Small businesses hurt financially because of the COVID-19 pandemic may receive up to two months payroll and other expenses as part of a new federal Paycheck Protection Program.
The intent is to keep paychecks flowing and benefits in place for employees who have been laid off, furloughed or had hours cut due to the coronavirus outbreak, said Glenn Hamer, president and CEO of the Arizona Chamber of Commerce and Industry.
Hamer, Phoenix business attorney Sarah Strunk, and other business advocates lay out the what and the how for companies needing the help.
“The federal government is extending a life preserver for all small businesses,” Hamer said. “They’re going to be able to, dollar for dollar, have those expenses covered by that loan. This is the single most potent program ever established in the history of the United States for small business.”
Companies can apply for the loans that act as grants as long as companies maintain their payroll and do not reduce salaries by greater than 25 percent for a period after the loan is originated, Hamer said. The money can be used for payroll, utilities and other operating expenses.
A goal of the program is to keep more employees connected to their companies during a natural disaster that is affecting every state, Hamer said.
“Then when we get to the other side of this, it will be much easier for our economy to ramp up again,” he said.
Chamber encouraging small businesses to apply
In Arizona, where small businesses employ 2.4 million workers, tens of thousands of employees are being affected, tourism, restaurant and other industry leaders said. Many more will follow without some relief.
The Chamber is encouraging small businesses to apply for the forgivable loans.
“We’ve never had a program where it would be so easy to get cash in hand to businesses that so desperately need it,” Hamer said. “It’s vitally important for these businesses to apply. This, at least for a two-month period of time, flips this terrible situation on its head.”
Businesses and company with 500 employees or less eligible
Small businesses — including 1099 and sole proprietor companies — can apply for the loans through the program that is part of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act signed last week by the president.
It allocates nearly $350 billion to help small businesses survive and keep workers employed.
Of that, Arizona is eligible for about $5.6 billion, according to an analysis by the U.S. Chamber of Commerce that held its first National Small Business Town Hall Friday in response to thousands of questions from its members.
The paycheck program provides 100 percent federally guaranteed loans to businesses. No personal collateral or personal guarantee is required, said Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber, which has issued a guide and checklist for companies wanting to apply for the relief.
Funds also should come more quickly than traditional loans as the program has eased requirements to streamline the process, Bradley said.
“A lot of the programmatic things [that are involved with] getting a government loan are waived in this instance,” he said. “For example, the requirement that you first try to get a loan elsewhere before turning to the government program is completely waived in this legislation.”
The program will be administered primarily through the federal Small Business Administration (SBA). It is in addition to SBA’s economic disaster loans approved earlier this month. These low-interest loans provide working capital and money for operating expenses for companies adversely affected by COVID-19.
Answers for businesses interested in applying
Phoenix attorney Sarah Strunk, who specializes in business and finance at Fennemore Craig, answered key questions for companies interested in applying:
Who qualifies for participation under the Paycheck Protection Program?
Any business in operation on February 15, 2020 with no more than 500 employees (or which meets the applicable size standard for the industry as provided by SBA’s existing regulations, if greater) is eligible. Also included are qualified nonprofit organizations, sole proprietorships, independent contractors, and self-employed individuals can also be covered.
A business in the accommodation and food services industry with more than one physical location qualifies if it employs no more than 500 employees at each location.
For purposes of eligibility, the SBA’s affiliate rules are waived for businesses in the hotel and restaurant industries, franchises approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program, but not for any other businesses. That means, even if you have fewer than 500 employees in a U.S. subsidiary, you may have to add your other employees in affiliated entities.
What is the maximum loan amount that can be borrowed under the Paycheck Protection Program?
A qualified business can receive the lesser of $10 million or the sum of 2.5 times the average total monthly payroll costs for the prior year.
What can a business use loan funds for?
Businesses can use the loan proceeds to cover expenses including:
Payroll costs, including compensation to employees; payments for vacation, parental, family, medical or sick leave; severance payments; payments required for group health care benefits including insurance premiums, retirement benefits, and state and local employment taxes;
Interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 but not any payments or prepayments of principal; rent pursuant to lease agreements that were entered into on or before February 15, 2020; and utilities.
What are the provisions applicable to the loans made under this Paycheck Protection Program?
The CARES Act provides that these are non-recourse loans that will not require any personal guarantees or pledges of collateral. Under the Act, the Small Business Administration guarantees all of the qualified loans under the Paycheck Protection Program at 100 percent. Interest on the loans is capped at 4 percent. A business applying for a loan is not required to show that it cannot obtain credit elsewhere, but all borrowers are required to certify that: (a) the loan is necessary due to the uncertainty of current economic conditions; (b) they will use the loan proceeds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and (c) that they are not receiving duplicative funds for the same uses. All payments of principal, interest, and fees under the program are deferred for no less than 6 months and no more than 1 year. There are no SBA fees for the loans and prepayment penalties are waived.
How does a borrower get the loan forgiven?
Borrowers are eligible for loan forgiveness for up to 8 weeks of payroll costs, rent payments, utility payments, or mortgage interest payments. However, the amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25 percent as of the last calendar quarter. But, employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period.
Borrowers must apply for loan forgiveness to their lenders by submitting required documentation (as discussed in further detail below) and will receive a decision within 60 days. If there is a loan balance after loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.
What are the tax implications of loan forgiveness?
Any amount which would be includible in gross income by reason of forgiveness shall be excluded from gross income.
How do you apply for a loan under the Paycheck Protection Program?
There will be additional guidance from the SBA regarding how to apply for these loans and to find a qualified lender.
How long do I have to obtain a loan under the Paycheck Protection Program?
To qualify, these loans have to be made prior to June 30, 2020.