Beginning April 3, 2020, you may be eligible for financial relief through the federal Paycheck Protection Program that's being introduced as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, there's a funding cap for this program and there's no guarantee that Congress will enact new legislation if loan demand exceeds the cap. So you should act now to ensure you receive any eligible funds. Here are three tips to get you up to speed quickly on what you need to do.
1. Understand the key components of the program
The Paycheck Protection Program is a federal relief program established by Congress and implemented by the U.S. Treasury Department and the Small Business Administration (SBA) with rules, requirements, protocols, and processes that all participating banks must follow. Below are the key components of the Paycheck Protection Program as provided by the U.S. Treasury Department:
Loans are fully forgiven
Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.
Employers must keep employees on the payroll—or rehire quickly
Forgiveness is based on the employer retaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines or if salaries and wages decrease.
All small businesses are eligible
Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors—are eligible. Businesses with more than 500 employees are eligible in certain industries.
When to apply
Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply. The program is open until June 30, 2020, but you should apply as quickly as you can. Lenders are likely to be overwhelmed with applications.
How to apply
You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. All loans will have the same terms regardless of lender or borrower.
2. Apply with your current bank or business loan provider
It's encouraged that you apply with your current bank or business loan provider, ideally with a pre-existing business lending and business deposit relationship as of February 15, 2020. This is the best and fastest method for applying for federal relief, based on the U.S. Treasury requirements and guidance. Your existing relationship ensures your lender already has the established accounts and underwriting verifications in place to provide the quickest access to the relief funds.
If you need to find an eligible lender, here's a searchable database from the SBA.
3. Prepare in advance for the application process
To prepare for the application process, review the requirements listed on the U.S. Treasury website.
- 2019 Payroll — Total payroll for full year 2019, by employee, as reported to the IRS.
- 2019 Independent Contractor Costs — Listing of 1099's-MISC for 2019 independent contractors, by person, as reported to the IRS. (Note: Do NOT include 1099's for services.)
- Payroll report as of February 15, 2020, or closest date after that date, by employee.
It's possible that Congress may enact additional legislation if the well runs dry on this program, but that's a gamble you probably don't want to take. So go ahead and learn the basics of the program, contact your bank or lender (or find one), and be prepared to process the application properly. There's no need to wait.
Note: This information is provided for general educational purposes only. For counsel specific to your business, please contact your financial or legal adviser.