is 30 days after the enactment of the CARES Act. For example, as compared to February 15, 2020, and it shall not reduce the amount of loan forgiveness IF, by June 30, 2020, the borrower eliminates the reduction in employees or reduction in wages.
Coronavirus Emergency Loans – WHAT’S NEXT?
Look out for additional guidance from the SBA soon. For more advice and resources for small businesses, visit uschamber.com/co.