Written by: Todd C. Bernhardt, Timothy Kosiek

Eligible small businesses and nonprofit organizations can apply for business interruption loans for expenses covering the period beginning Feb. 15, 2020, through June 30, 2020, under the Coronavirus Aid, Relief and Economic Security (CARES) Act, passed by Congress on March 27, 2020. Funds borrowed under the new Paycheck Protection Program (PPP) (part of section 7(a) of the Small Business Act) can be used to meet payrolls and other employee-related costs as well as debt, rent and utility payments. Use of these loans for payroll is limited to compensation of up to $100,000 per employee, independent contractor or sole proprietor.

Eligible borrowers include entities with not more than 500 employees (or higher as defined by the Small Business Administration (SBA), including small businesses, section 501(c)(3) nonprofits, section 501(c)(19) veteran’s organizations, and certain tribal business concerns. Eligible borrowers also include food service business concerns (NAICS 72) with multiple locations, but that employ not more than 500 persons per location. The SBA’s Table of size standards will help you assess the size of your business.

Paycheck Protection Program (PPP) highlights

The bill establishes a maximum loan amount per borrower at $10 million through December 31, 2020, and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan. The formula is the average monthly payroll, including benefits, incurred during the one-year period before the date of the loan) multiplied by 2.5.

As an example, if the borrower’s small business’ average monthly payroll is $400,000, they would be eligible for $1,000,000 as determined by the formula. If the borrower makes qualifying payments (payroll, utilities, interest on debt) of $1,000,000 between funding and June 30, 2020, the loan may be forgiven. Any unspent amount is not forgiven.

Note: The SBA is required to establish regulations regarding the PPP no later than 15 days after the President signs the bill into law. It is uncertain if borrowers can apply for PPP loans before the regulations are issued but there is still a lot they can do:

  • collect necessary documentation
  • consult with business and legal advisors about the potential short- and long-term impact of the pandemic on the business
  • evaluate vendor and customer relationships that may be interrupted by the crisis and could have an effect on payroll and other qualifying expenses

Loan forgiveness
These loans are eligible for forgiveness of indebtedness in an amount equal to the cost of maintaining payroll continuity from February 15, 2020, through June 30, 2020 (the “covered period”). The amount of loan forgiveness for an eligible small business may not exceed the sum of:

  • the total payroll costs incurred by the eligible recipient during the covered period; and
  • the amount of payments made during the covered period on debt obligations that were incurred before the covered period.

An eligible recipient with tipped employees may receive loan forgiveness for additional wages that would have been paid to those employees during the covered period.

The amount of loan forgiveness shall be reduced by a specified percentage if, during the covered period, the number of full-time equivalent employees or total compensation paid is reduced by more than 25%.

Allowable uses
Small businesses can use proceeds of the Section 7(a) loan for the following:

  • payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
  • employee salaries;
  • mortgage payments;
  • rent
  • utilities; and
  • any other debt obligations that were incurred before the covered period.

Eligible businesses for these loans are those that were in operation on February 15, 2020, and had employees for whom the business paid salaries and payroll taxes.

The SBA will charge either no fee or a reduced fee as much as possible for this program.

Repayment of loans under this program will be deferred for a period of not longer than one year.

Good faith certification
Eligible borrowers must make a good faith certification that:

  • the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19;
  • they will use the funds to retain workers and maintain payroll, lease, and utility payments; and
  • they are not receiving duplicative funds for the same uses from another SBA program.

Other options for emergency funds
Funds may not be available for a few weeks at best after the law is enacted. Small businesses, if they qualify can pursue Economic Injury Disaster Loans (EIDL) directly from the SBA. (See our story “How to access SBA low interest loans for working capital during coronavirus pandemic.”) The CARES Act expands eligibility for access to EIDLs to include tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020). Private non-profits are also eligible for both grants and EIDLs.

Note: The SBA is now administering two different loan programs for small businesses related to COVID-19: the EIDL and the PPP. An eligible borrower can only get a loan from one of the programs. A borrower who has an EIDL loan unrelated to COVID-19, however, can apply for a PPP loan, with an option to refinance that loan into the PPP loan.

Impact on lenders

Forgiven loan amounts shall be considered canceled indebtedness by lenders. For purposes of the redemption of a guarantee by the lender for a covered 7(a) loan, amounts which are forgiven shall be treated as a default.

An eligible small business seeking loan forgiveness shall submit to the lender that originated the covered 7(a) loan an application, which shall include documentation verifying the number of full-time equivalent employees on payroll and pay rates for the designated periods, including:

  • payroll tax filings reported to the Internal Revenue Service;
  • state income, payroll, and unemployment insurance filings;
  • financial statements verifying payment on debt obligations incurred before the covered period; and
  • any other documentation the SBA determines necessary.

Not later than 15 days after the date on which a lender receives an application for loan forgiveness from an eligible recipient, the lender shall issue a decision on an application. Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender.

Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.

Entrepreneurial grants
Small business development centers and women’s business centers are eligible for grants to provide education, training, and advising to small businesses in an area substantially affected by COVID-19. (Small business development centers will be eligible for 80% of the available funds; women’s business centers the remaining 20%). “Substantially affected” means that a small business has experienced:

- supply chain disruptions, including changes in:

  • quantity and lead time, including the number of shipments of components and delays in shipments;
  • quality, including shortages in supply for quality control reasons; and
  • technology, including a compromised payment network;

- staffing challenges;
- a decrease in sales or customers; or
- shuttered businesses

Baker Tilly Insight

We anticipate that these borrowing opportunities will move quickly into and through the qualifying lenders. Accordingly, for potential borrowers it will be essential to start collecting basic information before approaching a lender, including:

  • 2019 Tax Returns and/or 2019 P&L and Balance Sheet
  • Last 4 quarters of Payroll Tax Forms (941) or Annual Payroll Forms (944)
  • Verification of the number of employees and payroll incurred over the most recent 12 months.

For Section 7(a) lenders it will be essential that they have well-developed internal control processes for the execution of underwriting, assembly of documentation, distribution of funds and reporting pursuant to the SBA requirements. Further, because the terms and fee structures of the Section 7(a) loans made pursuant to the CARES Act will be inherently different than those made under the historical program, it will be important to understand and implement financial accounting and reporting processes that are responsive to these loans.

Certainly, there remains much to be learned about the submission of credit applications by borrowers and the execution of Section 7(a) loans by qualifying lenders. Nathan Ware of Baker Hostetler notes that “prior to applying for a covered loan, prospective borrowers should review all existing loan agreements to determine whether incurring additional debt will cause a default or otherwise violate the terms of those agreements.”

Note: The SBA is anticipated to request the following items along with the application for the Paycheck Protection Program.  Updates will be shared as new information is made available.

  • Completed Application
  • SBA Form 1919 or corresponding SBA Form 912, if applicable.
  • Articles of Incorporation/Organization of each borrowing entity
  • By Laws/Operating Agreement of each borrowing entity
  • All owners Driver’s Licenses
  • Payroll Expense verification documents to include:
  • IRS Form 940 and 941
  • Payroll Summary Report with corresponding bank statement
  • If a Payroll Summary Report is not available, Employee Pay Stubs as of February 15, 2020 (or corresponding period) with corresponding bank statement, and,
  • Breakdown of payroll benefits (vacation, allowance for dismissal, group healthcare benefits, retirement benefits, etc.
  • 1099s (if Independent Contractor)
  • Certification that all employees live within the United States. If any do not, provide a detailed list with corresponding salaries of all employees outside the United States
  • Trailing twelve-month profit and loss statement (as of the date of application) for all applicants
  • Most recent Mortgage Statement or Rent Statement (Lease)
  • Most recent Utility Bills (Electric, Gas, Telephone, Internet, Water

Baker Tilly professionals with relevant experiences in assisting small businesses with a wide range of services and deep expertise in the banking and credit industries are available to assist entities seeking to participate in the critical aspect of the COVID-19 relief effort.

Contact us for COVID-19 questions

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