On Thursday, April 23, 2020, the House passed the Senate version of the most recent legislation proposed to help provide relief for small businesses, support for hospitals, and expansion of medical testing. This is the fourth relief packaged passed as a result of the COVID-19 pandemic.
The deal provides for roughly $484 billion in funding for the above areas. It includes an additional $310 billion to re-fund the popular Paycheck Protection Program (PPP), specifically setting aside $60 billion for community banks and small lenders. This is good for a community such as ours where most small businesses have a good working relationship with our locally owned and operated banks. We are aware of at least two locally owned banks that have been able to obtain loans through the initial round of PPP funding without issue.
Additionally, approximately $60 billion is being set aside to fund the SBA's Economic Injury Disaster Loan. This program was designed to provide emergency grants to applicants of up to $10,000 which did not need to be repaid. The most recent data indicates that in Kansas 116 loans were approved for a total of $25,034,700 and the program provided 5,219 advances totaling $24,205,000. The EIDL program has provided loans totaling $5,566,913,788. These numbers would indicate that reliance upon this program, alone, would be indicia of a small chance of success of receiving the same.
The funding of these programs is intended to replenish the previously authorized funding of $349 billion allotted by Congress on March 27. Those programs ran out of money before many small businesses could obtain the funding.
The PPP is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.
PAYCHECK PROTECTION PROGRAM
Most of the small businesses, including not-for-profits, who comprise the membership of the Atchison Chamber of Commerce are eligible to apply.
- Any small business concern that meets SBA's size standards (either the industry based sized standard or the alternative size standard)
- Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans' organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
- 500 employees, or
- That meets the SBA industry size standard if more than 500
- Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
- Sole proprietors, independent contractors, and self-employed persons
New Guidance on Eligibility:
In the initial PPP package, a business had to certify that it was necessary to obtain the funding in order to meet its payroll obligations. This vague language allowed for large corporations, including for-profit chain companies that are publicly owned, to obtain significant funding from the program. Under the current program, guidance contained within the program indicates that all borrowers must still make a good faith certification while taking into account their current business activity and their ability to access other sources of income/cash to support their ongoing operations. While the requirement of eligibility has not changed much between the versions, closer public scrutiny will likely give some businesses pause and thus create a greater opportunity for businesses like our Chamber businesses. The SBA may still audit any certification for need and, as a result of the audit, make that loan ineligible for forgiveness. That, however, will do little to help the small businesses that the program was originally designed to protect if the funding is depleted.
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 may be available to make these loans once they are approved and enrolled in the program. We are aware of at least two local banks in Atchison that are effectively handling the PPP loan program.
In order to apply you will need to fill out a basic application (which your lender can provide you) and provide certain information including previous payroll data. They require that you calculate the average monthly payroll over the last 12 months (note that this calculation will exclude federal withholdings but include state/local withholdings). If you are a new business and do not have 12 months history, you can still apply and receive funding. Local banks and/or your accountant will be able to advise you on how to average your available data to qualify for the most funding possible. For small businesses who handle their own payroll you can most easily find the necessary information by reviewing your 941 quarterly reports.
If you applied for the first round of funding but did not receive approval prior to the depletion of funds, then you do not have to necessarily reapply for the second round of funding. You should contact your bank to ensure that your application is still on file and confirm that you do not need to apply again. Clearly if your circumstances have changed then you should correct or otherwise update your application.
The loan will be fully forgiven if the funds are 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.
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease too significantly. This loan has a maturity of 2 years and an interest rate of 1%.
The question most pressing upon small business is what is the catch? Well, the devil is in the details. You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan. You will also owe money if you do not maintain your staff and payroll.
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Some Guidance for Small Businesses:
The 8-week loan forgiveness period begins to run on the date that the loan proceeds are disbursed to you.
- Keep in mind that the way these proceeds are spent will be scrutinized during this 8-week period. Take steps to safekeep the money and accurately document the uses of the funds on authorized and forgivable costs. A good idea, if possible, would be to deposit the loan proceeds into a separate bank account. Many financial institutions are recommending this and the ease of opening, and directly funding, that account should make this an easy step even if you are working remotely.
- Although not required under the Act, separating the funds may help you prevent commingling with other funds and more easily track the PPP loan proceeds for forgiveness calculation purposes.
- A separate account may also help ensure that the funds are not inadvertently used for unauthorized purposes. If the funds are used for unauthorized purposes, they must be repaid, and, if knowingly used for unauthorized purposes, you may be subject to additional liability, such as fraud.
- Maintain proper documentation to substantiate "payroll costs" and other authorized costs paid during the 8-week period.
- PPP loan funds should only be used to pay "payroll costs," payments of interest (not principal) on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020. Payroll costs include salary, wages, or tips, employee benefits (including vacation, family leave, sick leave, etc.), state and local taxes assessed on compensation (excluding federal withholdings) and does include the same uses for payment to self-employed individuals. There are caps to these amounts and more information can be found at the US Treasury website.
- Payroll tax filings and other appropriate documentation (i.e., cancelled checks, payment receipts, and transcripts of accounts) will be necessary to document that the proceeds were spent on authorized expenses during the 8-week period. This verification must be provided in connection with the loan forgiveness application. Remember that at least 75% of the loan proceeds must be used for "payroll costs."
- The Small Business Administration (SBA) requires that at least 75% of the loan proceeds be used for "payroll costs." Further, at least 75% of the forgiven amount must be attributable to "payroll costs," and no more than 25% of the forgiven amount may be attributable to eligible expenses other than "payroll costs." The amount of loan forgiveness will be reduced if you do not maintain your staff and payroll.
- Remember that your loan forgiveness will be reduced if you decrease your full-time employee headcount or if you decrease salaries and wages by more than 25% (compared to their most recent full quarter) for any employee that made less than $100,000 annualized in 2019.
- However, reductions in employment or wages that occur between February 15, 2020 and April 26, 2020 (as compared to February 15, 2020) will not reduce your amount of loan forgiveness if you eliminate such reductions by June 30, 2020.
After the 8-week period, file a loan forgiveness application with your lender. The SBA has indicated that it will be issuing additional guidance regarding loan forgiveness. However, you should contact your lender directly to confirm what its loan forgiveness process will be, and what documentation it will be requiring.
Economic Injury Disaster Loan (EIDL):
In response to the Coronavirus (COVID-19) pandemic, small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available following a successful application. This loan advance will not have to be repaid.
This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors, and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19.
Businesses in certain industries may have more than 500 employees if they meet the SBA's size standards for those industries.
The Economic Injury Disaster Loan advance funds will be made available within days of a successful application, and this loan advance will not have to be repaid.
In Kansas, however, receiving funds are not as simple as just applying. Personally, we have not been made aware of any individuals who have received the funds and, with Kansas receiving less than 1% of all funded loans through the program, that is no surprise. With this program receiving additional funding in the most recent legislation perhaps this will improve total funding for Kansas businesses.
Additionally, rules continue to change on how much a business can receive. As a result of the number of applications to the program, the SBA has imposed limitations that now allow up to $1000 per employee up to a total of $10,000 for the initial grant. This limitation will most certainly impact total loan availability to a business as well. So, if you are a sole proprietor and have no employees, you will only benefit to the tune of $1000 from these EIDL loans. The SBA continues to issue guidance on application of program requirements.
The attorneys at Farris, Fresh, and Werring Law Office, LLC standby to assist you with any questions or concerns you may have during this time. Please do not hesitate to contact us.
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