You’ve been reading and hearing about The Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act (the Act.) This historic $2 trillion stimulus bill includes a $349 billion relief program for small businesses and nonprofit organizations, available through the Small Business Administration’s (SBA) existing §7(a) Paycheck Protection Program. Structured as forgivable loans, the program is designed to bridge employers through the shutdowns caused by COVID-19. We, at HW&Co. are here to help our clients understand this package, determine if it applies to their situation and provide assistance in the application process.
Who Qualifies for a 7(a) Loan?
- Small business, nonprofit, or veteran’s organization with 500 or fewer employees, subject to:
- (a) affiliation rules may apply to include employees of parents/subsidiaries/etc., and
- (b) SBA may set a higher number than 500, depending on applicable size standard for the industry.
- Borrower must have been operational as of February 15, 2020.
- Borrowers must make a good faith certification they have been impacted by COVID-19 and will use the funds to retain workers and maintain payroll and other debt obligations and sets out parameters for full-time equivalent employees.
Key Loan Terms
- Maximum principal for any borrower is equal to lesser of (a) $10 million, and (b) 2.5x average monthly payroll costs (measured by the 12 months preceding the date of the loan).
- It’s important to note that the definition of “payroll costs” includes healthcare premiums and other benefits, but is capped at $100,000 for any given employee.
- Interest rates will be 4% or less.
- The loans will be repaid in 10 years, but see “Forgiveness of Loans” below.
Loan Forgiveness
- Principal will be forgiven, equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
- The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. Borrowers which re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
How to Apply
- Loan applications are processed through banks. You should contact your regular banker to begin the process.
- According to Treasury Secretary, Steve Mnuchin, all FDIC insured financial institutions will be able to participate in the program. This expands the pool of lenders significantly beyond the current SBA-approved lenders.
Other Types of Available Relief
- SBA Economic Injury Disaster Loans (EIDL) and Emergency Grants – During the application process for EIDL Loans, SBA will provide an up-front grant of $10,000. These grants are subject to forgiveness provisions described above. Click here to apply for an EIDL grant on the SBA website.
- Delay of payment of employer payroll taxes – Employers and self-employed individuals may defer payment of the 6.2% employer share of the Social Security tax. Instead, half will be due by December 31, 2021 and the other half by December 31, 2022.
Next Steps
You’ll want to move quickly on this. Loans are given on a first-come-first-served basis. Here is what you need to do:
- Call your regular banker. Let them know you will be applying for a 7(a) loan and ask for application details.
- If needed, let your board know that you will be applying for this loan that’s part of the CARES Act.
- Calculate your average payroll for the previous 12 months – you’ll need this for the loan application.
- Draft a statement on how your organization has been financially impacted by the COVID-19 crisis; Include information on lost donations, cancelled fundraisers, etc.
Please contact your HW&Co. professional with any questions you have about CARES.
