Other Loan Questions and Answers
Remember that the federal CARES Act creates 6 separate initiatives, some of which we’ve covered in previous issues. Tonight, we want to focus on the two financing options available: Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL)
TOP 15 PPP QQQs
1. What are the conditions to full loan forgiveness under the PPP?
2. What are the “permitted purposes” for PPP loans?
You can only use PPP loan proceeds for (i) covered payroll costs (see below); (ii) rent and utility costs for leases/service contracts in effect as of February 15, 2020; (iii) interest (not principal) on mortgage obligations incurred prior to February 15, 2020; and (iv) interest (not principal) on debt obligations incurred prior to February 15, 2020. Please note, however, that payments relating to interest on debt obligations are permitted, but will not be forgivable.
3. What is included in “payroll costs” for calculating loan forgiveness?
Payroll Costs include:
- Salary, wages, commissions, or similar compensation
- Cash tips of the equivalent
- Payments for vacation, parental, family, or sick leave
- Severance fees
- Payments for employee benefits consisting of group health care coverage, insurance premiums, and retirement benefits
- Payments of state and local taxes assessed for compensation
Payroll Costs DO NOT include:
- Compensation paid to non-U.S. residents;
- Compensation paid to independent contractors;
- Compensation to an employee in excess of $100k per year on an annualized basis;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020
4. Do “payroll costs” include fees/payments to managing members/partners that are classified as ‘guaranteed payments’?
This is a good question. Neither the CARES Act nor current SBA guidance addresses ‘guaranteed payments’ payable to a borrower’s equity owners. Profit distributions and dividends are not covered under ‘Payroll Costs,’ but the law is currently silent on guaranteed payments. The CARES Act does explain, however, that ‘wages, salaries, and similar compensation’ payable to employees are covered under the PPP program, which leads us to believe that guaranteed payments are covered under the PPP program to the extent that they are paid in exchange for actual services rendered. The case for including these guaranteed payments is strongest, in our opinion, when the company owners are performing a service that would otherwise have to be outsourced to an employee (e.g., when an executive chef is also an equity owner of the business).
This said, the law is not yet clear on this issue, and the industry is awaiting SBA guidance on this issue specifically.
5. When does the 8 week covered period start?
PPP loan proceeds are only forgivable if they are spent within an 8 week period beginning on the loan origination date, which is the date on which you first receive loan proceeds from your bank.
While we have heard that lenders may ultimately have some discretion when it comes to disbursing the funds to your account, this will depend entirely on your bank. Each lender will have different policies relating to when the loan proceeds will be distributed following the acceptance of a loan application, and whether or not the borrower has any say in when the loan proceeds will be distributed once the application is approved. It couldn’t hurt to reach out to your bank to see whether this date is negotiable. Smaller banks are more likely to work with borrowers on a case-by-case basis than larger banks.
6. This is the first I’m hearing of this 75% limitation. What does it mean?
The SBA’s Interim Final Rule states that 75% of your total loan proceeds must be spent on covered payroll costs. In other words, in order for any portion of your loan to be forgivable, at least 75% of the total loan amount must be spent on payroll costs within the 8-week covered period.
Please note that certain SBA materials, as well as the US Dept. of Treasury guidelines, frame this 75% rule as applying only to forgivable amounts, which would mean that borrowers wouldn’t necessarily have to spend 75% of the total loan on payroll costs. However, the SBA’s Interim Final Rule makes very clear that this 75% rule should be interpreted as an all-or-nothing requirement for forgiveness. Therefore, we encourage borrowers to err on the safe side and assume that, in order for the loan to be forgiven, 75% of the total loan amount must be spent on payroll costs. We are actively seeking clarification from the SBA on this.
7. Can we give bonuses to meet this 75% requirement within 8 weeks?
Though the answer to this question is not completely clear, the answer is likely no. Payroll Costs are defined to include only ‘salaries, wages, commissions, or similar compensation,’ and bonuses are not included in the list. Legislators passed this bill with the hope that employees would be rehired as soon as possible. Businesses that wait until the last minute to rehire, and then attempt to satisfy the salary metrics through last-minute bonuses, are not nearly as likely to receive loan forgiveness as those borrowers who rehire early and pay their employees in accordance with ordinary payroll practices.
8. The only way I can meet the 75% rule is to pay people to sit at home and do nothing. Is this permitted?
Yes. The SBA is not concerned with what the rehired employees are actually doing, only that they are being paid.
9. As long as I spend 75% of the total on payroll, will my loan automatically be forgiven?
No; you’ll have to submit a separate application for forgiveness with your vendor, along with substantiating documentation that your loan was spent for the permitted purposes.
Your total loan amount may also be reduced for purposes of forgiveness if you experience a reduction in your full-time equivalent (FTE) employee headcount or if you reduce salaries more than 25% of what they were during the pre-COVID measuring periods. So, in addition to the 75% threshold test, in order to receive full forgiveness, borrowers will also need to rehire their staff and restore salaries to within 25% of their prior levels within the 8 week covered period.
10. How do I calculate FTE when most of my employees are actually part-time employees?
For these purposes, a full-time employee is one that works an average of 30 hours per week. FTE, on the other hand, measures the number of hours being worked by all of your employees, rather than a total number of employees working for you. For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee. Please reach out to us if you have any questions on how to calculate your FTE.
11. Are the forgiveness applications available for review? What will they involve?
There are not yet any forgiveness applications available for review. These will be made available by participating banks in the coming weeks.
This said, we do know that the forgiveness applications will require documentation substantiating that at least 75% of the loan proceeds were used towards covered payroll costs, and that 100% of the loan proceeds were used only for permitted purposes (payroll costs, rent, utilities, and/or interest on mortgage payments). In other words, it’s important that borrowers keep careful written records detailing exactly how PPP proceeds are spent, and that borrowers work with their accountants to ensure that all financial activities are being appropriately documented.
12. Can I spend nothing during the 8-week period and just treat it as a 1% loan over the 2 years?
Yes. If you are not applying for forgiveness, you can spend the loan proceeds over a longer period of time, provided you spend them only for the permitted purposes (to cover payroll costs, rent, utilities, and interest on debt obligations). Note that the entire loan must be repaid within 2 years, so it would not make sense to space out the spending beyond that 2 year period.
13. If we rehire people to use PPP proceeds, will they be giving up their right to full unemployment benefits?
Unfortunately, yes. Employees will not be eligible to collect full unemployment benefits for as long as they remain on your payroll.
This said, New York has waived the waiting period associated with unemployment benefit applications. So, to the extent you are not able to retain your staff beyond the 8 week covered period, your employees would be eligible to reapply for unemployment benefits without suffering a waiting period, and the unemployment benefits would be retroactive to the termination date.
14. Can I just hire family members and put them on payroll to meet these forgiveness requirements?
Borrowers are required to certify that they will spend this money in good faith on the permitted purposes. Simply hiring friends or family members in favor of laid-off staff would very likely run afoul of that certification. We encourage borrowers to try to rehire the same people who were on their payrolls prior to the pandemic.
To the extent that those same people are not willing to return to payroll, or cannot be located, then you are free to replace those employees with different employees. There is no penalty associated with doing so. In this case, we advise borrowers to ensure that any replacement employee is independently qualified for the position in question, and would be a suitable long-term replacement.
15. Can I reclassify a 1099 independent contractor as an employee in order to meet the forgiveness requirements?
Not necessarily. The reclassification of an employee can be an incredibly complicated process, and while you may ultimately be able to do this successfully, it is not as simple as having them re-hired and/or issuing new paperwork. As a general rule, please reach out to Lee Jacobs (firstname.lastname@example.org) and Megan Shaw (email@example.com) from our Employment Group before implementing any change like this one.
Can I apply for both the PPP and the EIDL?
Yes. However, you cannot apply for both loans if you are planning to use the loan proceeds for the same purpose. Said differently, you cannot double-dip for the same type of cost (e.g., rent, payroll, etc.). If the funds are used for different businesses expenses, not for duplicative purposes, you may apply — and be approved — for both loans. So for example, if you apply for the PPP and the EIDL, you may use the EIDL proceeds to pay vendors, and the PPP proceeds to pay payroll costs.
What if I’m approved for an EIDL – or the $10,000 advance – and then approved for a PPP?
The outstanding amount of an EIDL may be refinanced into a Paycheck Protection Program loan. In addition, any emergency EIDL advance received by a borrower who subsequently receives a PPP loan will be subtracted from the calculation of the loan forgiveness amount referenced above.
How do I know which one is right for me?
A few key considerations include the following: spending discretion, immediacy, and the length of time for repayment.
- Spending Discretion. A PPP loan can only be used to pay payroll, rent, and utility expenses (and interest, but not principal, on existing debt), whereas EIDL proceeds can be spent on a much broader category of expenses, including the repayment of obligations that cannot be met due to revenue loss.
If you choose to apply for an EIDL, you could have quick access to $10,000
— the advance would be available within three days of your application,
with no requirement to repay any amount of it back, even if your application
is subsequently denied the EIDL grant.
- Then, if necessary, you can always apply for a PPP loan and roll the EIDL loan into that application. If an applicant receives an advance under the CARES Act but is approved for a PPP loan instead, the advance amount is reduced from the amount of the loan eligible for forgiveness under the PPP program.
What about those other initiatives from the CARES Act that are designed to help me out?
An employer who receives a PPP loan is ineligible for the employee retention credit under the CARES Act. And if your PPP loans are forgiven, you are not eligible for deferral of payroll taxes as otherwise permitted under the CARES
What are employee retention credits?
The CARES Act allows tax credits to employers that have seen their operations shuttered or partially shuttered because of COVID-19.The credits can go as high as 50% of qualified wages paid to an employee between March 13, 2020, and the end of the year. These credits max out at $10,000 per employee. They also apply only to employment taxes, such as FICA, federal unemployment taxes, and Social Security taxes. And they cannot be taken alongside other coronavirus-related benefits, such as credits for paid leave under the FFCRA or Paycheck Protection loans. Qualifying employers with 100 employees or fewer can take a credit for all qualifying wages.
What about payroll tax deferrals?
Employers are able to defer Social Security taxes. Any deferred payment would need to be paid over the next two years, with half due by December 31, 2021, and the rest due by December 31, 2022.
Top 7(a) Q’s of the Day
1. If rent is forgiven under the 7(a) loan, how far back in time can I go to pay it?
The loan’s “covered period” begins on February 15, 2020. In other words, you can use 7(a) loan proceeds to pay rent owed between February 15, 2020 and the date of the loan’s origination. However, 7(a) loan proceeds used pay rent owed prior to February 15, 2020 would not be forgivable.
2. Can I use loan proceeds to pre-pay rent?
Yes, but only for rent owed during the 8 week period following the loan origination date.
3. Can I use loan proceeds to pay vendors or distributors?
We think yes, but we are trying to verify. If you can, it won’t be forgiven.
4. Is there a citizenship requirement to apply for the loan?
No, at least not based on the bill as it stands now.
urrently, borrowing entities must have been organized in the U.S., and employee payroll is only forgivable for employees whose principal residence is located in the U.S. Typically, SBA loans require that at least 80% of the borrowing entity be owned by U.S. citizens, but there is no analogous requirement yet for 7(a) loans. The SBA is expected to publish additional guidance in the coming weeks, however, which may or may not impose citizenship requirements, so stay tuned.
5. If you have an employee that makes $150k, is $100k of that ‘forgiven’ or is nothing forgiven for that employee since he makes over $100k annually?
Only the difference would not be forgiven. The first $100k would be forgiven.
6. What if I opened recently; can I still apply for this loan?
To be eligible, borrowers must have been operating as of February 15, 2020 with employees on payroll as of that date. To the extent a business was not operating in 2019, for purposes of calculating average monthly payroll costs, the measuring period will be between January 1, 2020 through February 29, 2020.
Note that the amount of a 7(a) loan is based on a multiplier of payroll costs for the previous year. So, to the extent a business opened within the year, the amount of the loan would be reduced proportionately. For businesses that have very recently opened, we encourage you to speak with us about what loan options might make most sense for you.
7. What if I don’t plan to re-open until this is all over? Do I still need to re-hire employees to be eligible for loan forgiveness?
Yes. Lenders aren’t concerned with what your employees are actually doing, they only care that about the number of employees, and what your employees are being paid. They could theoretically be paid to sit at home and do nothing.
8. Do I need to re-hire the same employees?
No. The lenders are concerned about the number of employees, and the total amount being paid in payroll. If, for whatever reason, you can’t invite an employee back, you should be alright provided you find a comparable replacement and pay that person the same rates.
9. Do I need consent from my investors to obtain this loan?
It depends. Your operating or shareholders agreement would govern whether you need investor approval to obtain a loan. Sometimes, obtaining a loan is classified as a “Major Decision” for which investor consent is required. Even though these loans are forgivable, they are still considered debt. So, if your operating agreement or shareholders’ agreement requires third party consents for debt, you would need to obtain those same consents for 7(a) loans.
Remember that the federal CARES Act creates 6 separate initiatives, some of which we’ve covered in previous issues. Tonight, we want to focus on the two financing options available: Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL).
Who is eligible?
Fortunately, the eligibility test is rather lenient. Any
borrower with fewer than 500 employees is eligible, provided that the business
was operating as of February 15, 2020, and had employees on payroll as of such
date. Borrower entities must have been created or organized in the U.S. and
have significant operations, and a majority of employees, based in the U.S.
Hospitality-based businesses are eligible for the loan so long as they have 500 or fewer employees in any one location, meaning that just about any hospitality business will be eligible.
Borrowers must also certify that:
· Uncertain economic conditions make the loan necessary to support operations (there is a presumption, however, that all current economic conditions render the loan necessary for all small businesses);
· The proceeds will be used to retain workers and maintain payroll, and/or to make mortgage, lease, and utility payments;
· Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here; and
· Between February 15, 2020 and December 31, 2020, the borrower has not received loan proceeds from a loan duplicative of the purpose and amounts applied for here.
Fortunately, borrowers who have previously received an SBA Economic Injury Disaster Loan Program (EIDL) between January 31, 2020 and the date PPP loans are first available may refinance the EIDL loan into a PPP loan.
The rule is that borrowers may not take out an EIDL and a
PPP loan for the same purposes. For borrowers to whom this applies, we
recommend that you speak with your accountant about this process, and contact the
SBA directly about your options.
How much can I borrow?
PPP loans are available up to $10 million. The loan amount will be equal to the lesser of:
(i) 2.5 times the average monthly “Payroll Costs” (defined
below) for the 12 months prior to the loan origination date; and
(ii) $10 million.
Applicants that were not in business between February 15, 2019 and June 30, 2019 may request to use average monthly payroll costs between January 1, 2020 through February 29, 2020.
For purposes of this calculation, “Payroll Costs” include:
· Salary, wages, commissions, or similar compensation (up to $100k per employee and independent contractor per year, and excluding payments to employees/contractors whose principal residence is outside of the U.S.);
· Payment of cash tips or an equivalent;
· Payment for vacation, parental, family, or sick leave;
· Allowances for dismissal or separation;
· Payments for group health care benefits, including insurance premiums;
· Payment of retirement benefits;
· Payment of state and local taxes assessed on employee compensation; and
· Payments to sole proprietors or independent contractors up to $100k per year, pro-rated for the covered period.
Payroll Costs do not include: payroll taxes, income taxes, compensation in excess of $100k per year per employee/contractor, compensation to employees whose principal place of residence is outside of the United States, and qualified sick leave wages covered under the Families First Coronavirus Response Act.
What are the terms of the loan?
The precise terms of these loans will differ on a case-by-case basis. However, all loans will be subject to the following terms: interest rates will be capped at 4%, with a repayment term of up to 10 years. Repayment installments will be deferred for no less than 6 months, and no more than 1 year. There are no prepayment penalties.
Will there be a personal guarantee?
No. These PPP loans will not require collateral or personal guarantees, which is great news for borrowers.
How can these loans be forgiven?
Borrowers can obtain loan forgiveness equal to the amount spent in the 8 week period following loan origination on any of the following:
- Payroll Costs (defined above);
- Rent on leases executed prior to February 15, 2020;
- Utilities for services initiated before February 15, 2020;
- Interest payments on mortgages incurred before February 15, 2020.
As you might expect, the total amount forgiven cannot exceed the principal of the original loan (i.e., you cannot be reimbursed for more than the amount of the loan you accepted).
Can the forgivable amount be reduced?
Yes. The amount forgiven will be reduced based on the number of employee layoffs or wage/salary reductions.
Specifically, the amount forgiven will be reduced proportionately by the sum of the following:
(i) the ratio of the average number of full-time equivalent (30+ hours per week) employees (“FTEs”) during the “Covered Period” (8 weeks following receipt of the loan) compared with the average number of FTE’s from February 15, 2019 through June 30, 2019, or the average number of FTE’s from January 1, 2020 through February 29, 2020. For seasonal employees, the measuring period is February 15, 2019 through June 30, 2019.
(ii) for any employee who did not earn more than $100k during the 2019 calendar year, the amount of any reduction in wages that is greater than 25% compared to their most recent quarter of employment.
What if I already terminated or furloughed employees?
To encourage borrowers to rehire employees and normalize their payrolls, there will be no reduction to the amount forgiven if, by June 30, 2020, the borrower: (1) eliminates any reduction in FTEs that occurred between February 15 and April 26, 2020; and (2) restores any salaries/wages reduced between February 15 and April 26, 2020 within 25% of their original amounts.
In other words, the amount of loan forgiveness will not be reduced if the borrower eliminates the reduction in employees and the reduction in wages by June 30, 2020.
In other words, if borrowers normalize their payrolls by June 30, 2020, they will be eligible for full loan forgiveness.
How do I apply for loan forgiveness?
Borrowers must submit an application to their lenders, which includes a certification and supporting documentation demonstrating that the loan proceeds were used for the Permitted Purposes, described above. To be eligible for full forgiveness, borrowers must also demonstrate that, as of June 30, 2020, their payrolls have normalized as of June 30, 2020 (see above). Lenders will not forgive loan amounts without this supporting documentation, so borrowers should maintain careful and thorough recordkeeping practices, and are encouraged to work with their accountants in doing so. Lenders are required to render decisions on loan forgiveness applications within 60 days after submission.
What happens to amounts that are not forgiven?
Any loan amount not forgiven will be treated as a regular loan, subject to the terms described above.
How do I apply?
These loans will be made available through participating private lenders (i.e., regular banks), and the loans will be 100% guaranteed by the SBA. In other words, you would deal with regular banks, regular banks collect from you, and are reimbursed by the federal government for any amount forgiven. There are thousands of banks that already participate in the SBA’s lending programs, so it’s likely that you will be able to apply for this PPP loan through your existing bank.
The SBA is expected to provide additional guidance concerning exactly how to apply for PPP loans, and how to find a participating lender. In the meantime, feel free to call your existing bank to see if they are, or plan to, participate in this PPP loan program under the CARES Act.
The deadline to apply to the program will be June 30, 2020, though no applications are available yet. It is possible that lenders could begin taking loan applications as soon as mid-April.
What can I do now?
Collect your paperwork! To seek loan forgiveness, borrowers
must submit an application that must contain the following documentation:
· Documentation verifying the number of full-time equivalent employees on payroll, and payrates, for the applicable periods (including payroll tax filings, state income, payroll, and unemployment insurance filings); and
· Documentation verifying payments on lease obligations, utilities, and mortgage obligations, including cancelled checks, payment receipts, transcript of accounts, and other verifying documents.
So, speak with your accountant to gather all payroll records for the prior year, and all lease/utility/mortgage records from February 15, 2020 forward.
News about the coming availability of federal and forgivable loans has the entire country buzzing. And for good reason. This is the federal bailout that hospitality so desperately needs. The act has been officially named the Coronavirus, Aid, Relief, and Economic Security” (CARES) Act. Thank goodness for us, because the previous working title, “Keeping American Workers Paid and Employed Act,” or KAWPAEA, was a nightmare to type.
We’re thankful to everyone who has reached out to us yesterday and today with questions about the CARES Act, as you have helped us focus our analysis on the issues that really matter to us here in the hospitality industry. Unsurprisingly, the vast majority of questions fielded today revolve around how to qualify for loan forgiveness under the CARES Act. We’re writing to offer some clarity on the questions that were asked today, with the caveat that the specifics here are subject to change, since we don’t yet know all the details.
Though we covered this in yesterday’s newsletter, in case you
missed it, here’s a very brief recap of the CARES Act as it pertains to
Under the CARES Act, the Small Business Administration (SBA), through qualified bank lenders, will offer federally-backed loans (known by unimaginative lawyers as Section 7(a) loans) to eligible small businesses with up to 500 employees in amounts up to $10MM. Congress’s goal is to prevent the economy from continuing to tank. Specifically, Congress intends small businesses to use these funds to keep employees on payroll (and to rehire laid-off employees), and to pay their rent and utilities.
If you’re just tuning in, you might be wondering what makes these loans so special. Isn’t the SBA already offering disaster relief loans? The answer is yes, but Section 7(a) loans are special because they are forgivable. Provided that you use 7(a) loans to cover approved costs accruing during the “Covered Period” (February 15, 2020 through June 30, 2020), the entire loan amount can be written off. Approved costs include payroll (inclusive of insurance premiums, paid time off, retirement contributions), rent, utility payments, and interest on mortgage payments.
Needless to say, this is a very big deal.
However, there’s a catch. The amount of loan forgiveness will be reduced on a sliding-scale basis for any employee cuts or wages during the “Covered Period” (February 15, 2020 through June 30, 2020). Conceptually speaking, this makes sense given that the purpose of this bill is to rescue our economy by motivating companies to rehire staff and keep them on payroll, regardless of whether their business is operating normally. But legally and practically speaking, this raises more than a few questions!
How is the forgiveness deduction calculated?
There will be a specific reduction formula based on the
number of employee layoffs. The formula will be different for full-time versus
part-time employees, but essentially works as follows: you take the ratio of
the reduced number of employees during the Covered Period and divide it by the
average number of employees on payroll between February 15, 2019 through June
30, 2019 (or, for new businesses, between January 1, 2020 through February of
There will be an additional reduction formula corresponding to any reduction in employee salaries. This reduction is straight-forward, equal to the amount of any reduction in total salary or wages of any employee during the Covered Period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment prior to the COVID-19 crisis. There are exceptions to salary reductions for employees who earned more than $100k in 2019.
The CARES Act currently provides that in order to be eligible for loan forgiveness, borrowers must maintain payroll as it existed prior to the COVID-19 crisis for the entirety of the loan term (which will be unique to each loan), “to the extent practicable” (meaning that exceptions may be made on a case by case basis). Additionally, lenders cannot reduce their employment levels by more than 10% during the lifetime of the loan.
The forgiveness amount may also be reduced by any other SBA disaster relief loans that the borrower has already secured. So, if you’re planning to apply for a forgivable loan, talk to us first about loan strategy.
What if I already laid off employees or reduced their salaries?
This is the question of the day, because, let’s be honest,
what bar or restaurant hasn’t laid off or furloughed employees
at this point? Fortunately, Congress appears to recognize this, and is offering
a solution in the proposed bill.
The forgiveness deductions described above do not
apply if a borrower normalizes payroll by June 30th, 2020. In
other words, loan forgiveness deductions will not apply to you if, by June 30th,
(i) rehire the same number of employees laid off between February 15, 2020 and 30 days after the enactment of the CARES Act (note that you do not necessarily need to rehire the same people); and
(ii) restore any salaries/wages reduced between February 15, 2020, and 30 days after the enactment of the CARES Act back to what they were as of February 14, 2020 (so that total payroll goes back to what it was).
What does this mean in plain English? Basically, that once this legislation is passed, you will have until June 30th, 2020 to get your employees back on the books! If you do so, you will be eligible for full loan forgiveness.
What should I be doing now?
Contact our Licensing Group firstname.lastname@example.org so
they can help you put together a loan application strategy.
How do I secure loan forgiveness?
In short, by papering everything. You’ll need to
submit the following documentation to your lender in connection with any loan
Documentation verifying employees on payroll and their pay rates;
- Documentation on covered costs/payments (e.g., rent and utility payments, etc,); and
- A certification from a representative of your business that the documentation is true and correct, and that forgiveness amounts requested were used to retain employees and make other forgive-ness eligible payments (e.g., rent and utility payments, etc.).
Our advice at this stage is to ensure that all of
your books and records are clean, and that you are maintaining careful written
records of any and all costs and expenses moving forward. With
loan forgiveness on the line, we advise all clients to get in touch with their
accountants to ensure that you’ll have everything you need to submit for this
loan application, including for the separate loan forgiveness application.
What happens with unforgiven amounts?
It’s important to remember that, the possibility of
forgiveness aside, this money is still a loan. To the extent that any portion
of the loan is not forgiven, the remainder would be treated as such, with 4% interest
that must be repaid over the course of a term not to exceed 10 years. This loan
will come with a personal guarantee. Principal, interest, and fee payments can
be deferred from 6 months to 1 year.
Will there be bank fees?
Yes, almost certainly. As discussed in last night’s
newsletter, these loans would be offered by banks, and guaranteed by the SBA.
In other words, you’d be dealing with private banks, and the private banks
would be knocking on the fed’s door for reimbursement. That said, the private
banks may charge fees in consideration of their handling of the loan. Those
fees would not be reimbursable.
Different banks may impose different fees, but it’s quite likely that the market will quickly establish a uniform range of fees for these loan applications.
Applications for the NYC SBS Small Business Continuity Loan Program are now open. These are interest free loans of up to $75,000
To Apply, businesses must:
– Be located within the 5 boroughs of NYC
– Have fewer than 100 employees across all locations
– Demonstrate at least a 25% decrease in revenue as a result of Coronavirus
– Have been in operation for at least 2 years
– Demonstrate ability to repay the loan
– Have no outstanding tax liens or legal judgements
Even if you have already submitted the pre-application form, you must still complete the application here: https://www1.nyc.gov/nycbusiness/article/nyc-small-business-continuity-loan-program
*** I reached out to enquire about the revenue decrease requirement as they are asking for proof of two months of revenue decline of 25% or more compared to sales in 2019. Most businesses in NYC didn’t see a major decline until March 12th or so when the shutdown order came in. Here is the response from Steven Picker, Executive Director – Food & Beverage Industry Partnership, NYC Department of Small Business Services and all-around really great guy (and former chef/owner of Good in the West Village):
“SBS wanted to make a product available to businesses as quickly as they could, which meant that asking for a 2-month comparison had to include February. The assumption was that most businesses that had either closed or pivoted to delivery/pickup-only, even in March 2020, would inevitably show a 25% loss compared to 2019 numbers.
The 2-month period can be “to-date” and not full calendar months; so January 27-March 27 will, in many cases, show sufficient loss to qualify.”
The relief bill pending in the Senate, if passed and signed into law, would amount to a whopping $2 trillion package. Trillion, gazillion, infinity, as long as there’s money for those of us who need it. There are many components to it, but we will be focusing on one of its most exciting aspects: forgivable loans for small businesses!
The legislation at issue is called “Keeping American
Workers Paid and Employed Act” (‘KAWPAEA’). Really rolls off the
tongue. How do you even pronounce it? Cowpow? Cowpee? Paellla? Who
cares. The primary purpose of this bill is to keep Americans employed
during the time of uncertainty, and aims to provide small businesses with access
to enough cash to maintain their payrolls. Although this relief would come in
the form of loans, unlike other loan options offered up until this point, these
loans are eligible for forgiveness. That is, if the loan is used
correctly, eligible applicants would not have to repay the principal of this
That said, here is a summary of the proposed bill, subject to change at the whim of our legislators of course:
What kind of relief are we talking about?
Eligible applicants would be eligible to receive a
loan equal to 250% of an employer’s average monthly payroll, up to a
maximum of $10 million. These forgivable loans would have a maximum annual
interest rate of 4%, with repayment terms (for any unforgivable amounts) of up
to 10 years.
Who is eligible to apply for this loan?
Businesses or self-employed individuals with 500 or fewer
employees are eligible to apply, provided that their business was operational
as of February 15, 2020, and had employees on payroll as of such date.
Qualified lenders will also be authorized to run credit checks on applicant
There may be certain citizenship restrictions for
applicant entities as well (e.g., at least 80% of the borrower must be
owned by a U.S. citizen). Details here are currently unclear, but we will track
this issue as the bill progresses.
An important item to note: as currently
drafted, applicants will be disqualified from receiving
forgivable loans under this bill if they have already successfully applied for
a SBA disaster loan (or other SBA relief related to COVID-19. So, to
the extent you wish to apply for a forgivable loan under this bill, do
not accept any SBA disaster relief loans at this time. If you have a
disaster loan application pending with the SBA, you’re likely
fine, provided you do not accept that pending loan. The relationship between
KAWPAEA loans and other SBA disaster-relief loans is currently unclear, and we
hope that Congress and the SBA offer clarity on this in the coming days.
Is there a revenue test for eligibility?
No. As currently drafted, applicants would not be limited by
the amount of money their businesses generate, and there is currently no
restriction on the number of physical locations that applicants may operate. In
other words, it doesn’t matter if you are a hospitality group with multiple
venues earning tens of millions of dollars a year, or if you are a small,
single-location mom-and-pop; you would be eligible to apply for this loan as
long as the above requirements are satisfied.
How Does Loan Forgiveness Work?
This is the million-dollar question. The principal of
these loans would be forgivable provided that the borrower used the funds for
to cover any of the following expenses accruing within an 8 week period
beginning on February 15, 2020 through June 30, 2020: payroll costs (including
insurance premiums, paid time off, and retirement contributions), rent, utility
payments, mortgage payments (covering interest, not principal), and interest on
other pre-existing loans. Though it’s not entirely clear how an
applicant would prove that funds received were used for this purpose, borrowers
would be wise to carefully document any and all costs and expenses paid using
proceeds from these loans.
The amount forgiven will be reduced by any reduction in payroll costs during the 8 week measuring period relative to the 2019 fiscal year, and will be further reduced by any reduction in salary of any employee beyond 25% of their compensation for the prior year. In other words, businesses will be penalized for laying people off, and for reducing salaries, as a result of this Pandemic.
What if I re-hire employees?
Fortunately, borrowers that re-hire workers who have been
previously laid-off will not be penalized for having a reduced payroll,
provided that the re-hiring occurs on or before the date on which the loan is
granted. So, to the extent that you have laid-off staff and plan to
apply for this loan, in order to receive your full loan forgiveness under the
KAWPAEA, gear up to re-hire your employees!
Will the amount forgiven be taxable?
No. Cancelled indebtedness will not be included in the
borrower’s taxable income.
Who would the lenders be?
Given the scale of this relief package, the federal
government is relying on the participation of banks and commercial lenders to
act as the primary loan lenders under this bill. To the extent a loan is
forgiven, those third party lenders would be reimbursed by the government.
Currently, there are 800 existing SBA-certified lenders, meaning that you
could likely apply for this loan through your existing bank.
When would these loans go live?
Though there’s no clear answer yet, it is expected that
loans under this program will begin to be processed by late April or early May
What about amounts that are not forgiven?
If, for whatever reason, some or all of the loan amount did not qualify for forgiveness based on the KAWPAEA’s criteria, the unforgiven amount would be treated as a loan. The repayment terms of this loan would likely be determined on a case-by-case basis, though the proposed bill does contain some parameters: the maximum repayment term would be 10 years, and there would be a maximum interest rate of 4%. Applicants will be required to sign a personal guarantee to secure the repayment of any unforgiven amount.