Putting Things in Order for the SBA Loan Applications (Mis en Place)

Originally Published : April 2, 2020

Dear HL Clients,

Let’s get our shit ready.  Despite a lot of pushback from the banks, Secretary Mnuchin is sticking to his guns and saying that the loan program will start tomorrow.  Who to believe?  Better safe than sorry, so we are prepping our applications and getting them ready to go.

The banks claim that they are not ready to process the loan applications and that they have received insufficient guidance from the SBA as to how to do so and there seems to be a disconnect between the feds and the banks as to how this is going to get done.  We hear that the banks are afraid of the risk of these loans and that they are not happy with the profit potential for lending in this program.  I suspect that they are looking for the Feds to sweeten the deal for them and make it worth their while to be a lender.

Chase just posted something on their website stating that they “most likely won’t be able to start accepting applications on April 3rd, like we’d hoped”.  They hedged but that’s a pretty strong statement.  Anyway, the rumor mill will churn and who knows how it will play out but we are of the opinion that we will be better off getting everything ready now so when the moment does arrive, we are ready to file our applications. Chase, Bank of America, and Wells Fargo are expected to only accept applications from existing customers through websites the banks are building. Let’s see how that develops.

Another rumor has it that the NYC No-Interest 75K loan may be closing soon.  We suggest that if you are planning for this loan, you should kick it into gear and get your application filed before you get shut out.

Here is the very latest, most up to the second update on PPP.  There is new info in it so you should read:

UPPPDATE: By Andrew Fine and Megan Shaw

The Paycheck Protection Program provides small businesses with funds to cover payroll costs, interest on mortgage obligations, rent, insurance, and utilities incurred from February 15, 2020 to June 30, 2020. Borrowers may apply to have these loans forgiven, which means that you may not have to pay them back.

Who’s eligible?
Any business with fewer than 500 employees is eligible, provided that the business was created/organized in the U.S, has been operating as of February 15, 2020, and had employees on payroll as of such date. Hospitality-based businesses with 500+ employees are also eligible, as long as there are no more than 500 employees working at any one location.

As of April 2, the sample loan application released by the SBA and the U.S. Dept. of Treasury indicated that all applicants would need to certify that all individuals with more than 20% ownership interest were U.S. citizens or otherwise had lawful permanent residence in the U.S. As you can imagine, this was completely unexpected and equally devastating, especially for an industry so enriched by foreign participants.  

Please note that the SBA reported to us today that the sample loan application was just that: a sample. Private lenders may ultimately have the discretion to impose citizenship requirements. So, they may, or they may not. However, note that lenders will be doing whatever they can to maximize their chances of federal reimbursement for these loans. This fear of non-reimbursement may compel many lenders to follow the SBA sample to a tee. That said, we just don’t know the answer yet, and the answer will likely vary from bank to bank. 

Is there additional criteria for approval?
You must certify that a loan is necessary to support business operations and that any funds received will be used only to retain workers, maintain payroll, make mortgage and lease payments, and pay for utilities. You will also be required to certify that you have not applied or received funding for a “duplicative” loan in order to cover the same expenses and amounts.

Note that you can apply for other federal relief loans, such as EIDL, as long as you don’t spend EIDL money on the same thing for which you’re spending PPP money. For example, if you obtain a PPP loan for payroll and rent costs, you cannot use EIDL money for those costs as well.

How much funding can I get?
You may receive up to 2.5 x the borrower’s average monthly payroll costs, not to exceed $10M.
Your average monthly payroll costs are calculated using the costs incurred during the year prior to the loan date. If you were not operating in 2019, you can use the payroll costs incurred for January and February.

What can be used to calculate payroll costs? Employee compensation (salary, wages, commissions, payment of cash tips or an equivalent), payments for employee leave (vacation, parental, family, or sick leave), severance payments, health insurance costs (including insurance premiums), retirement benefits, and state/local taxes assessed for compensation. You cannot include payroll tax, income tax, any amounts paid to an employee that exceeds $100,000, or any payments made to employees for leave under the Families First Coronavirus Response Act.

Although SBA guidance now says that each lender will be responsible for computing the loan amount, some lenders have indicated that applicants should consult with their advisors to properly compute the loan amount being requested before submitting the application.

What can the funds be used for?
PPP proceeds can only be used to cover payroll costs and to pay mortgage, rent, and utilities (to the extent that those obligations were effective as of 2/15/20). According to the guidance released by the U.S. Department of Treasury, if you use funds for any other purpose, the federal government will pursue criminal fraud charges against you.

Do I have to repay the funds?
While PPP proceeds will be issued as a loan, you may be able to avoid having to repay it. However, you must meet a very specific set of criteria to qualify for loan forgiveness, so please familiarize yourself with those details outlined below.

How does PPP loan forgiveness work?
You can obtain loan forgiveness equal to the amounts spent during the 8 weeks after the issuance of your loan, only as that spending relates to payroll costs, mortgage interest, rent, and utilities during that period will be eligible for forgiveness. The Treasury Department has now stated that PPP loans will not be eligible for forgiveness unless at least 75% of the loan amount is used towards payroll costs and payroll costs alone. And of course, the amount forgiven cannot exceed the original amount borrowed.

To avoid having to repay any of this loan, you must plan to normalize your payroll on or before June 30, 2020. The amount of forgiveness can be reduced under two circumstances: (1) if your full-time equivalent (FTE) employee headcount is lower on June 30, 2020 than it was during 2019 at that time and (2) if, on June 30, 2020, your employee pay rates have been reduced by more than 25% from what they were during this period in 2019.

How do I apply for loan forgiveness?
Lenders will not forgive loan amounts without this supporting documentation, so borrowers should maintain thorough recordkeeping practices and are encouraged to work with their professional advisors in doing so. Lenders are required to render decisions on loan forgiveness applications within 60 days after submission.

For any portion of the funding that cannot be forgiven, what are the terms of the loan?
The precise terms of these loans will differ on a case-by-case basis. But to the extent that a PPP loan is not forgiven, your repayment will be subject to the following terms: interest rates will be capped at 1% (this and increase from the previous rate of .5%) with a repayment term of up to 2 years. Deferment of repayment will be granted for 6 months after loan issuance.

All loan application fees, personal guarantees, collateral requirements, and credit status will be waived for any covered loan, however, any person using loan proceeds for unauthorized uses will be personally liable for repayment (and may also be subject to criminal charges).

UPDATE:  Sidewalk Cafe License Fees Waived

From Andrew Rigie at the NYC Hospitality Alliance:  “The NYC Hospitality Alliance is happy to report that the city’s Department of Consumer Affairs has agreed to our request to waive sidewalk cafe consent fees this quarter (March 1 to May 31). Any consent fees already collected will be refunded. The agency will also reevaluate future fees in the coming months. We thank Mayor de Blasio’s administration for working with us and supporting our industry during this trying time. We will continue to work with our government officials to enact policies that will support our local restaurants and nightlife venues during this crisis.”
Nice job Andrew.

And I bid you goodnight.