What the loans will look like, and who is eligible.
President Donald Trump signed the CARES Act into law which includes the Paycheck Protection Program. It has become the law of the land. The Township Committee has been following Stimulus Program developments throughout the approval process. We have outlined some of the more salient provisions of this law which should benefit not only our town’s businesses but their employees also. All in all, we believe this law has the potential to save many businesses and jobs in our community, but it is not without some difficulty… common to any new government program. As there have been several versions of the bill prior to approval, confusion as to what is law and what was in earlier versions is common.
We have tried to unravel some of the features of this approved program. As clarity around the program grows, we will update this information provided. Please understand we are not lawyers, tax advisors or SBA experts by any measure. Our data is based upon the text of the executed law. Again, we are not lawyers, tax or SBA experts and the regulations surrounding this program are yet to be written. Our objective is to bring awareness to this unique program and its short life span.
First…what is the Paycheck Protection Program? It is part of the stimulus program designed to keep our economy strong while the COVID-19 issue remains. The program is funded at $349 billion through the end of 2020. The program is intended to provide working capital to businesses, non-profits [501 (c)(3)], as well as sole proprietorships, independent contractors, and self-employed people.
Second…how does a business get a loan from this program and how much money will it qualify to borrow? Who is eligible? To qualify for a loan under this program a business must have had a payroll on February 15, 2020. That is the first qualifier for a loan. The intent of the program is to provide 2.5 times the monthly payroll costs for businesses that are eligible. The loans may be up to $10 million; most loans will be much smaller amounts. Unlike a typical bank loan, the amount of the loan is NOT driven by the businesses’ ability to repay the loan. Here is where this program begins its uniqueness. A business may borrow up to 2.5 times its monthly payroll including its insurance premium costs and or medical leave or sick pay tendered to its employees. It even covers the lost tips from tipped employees for advances. The loan will also cover all utility payments for a prescribed period, interest on a mortgage for a business facility for that period and/or rent. The prescribed period is generally February 15,2020 until June 30, 2020. Be very aware that any lender will be requiring proof of the costs incurred during this period for which you seek a loan under this program. The SBA will require this certification.
Third…what to expect while requesting a Paycheck Protection Loan…You will not be asked to prove you can repay the loan …you are reading this information correctly. These loans are being made to re-start the economy and aid small businesses to do so. As a business owner you will be asked to “good faith” certify that this loan is needed as a result of the COVID-19 crisis. You may only use the funds to pay employees, their insurance costs, utility payments, lease payments and or your mortgage. No other uses of funds are acceptable.
Fourth…this is not an SBA 7(a) loan. All borrower fees have been waived under this program…so do not agree to pay any banking fees for placement of this loan. In the SBA 7(a) program, businesses are asked for collateral to support the loan amount. In this program, that is not the case. Read above as to the basis for loan amounts, no collateral is being requested. Personal guarantees are not required under this program. All “credit tests” are waived.
Fifth…loan terms…the maximum interest rate in the bill states 4%. However, the language is ambiguous regarding the maximum rate being 4% or the maximum allowed on an SBA 7(a) loan. Price should not deter a business from seeking this loan. The longest term of the loan is 10 years.
Last and without question the most unique aspect of this loan…these loans will be forgiven on 12/31/20 for those businesses who request Forgiveness from the Lender/Treasury! Okay…we are not kidding ….Yes… you can borrow money to re-start your business and not pay it back if you execute the re-start of your business… To have your loan forgiven in December, you will need to sustain your payroll and stay in business. Of course, you will need to be able to certify and prove you did exactly that…. sustained your payroll at the level you borrowed money. Keep your records…promises will not work for forgiveness!
And yet it gets even better! As you know, “forgiven debt” is taxable income. The law specifically says these forgiven loans will NOT be taxable income in 2021. So, it is essentially free money to sustain payrolls to employ our citizens.
Lastly, what is the next step? Who is offering these loans? The law specifically mentions all SBA 7(a) lenders will offer these loans…your local banks. To be fair, the actual guidelines for this program are not yet written and there is no legal document for these loans as of yesterday. So, the banks will need to await guidance from Treasury and the SBA. Further, to incent competition to make these loans, the Treasury will authorize “other lenders” to join the program.
The Township Committee is reviewing this and other programs and will post updates as soon as they are available.
For more on the program, you can read an article on Forbes.com.