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How does the Paycheck Protection Program work?

The Paycheck Protection Program is a loan program administered by the Small Business Administration (SBA). Since this is not a TAX benefit, we are not experts in it and cannot provide advice.  BUT, we have been getting a lot of questions on it, so here is what we are hearing on the grapevine. This is not advice.  Please contact your attorney to be sure you understand all the details of these loans.

What is it?

  • The Paycheck Protection Program is designed to provide a direct incentive for small businesses to keep their workers on payroll by providing each small business a loan up to $10 million for payroll and certain other expenses.
  • If all employees are kept on payroll for eight weeks, SBA will forgive the portion of the loans used for payroll, rent, mortgage interest, or utilities. Up to 100 percent of the loan is forgivable.

Who is Eligible?

  • Businesses – including eligible non-profits, Veterans organizations, Tribal concerns, sole proprietors, self-employed individuals, and independent contractors described in the Small Business Act – with 500 or fewer employees may apply.
  • Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.

What can the loans be used for?

Loan proceeds may be used for:

  • payroll costs,
  • costs related to group health care benefits during periods of paid sick, medical or family leave, and insurance premiums,
  • employee salaries, commissions, or similar compensations,
  • mortgage interest payments (but not any prepayment of or payment of principal on a mortgage obligation),
  • rent,
  • utilities and
  • interest on any other debt obligations that were incurred before the Covered Period.

What are the Loan Terms?

  • Your maximum loan size is 250% of average monthly payroll costs for the one-year period before the loan is made.  If you are a seasonal worker, it is 250% of average monthly payroll costs from February 15, 2019, to June 30, 2019, or you can opt to choose March 1, 2019, as the time period start date. If you were not in business this time last year, your maximum loan is equal to 250% of your average monthly payroll costs between January 1, 2020, and February 29, 2020. The loan maximum in all cases is $10 million.
  • The interest rates for loans may not exceed four percent (4%).
  • Any loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4 percent.  Principal and interest will continue to be deferred, for a total of 6 months to a year after disbursement of the loan.
  • The SBA will not charge any fees on a Paycheck Protection Loan. Participating lenders will be entitled to charge a fee, as a percentage of the original principal balance of the Paycheck Protection Loan.

Do I have to start making payments right away?

  • The SBA will direct lenders to defer all payments (principal, interest and fees) otherwise due under a Paycheck Protection Loan for a minimum of 6 months and a maximum of 12 months.

Do I have to give them my first-born for this loan?

  • A borrower will not be required to pledge any collateral or provide personal guarantees to secure or support a Paycheck Protection Loan.

Can the Loan be forgiven?

  • After you have had the loan for 8 weeks, you can apply to your lender to forgive your loan for the amount of payroll costs plus payments of mortgage interest, rent, and utilities incurred.  The amount that can be forgiven is proportionate to maintaining employees and wages.
  • The total amount of loan forgiveness will be reduced if your workforce is drawn down through attrition or if wages are reduced. If you are forced to lay off employees because of economic conditions, you may be able to preserve some of your loan guarantee by hiring them back.
  • You must apply through your lender for forgiveness and provide:
    • Documentation verifying the number of employees on payroll, their pay rate, IRS payroll and state income tax filings, and unemployment insurance filings;
    • Documentation verifying payments of rent, mortgage interest, utilities, and other debt; and
    • Certification from your business that the documentation provided is true and that amount of the loan that is being forgiven was used in line with the program’s requirements.

We are told that loans may start as soon as Friday April 3, 2020 although many believe the banks will not be ready that quickly. Hopefully a digestable FAQ will be published soon so business owners can decide if this is a good option for them.

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