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It can be hard to keep up with the rapidly evolving news surrounding COVID-19, much less the details of the government stimulus package and what that means for small businesses and those that are self-employed.  Let CLG break it down for you.

The $2.3 trillion CARES Act Stimulus Package was signed into law on March 27, 2020.  The cornerstone of the CARES Act is the Paycheck Protection Program (PPP).  Under the PPP, $349 billion is earmarked to provide relief to small businesses negatively impacted by the outbreak of COVID-19, and is specifically designed as an incentive to employers to retain its employees. 

Its most attractive feature for employers is the potential for loan forgiveness.  Borrowers will not be required to repay principal to the extent that loan proceeds in the eight weeks after loan origination are used for the employer’s payroll costs which includes health insurance premiums, 401k contributions, and the related taxes, for example, mortgage interest obligations, rent obligations, and utility payments. To the extent loan proceeds are not used for such qualifying costs, repayment is expected after 24 months. 

Beginning April 3, 2020, sole proprietorships and small businesses (defined as those with fewer than 500 employees) can apply for paycheck protection loans from existing SBA lenders. Next week, on April 10, independent contractors and self-employed individuals can start applying for PPP loans.  The program is slated to close on June 30, 2020.

Congress doesn’t pass simple legislation under business-as-usual conditions, so it’s no surprise that the CARES Act, hastily negotiated during a world pandemic and economic collapse, is any less straightforward.  The terms by which an employer’s PPP loan proceeds may be forgiven include some fine print, summarized as follows:

1. SBA and Treasury guidelines suggest not more than 25% of the forgiven loan amount may be used for non-payroll costs.

2. If a business took out an SBA Economic Injury Disaster Loan (EIDL) related to COVID-19 between January 31 and April 3, 2020, the borrower may refinance that loan under the PPP and receive loan forgiveness on the refinanced amount.

3.  Loan forgiveness will be proportionately reduced if the average number of employees is reduced during the covered period as compared to the same period in 2019.  It gets a bit more complicated and we are walking our clients through it, but this is what’s important to know: if you rehire laid-off workers by June 30, you won’t be penalized for having a smaller workforce at the beginning of the covered period.

4. Borrower and lender fees are waived, as are prepayment fees.  Particularly welcome for many small business owners: no collateral or personal guarantees are required.

5.  No repayment of either principal or interest is required for a minimum of six months from loan origination.  

The PPP application process is streamlined, with no credit check other than verification that the employer was open for business as late as February 15, 2020.  It is an SBA 7(a) loan, which means the lending process begins with a completed SBA application, even though an employer’s loan proceeds will come from a local SBA-qualified lender.   The SBA will guarantee your lender repayment of 100% of the loan.

Because of the complexity of the legislation generally, and calculations of the potential forgiveness amount specifically, we are actively encouraging our clients to discuss their unique situations upfront with their attorneys and bankers, to ensure understanding of exactly what is required to maximize the amount that will be forgiven.

This is particularly important because the maximum loan amount will usually be capped at 250% of the borrower’s average monthly payroll costs (which is about 10 weeks) yet the measurement period for forgiveness is eight weeks after the origination of the loan.

Congress understands that additional lending capacity is required.  The CARES Act is positioned to replace only 25% of the anticipated lost revenue over the next three months.  Like every other aspect of COVID-19, this is a fluid environment subject to very rapid changes.  Chenoweth Law Group clients and SBA loan applicants should remain in communication with their professional advisors as relief efforts evolve, and new programs are added, and existing programs are extended or revised.  To get up-to-date information, or to access the PPP application, visit the US Treasury Cares website.