Payroll Protection Loan Overview

On March 27,2020,  President Trump signed into law H.R. 748 The Coronavirus Aid, Relief  and Economic Security Act ( the CARES Act) H.R. 748 – The Coronavirus Aid, Relief, and Economic Security Act, (the “CARES Act”).   The Act takes a number of major steps in providing small business with financial relief in the form of payroll protection loans.     

The CARES Act enables essentially ever American small business that has been in operation since February 15, 2020, to be eligible for payroll loan by the United States Treasury and is forgivable if certain requirements are meet.   

These payroll loans will be distributed through banks and fully backed by the Small Business Administration. There are no credit checks, liquidity/net worth requirements, or business plan reviews. The only requirements for businesses to receive a loan are payroll documentation and swearing to the government that certain statements about being negatively impacted by Coronavirus are true.

One of the greatest aspects of these loans are that there are no personal guaranties or collateral required. 

Whether the loan is forgivable is partially determined by how the loan funds are spent in the first eight weeks after receiving the loan. This eight-week period is called the “Covered Period.” The entire two and a half months of payroll is treated as a forgivable loan if you spend all of the funds on payroll, rent, mortgage interest, or utilities. 

To recap, the average monthly payroll is what determines the amount of the loan. Then, after the loan is issued, there are certain expense categories (payroll, rent, mortgage interest, utilities) that the money must be spent on within the first eight weeks for it to be forgiven. After the eight week period, the business must document the applicable expenses and apply to the bank for loan forgiveness. 

There are two issues which will determine whether the loan is forgivable.   

First, the business must maintain the same amount of full-time equivalents during the eight-week Covered Period as compared to the prior period. Second, the business must not decrease the pay of any specific employee by more than twenty-five percent.

To the extent a business does either of these actions, its loan forgiveness is reduced on a pro-rata basis and the remainder becomes a regular loan payable at 4% interest over a period to be set by the SBA (with a maximum of ten years). 

We will be providing more details on these loans in our next post.  If you have any questions or would like to discuss further please do not hesitate to contact us.