The Coronavirus Aid, Relief and Economic Security (CARES) Act is a reality!
Our clients are now asking, “How do we apply?” The SBA must now write rules and regulations to give specific instructions for these loans. Those rules are expected in the coming days and weeks. So, you can’t actually apply for one of these loans – YET.
The law attempts to make the application process as simple as possible. But as you might expect from a government program, the loan forgiveness process on the back end can get rather complicated. The end of this article provides a summary of the rules involved for the loan qualification and forgiveness process.
Even though we do not yet have all the details, we have been in touch with many of the SBA lenders to know what to expect. So, we’re already preparing clients to be ready for the application, when it is released.
The banks are telling us to get prepared so that when the regulations are released, you can get your application done quickly. Here are the steps you can take to be ready:
- Download our Loan Preparation Checklist HERE. We encourage our clients to begin gathering this information in advance of the SBA regulations. Some of this information may not be required by the SBA’s final application. But we think it’s better to have the information ready, just in case it is needed.
- Download other tools from our website to assist with the information gathering. This includes a Debt Schedule Template and SBA Personal Financial Statement Template.
- You should also create an estimate for your Qualified Expenses during the 8-weeks after you close the loan. Lenders may be asking to see an estimate of your Qualified Expenses as part of the application process. Qualified Expenses include: Payroll Costs, Rent, Utilities, and Loan Interest.
- We highly recommend estimating your forgiveness amount before you take the loan. You can see the forgiveness rules discussed below are rather complicated.
BiggsKofford is gearing up and training to assist our clients with these loans. We can assist clients with the following steps:
- Loan application: We can analyze your qualified Payroll Costs, determine your loan amount and complete the application with the required information.
- Forecast the Forgiveness: We can prepare an estimate of the loan amount that will be forgiven. The forgiveness rules are rather complicated. Understanding how these rules impact your specific scenario will help you manage your expenses over those 8-weeks to maximize the forgiveness amount.
- Forgiveness Application: We anticipate the SBA and Lenders will create a more formal process for the application of forgiveness, and we expect this process will feel a lot like filing a tax return. Adding to the complication, there are a few options that can impact the calculation. We can complete this application for you to ensure it is done accurately and chose the options that maximize the forgiveness amount.
- Forgiveness Documentation / Receipts: The law requires detailed documentation of your Qualified Expenses over the 8-week period. We can organize and summarize the required documentation that will need to accompany the forgiveness application.
BiggsKofford is committed to providing efficient and valuable services to our clients through this process. While there are still many unknowns for both the loan and the forgiveness applications, we have developed a process to assist clients navigate the program and eliminate surprises on the back end. If you would like to discuss engaging our assistance, please contact us today so that we can understand your specific situation and how we may be able to help.
SUMMARY OF THE SBA LOAN CHANGES
Before we discuss the new Paycheck Protection Program (PPP) – companies with a current SBA loans outstanding will be able to receive a subsidy for SBA Loan payments. The SBA must pay the principal, interest and any associated fees that are owed on most existing SBA loans for a six-month period starting on the next payment due date. (Most lenders are saying this means your May payment, not a payment due on April 1). Many lenders have already offered deferment terms, so borrowers will receive six months of payment by the SBA beginning with the first payment after the deferral period.
PAYCHECK PROTECTION LOAN PROGRAM RULES
Application and Loan Amount Rules – Summarized:
This new loan is eligible for small businesses and non-profits with fewer than 500 employees. There are special eligibility rules for restaurant and hospitality companies with more employees in total, but fewer than 500 employees per location.
Some of the typical SBA loan requirements have been removed from these loans, although others may remain intact. Specifically, these loans will not require a personal guarantee, no collateral and the SBA is guaranteeing 100%. (Typical SBA loans require personal guarantee and collateral from the business owner(s) and only offers a 75% guarantee).
The Maximum Loan Amount is calculated as: Monthly Average “Payroll Costs” multiplied by 2.5.
The Monthly Average is based on either:
- 1 – year period prior to the loan, or
- (for seasonal businesses) 12-week period from 2/15/19 (or at election of recipient 3/1/19) ending on 6/30/19, or
- if business was not in business during 2/15/19-6/30/19 then the average is from 1/1/20 – 2/29/20.
“Payroll Costs” are defined to include:
- Compensation: Salary, Wage, Commission or Similar (including owner compensation)
- Cash Tips
- Vacation, Family/Medical/Sick/Parental Leave
- Allowance for Dismissal or Separation
- Group healthcare benefits, including insurance premiums
- Retirement benefit payments
- State or local taxes on employee compensation (i.e. SUI)
- Payments to sole proprietor or independent contractor that is a wage, commission, income.
“Payroll Costs” specifically exclude:
- Compensation per individual over $100,000.
- Federal Payroll Taxes
- Employees who’s primary residence is outside the US
- Qualified Sick Leave wages under 7001 of the Families First Coronavirus Response Act
- Qualified Family Leave wages under 7003 of the Families First Coronavirus Response Act
Loan Forgiveness Rules – Summarized:
The Potential Forgiveness Amount equals the sum of the following qualified expenses that are incurred and payments made during the Covered Period (8-Weeks beginning on the Loan Origination Date):
- Payroll Costs that is 75% or more than historical amounts
- Payments of Interest on ‘covered’ mortgage obligations
- Payments on ‘covered’ rent obligations
- ‘Covered’ Utility Payments
“Payroll Costs” are defined the same as in the Application Process described above.
“Covered” expense noted above is an expense that was in place prior to 2/15/20 (i.e. not a new rental, new utility or new loan entered into after 2/15/20).
The Potential Forgiveness Amount is then reduced to the lesser of the Principal Borrowed or the Eligible Expenses adjusted by 2 possible reductions:
- Reduced to the ratio of Full-Time-Equivalent (FTE) employees during the Covered Period (8 weeks), divided by (at the election of the Borrower, or first option if taking Seasonal approach) either:
- The Average # of FTE’s during 2/15/19-6/30/19, OR
- The Average # of FTE’s during 1/1/20 – 2/29/19
- Example: If FTE’s are 20 during the Covered Period, but were 25 during the historical period, then ALL Eligible Expenses will be multiplied by 80% (20/25 = 80% x Eligible Expenses)
- Further reduced by any reduction in wage of each employee, by more than 25% compared to their average wage during the most recent full quarter the employee was employed before the Covered Period. (This only applies to employees making less than $100k in annual compensation).
- Example: If an employee made $1,000 per week last quarter, but is then paid $600 per week during the 8-week Covered Period, then they are deemed to have a reduction of 40%, which is greater than the 25% threshold. The resulting adjustment would be a reduction of $150 per week ($1,000 x 75% – $600). If that pay reduction continued during the entire 8-week period, the Eligible Expenses would be reduced by $1,200 due to that one employee.
- FTE’s shall be calculated based on pay periods falling within a given month
- Tipped or commission employees may need to receive additional wages to meet the 75% / 25% threshold and allow the company to receive the full loan forgiveness amount.
- Reductions to FTE’s and Salaries that were made between 2/15/20 and 30 days from the Enactment of the Act (4/26/20) will be excluded from these calculations, provided the FTE’s and/or the Salary Reduction is corrected by 6/30/20.