Near the End of March, the Senate passed the Coronavirus Response Bill that totaled 2 trillion dollars of relief funds to meet the needs of the COVID-19 crisis. The purpose of the bill now called the Coronavirus Aid, Relief and Economic Security (CARES) Act, is to inject capital into the economy to provide relief for business loss, job loss, and the economy as a whole. Under the act, there are four specific provisions for Small Business Owners that are specific to provide relief from the Health Crisis. These are:
- COVID-19 Economic Injury Disaster Loan
- SBA Debt Relief
- Paycheck Protection Program
- SBA Express Bridge Loans
Although there are many aspects to this bill, this article will focus specifically on the benefits and elements of the new Paycheck Protection Program (PPP).
The Purpose of The Paycheck Protection Program
The Paycheck Protection Program utilizes $349 billion of the $2 trillion funds in the CARES Act to promote job retention and incentivizes business owners to keep their workers on the payroll. Already, many businesses have shut down, laid off, and furloughed thousands of employees. To combat this issue, the PPP provides incentives for retaining, rehiring, and paying 100% of their employees.
Details of the Program and Loan
The main incentive of the PPP loan is that the funds received while under the program will be forgiven depending on how many employees are kept on the payroll or rehired, and how much of their salary remains at the former monthly pay rate before the crisis. Furthermore, the loan will be forgiven to cover up to 8 weeks of payroll. That means that you may be able to keep all your employees and can pay through the program without having to spend limited revenue or out of pocket for 8 continuous weeks. This will guarantee stability for your business and sustain your employees for 2 straight months. Additionally, you are eligible for more than just 8 weeks of payroll but additional funds may not be forgiven. Still, another huge incentive for this program is the term and interest of the loan. Any funds received through this program will have a term of 2 years for any amount that has not been forgiven at a very low-interest rate of 1%. The payment for the loan will start 6 months after receiving the loan so you do not have to start paying the loan back until a half a year later.
How the Funds Can be Used
It is important to understand how you can utilize the funds you receive under this program because there are several other options that you can apply for during this crisis. There are four separate areas where this loan can be used:
- Funds can be used to pay your full-time workers, part-time workers, and 1099 independent contractors
- Funds can be used to pay rent for the office or building you use to operate your business
- Funds can be used to pay interest on a mortgage for a property where you operate your business
- Funds can be used to pay utilities that are necessary for you to operate your business
Remember, this loan is not solely for paying your employees, this loan is a great option if you are looking for a low-interest loan to help your business survive during this crisis. However, the incentives may decrease if you use the majority of the loan for other purposes than payroll. We will explain in detail how incentives and forgiveness change when you utilize the funds in other areas of your business.
Loan Forgiveness
The loan under the PPP may be completely forgiven depending on several factors. They are:
- How many employees you keep on the payroll
- The percentage of the salary you pay your employees
- How long you keep your employees on the payroll
Additionally, in order to participate in loan forgiveness, 75% of the PPP loan must be used on employee payroll. However, you can use the other 25% on rent, utilities, and interest on mortgages for the business owners who own the premises of the business.
Eligibility For The PPP Loan
In order to be eligible for the program, you need to fit the criteria set out by the CARES Act. You must be:
- A business of 500 workers or less, including non-profit organizations, veteran organizations, or tribal business
- A business meeting the industry size criteria set by the SBA for business with more than 500 employees
- A business significantly affected by the Coronavirus
- A business in the Food Services Industry that has several locations but employs 500 employees or less per location
- An independent contractor, sole proprietors, or self-employed
Any business that fits the standard above can apply but must act quickly because the funds are given on a first-come, first-serve basis and will run out after the $349 billion is fully expensed.
The Paycheck Protection Program Rule and Interim Final Rule
In order to make sure that the funds are received by the proper entities and small businesses that it was intended for. There are affiliation rules, which are four tests that are based on control to determine the size of the business and number of employees. These four tests are:
- Ownership-Based Affiliation
To determine control under an ownership-based affiliation the presumed owner must own 50% or more of the equity in the business. If there is less than 50% ownership, the SBA will deem control to the highest-ranking official (Chief Executive Officer, President, or Board of Directors) in the company. However, the SBA may deem a minority shareholder in control if under the company shareholder’s agreement or by-laws allow the shareholder control.
- Affiliation from Convertible Securities, Stock Options, and Merge Agreements
The SBA will consider convertible securities, stock options, and merge agreements to determine the size and the power to control. All agreements and sales considered are those that are present and those subject to sale at a later date will not have an effect on control. All sales and agreements must not have conditions that cannot guarantee execution, thus they will not have an effect on control. Additionally, shareholders may not sell in order to divest part of ownership to avoid affiliation.
- Management Based Affiliation
Affiliation may also be attained if, under a management agreement, the management is allowed control of the business entity. This can range from several titles such as the CEO, President, Board of Directors. The SBA will determine control to management if this is found to be the case.
- Identity of Interest Based Affiliation
Identity of Interest affiliation is determined when close relatives own nearly or the same interest in the business or company.
Notwithstanding the four tests, there are additional final rules that were published on Apr 2nd, 2020. This final rule espouses the initial rule with guidance on how to apply the initial rules to section 1102 and 1106 of the CARES Act. The following rules apply for all applications that are submitted through the PPP until June 30th, 2020.
- Affiliates are Considered Together
For most businesses, the borrower is considered together with their affiliates when determining eligibility for the loan. Affiliates, under SBA standards, are entities with overlapping management, identity of interest, and stock ownership. When together, the combined group of affiliates must meet the criteria of a small business under the SBA standards.
- Faith-Based & Religious Organizations
Faith-based organizations are exempted from the affiliation rules, including those organizations where the rules substantially will hinder the organizations’ practice of religion. This is made possible under the Religious Freedom Restoration Act. Therefore, faith-based organizations will not be penalized or assessed allowing these organizations to receive benefits under the PPP. This means that any religious organization with affiliate entities with more than 500 employees are not subject to affiliation rules set forth by the SBA.
The Interim final rule is a set of regulations set by the SBA under section 1114 of the CARES Act and is to be applied immediately starting April 3rd, 2020. Although, the rule is to be implemented but they are subject to comments from interested members of the public, thus they are interim rules. Interested members may submit their comments to the SBA within 30 days of publishing this document on the federal register for the SBA to consider the comments and make revisions to the final rule.
Understanding the PPP Application Form
Applying for the PPP loan may seem simple and straightforward, but in order to ensure that the form is filled out correctly, contact the Small Business Loan Advisor to increase your chances of receiving the loan.
The PPP application form has 11 elements that need to be accurately filled out to be eligible to receive the funds.
- Lender Information
In this section, the applicant or lender will provide all information about the lender. This lender must be an SBA approved lender. You will provide the name, address, phone, email, and contact person for the lender.
- Applicant Information
Here you will indicate the type of business you operate as (Sole Proprietor, C-Corp, S-Corp, LLC, Partnership, Independent Contractor, Self-Employed, 501(c)(3) Nonprofit, 501(c)(19) Veteran Organization, Tribal Business, or Other). You will provide your Legal name, DBA, Tax ID, Address, and contact information. It is important to make sure you fill this section accurately to make sure the loan is processed quickly and smoothly.
- Loan Structure Information
This section already has several parts prefilled such as how much of the loan is guaranteed, the term, interest rate, and payment information. You will need to provide the loan amount you are requesting. In addition, provide a separate document calculating the amount needed in accordance with the PPP rule.
- Loan Amount Information
The Loan Amount information should be filled with the average monthly salary payroll, multiplied by 2 and a half months. Next, you will provide how much of the Economic Injury Disaster Loan you want to refinance with the PPP Loan. Lastly, you will calculate the total amount you are requesting under the PPP loan program.
- General Eligibility
This section checks several parts of the business to see if they meet the eligibility requirements. The applicant must have been in operation Feb 15th, 2020 and have employees or independent contractors to whom you paid payroll taxes and salary. Therefore, this loan only applies to those who were in operation during the time of crisis and must be used to retain workers and not to hire new workers or restart a business that was not in operation. In addition, you must meet the PPP loan requirements on the type of business this loan is available for.
- Applicant Certification of Eligibility
This section checks to see if the applicant has certified the lender that they are eligible for the loan under the PPP rule.
- Franchise/License/Jobber/Membership or SImilar Agreement
If the business is a franchise, the applicant must notify the lender that they are listed on the Franchise Directory of the SBA.
- Character Determination
In this section, the applicant or partner owners of 20% or more do not have any pending criminal cases or are on parole or probation. In addition, the applicant must agree that they or any partner of 20% or more does not have a felony conviction in the last 5 years. If you are unsure about your criminal background, the Small Business Advisor can help you determine if you meet this eligibility requirement for the PPP loan.
- Prior Loss to Government/Delinquent Federal Debt
Here the applicant must guarantee that they have not been suspended or ineligible to participate from transactions with any federal agency. Additionally, they must certify that they have not been delinquent on any payments or defaulted on any SBA loans in the past.
- U.S. Employees
The applicant must certify that all employees for the amount funded have a primary residence in the United States. The PPP loan cannot be used to pay any workers outside of the US.
- Fees
This section certifies that the lender will not collect any application fees or use part of the loan as payment for services provided to receive this loan.
It is crucial to understand all the elements of this application form in order to ensure full and quick delivery of the funds.
Contact Us to Review Your Paycheck Protection Program Loan Application
As reviewed above, there are many conditions that need to be met to be eligible for the Paycheck Protection Program. The Small Business Loan Advisor works with you by going over your eligibility as well as checking and all the necessary documents for submission to an SBA approved lender. We are a group of qualified attorneys that will take the time to review your documents to increase your chances of being approved for the PPP loan. Do not submit your application to the lender without the review of a qualified attorney. The PPP loan may be just the capital you need to keep your business running during these uncertain times. Call us now at 888-919-1210 to review your application today.
