How the CARES Act Paycheck Protection Program Stimulus Loans Can Help Your Business

Thursday, April 9, 2020
Scott Bossom

Scott Bossom

Senior Vice President - Community Financial Resources
Columbia Bank


The shutdown of business in Washington State has been devastating to many small companies and their employees, as a drastic reduction in revenue has made it difficult for those companies to pay wages and expenses. To provide some relief to small businesses and their employees, the CARES Act will provide 350 billion dollars in funding through loans and grants.

Scott Bossom from Columbia Bank gave a presentation explaining the Small Business Administration (SBA) loan and grant programs that are available to small businesses, some considerations businesses should make when applying for these loans, and the issues that are being encountered by some applicants.

The earliest funding that was available in response to economic impacts to businesses due to Coronavirus was from the SBA's Economic Injury Disaster Loan Program (EIDL), which was created before the Coronavirus outbreak to respond to economic injuries due to natural disasters, but also provides funding to help businesses recover from the economic impact of a shutdown or shelter-in-place Order.

EIDL loans provide up to $2 million at a maximum interest rate of 3.75%. These loans are available to 501(c)(3) non-profit organizations at a lower interest rate of 2.75%, and terms can be up to 30 years. Funds can be used for payroll, utilities, accounts payable, and inventory purchases, but can not be used to purchase fixed assets or pay off existing loans.

The application for EIDL loans is unchanged from the process prior to the Coronavirus outbreak, with applications going to the Small Business Administration for review. Businesses will need to meet normal standards of creditworthiness and provide collateral to receive an EIDL. While EIDL loans have no forgiveness component like the Paycheck Protection Program loans, there are far fewer businesses applying for EIDLs, which may make them a more likely source of funding for many businesses once the funds in the Paycheck Protection Program have been exhausted.

The Paycheck Protection Program (PPP) is a new program created as part of the Federal stimulus plan enacted in response to the Coronavirus outbreak. It provides businesses with loans of up to 2.5 times their monthly payroll costs (up to $10 million), which can be completely forgiven if used to pay for wages, payroll expenses, rent, utilities, or interest on a mortgage payment during an 8-week period following receipt of funds. (In an interim final rule, the SBA stated that no more than 25% of the loan could be spent on non-payroll costs in order for the loan to be eligible for 100% forgiveness.)

These loans also allow for payment deferrals for the first 6 - 12 months. Paycheck Protection Program loans must be spent on payroll and salaries, utilities, rent, or interest on mortgage, with at least 75% being spent on payroll and wages. The loans have a 2-year term, but all funds spent on approved expenses during the 8 weeks after receiving the loan, and any interest accrued on those funds will be forgiven.

The SBA has streamlined eligibility determination for PPP loans, and eliminated many requirements for standard loans such as needing to exhaust all other credit options before applying for an SBA loan, or providing a personal guarantee or collateral. Eligible businesses for PPP loans are small businesses with fewer than 500 employees. While this rule may seem to exclude companies with over 500 employees, Scott advised that the SBA will be determining eligibility regarding company size based on its standard thresholds, which may be higher for certain industries. A manufacturer with 1000 employees may still be eligible for a PPP loan, and businesses should consult with an experienced SBA administrator to determine if they can apply.

Employee count is based on the total number of employees who worked for the company during the last year, regardless of whether those employees were full-time or part-time workers. Businesses that are part of an affiliation or franchise will have special considerations that take into account the size of the affiliation or parent company. Sole proprietors, independent contractors, self-employed individuals, and Tribal businesses (other than casinos) are also eligible for PPP loans. Cannabis businesses are not eligible, nor are hobby businesses.

Businesses must have been in operation prior to February 15, 2020, and have employees who were paid salaries or paid independent contractors to apply for a PPP loan. Borrowers must make a good faith certification that the loan is necessary to continue business operations, that loan proceeds will be used to retain workers or pay for approved business expenses, and that the borrower does not have an application pending for another loan of "duplicative purpose" to the PPP loan.

The "duplicative purpose" rule does not preclude a business from obtaining both a PPP loan and an EIDL loan, but does require that they are taken to cover separate expenses. EIDL loans, unlike PPP loans, can be used to make inventory purchases or pay fixed debts, so a business could take out both types of loan to help them recover, so long as each loan was strictly allocated to address different expenses.

While the elimination of the normal SBA requirement that companies applying for a loan exhaust all other avenues of obtaining "credit elsewhere" promises to streamline the process and get money to businesses more efficiently, Scott observed that this will mean that much of the $350 billion earmarked for the Paycheck Protection Program will be obtained by companies that are not in immediate danger of closure. Companies do not need to demonstrate need for funding, or supply any financial documentation to corroborate it. Because of this, the Paycheck Protection Program is open to most small businesses, and may run out of funds quickly.

Due to unexpected volume of applications for PPP loans, several banks have decided to serve their existing customers first, or to restrict service to existing credit customers, before accepting PPP loan applications from non-customers. Scott mentioned that the Federal Reserve has announced that they will issue PPP loans to help handle the volume of applications, but it is not known how many applications they will be able to process. Scott advised that business owners without an existing lender relationship may also be able to apply for PPP loans with financial technology (fintech) companies such as Kabbage, Lendio, and OnDeck.

When applying for a PPP loan, the amount you can borrow is based on payroll, with the maximum loan amount being up to 2.5 times the monthly payroll costs of the business. Payroll costs include:

  • Salary or wage compensation
  • Commissions or tips
  • Vacation or sick leave pay
  • Dismissal allowances
  • Health insurance premiums
  • Retirement benefits
  • Local and State taxes on payroll

Figures are based on 2019 payroll, unless the business was not operational in 2019. In this case, the business uses payroll costs from January and February of 2020.

Payroll costs that are excluded from the payroll calculation are:

  • Any annual salary in excess of $100,000 (as prorated by month)
  • Federal payroll taxes
  • Railroad retirement taxes
  • Income taxes

For employees making over $100,000 annually, only the first $100,000 of prorated salary or wage compensation is included in the calculation, but vacation/sick pay, health insurance premiums, and retirement benefits can be included on top of salary. Compensation of employees living outside the US should not be included in the calculation.

Loan forgiveness is determined on the employer maintaining the same number of employees or employee pay during the 8-week period following receipt of the loan proceeds. Reduction in either the number of employees (which may include employees who voluntarily quit—pending clarification from the SBA), or the amount of employee wages by more than 25%, that are not reversed by June 30, 2020 will reduce the amount of the loan which is forgiven, even when loan proceeds are used for approved purposes. Because of this, employers will need to consider if the funding they can obtain will be enough to reinstate employee head count or pay until their normal business revenue resumes. The amount forgiven cannot exceed the principal, and any forgiven amount will not be counted as income for tax purposes.

Borrowers will be responsible to provide their lender with documentation verifying their approved expenses during the 8-week "forgiveness period". Payments can be deferred for 6-12 months, but interest will accrue during that time. Any interest accrued on loan proceeds that are later forgiven will also be forgiven.

Scott urged business owners to apply as soon as possible for a PPP loan if they are eligible. The banks administering SBA loans have received a deluge of applications that has crashed many banks' website servers. It is crucial that businesses get approved for their PPP loan early. Even if the loan is closed at a later date, their funds will be reserved when their loan is approved. Since funds are likely to be exhausted quickly, securing the loan approval as soon as is possible is essential.

Scott anticipated that disbursal of funds may take 1-2 weeks after loan approval, but stated that the unprecedented number of applications and scope of the PPP program makes it difficult to estimate the time required to process the loans. (The normal volume of SBA lending would take 16 years to process $350 billion in loans.)

Scott acknowledged that there were discussions in Congress about increasing the funding for the program, however now additional funding has been announced at this time.

Scott's final piece of advice was to contact the bank or credit union with which your business has a banking or lending relationship to process your application. Most banks will provide preferential treatment to their existing customers, and the $350 billion will not last for very long.

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