How is the loan amount calculated? The loan amount is the lesser of $10 million or 2.5 times the average monthly payroll costs. Payroll costs includes salary, wages and commissions, payments of tips or cash equivalents, payment for vacation or sick leave, payment of health insurance premiums, payment of retirement benefits, and payment of state and local tax assessed on such compensation. Note, the portion of compensation for an employee in excess of $100,000 annually is excluded.
What are the requirements in order for the loan to be forgiven? What amount of the loan will be forgiven? During the 8 week period beginning when the loan is originated, the loan proceeds must be used for payroll costs (including additional amounts paid as tips), interest on mortgage payments, rent, and utility payments, with at least 75% used for payroll costs. All amounts that fall into this category are eligible for forgiveness. Amounts forgiven are considered canceled indebtedness and are not includible in gross taxable income of the borrower.
I’m paid primarily based on commissions as a 1099 employee—do I qualify? Yes. For sole proprietors, independent contractors and self-employed individuals the total amount of wages, commissions, income, net-earnings from self-employment or similar compensation that is not more than $100,000 annually qualifies. So, for example, if you received $110,000 in compensation as an independent contractor, then $100,000 would be considered valid payroll costs, and you could seek a loan of $25,000.
Are single member LLCs and non-profits eligible for these loans? Yes.
Is a personal guarantee or posting of collateral as security for the loan required? No.
When do I start making payments under the loan? Payments of principal, interest and fees will be deferred for a minimum of six months. However, there will be no payments required in the event the loan is forgiven.
My business is doing well, should I still apply for this loan? When you apply for this loan you will be required to make a good faith certification that the uncertainty of the current economic conditions makes the loan request necessary to support ongoing operations.With the current unemployment numbers, the dramatic slowdown in economic activity, and the uncertainty of what is ahead, many businesses are currently able to make this certification. In the event you aren’t sure, you have until June 30, 2020 to apply for this loan.
What documentation will be required when I apply for the loan? Banks are working on this and many will roll-out online portals and forms after receiving SBA approval. In the meantime, a draft application can be found here. A copy of your most recent tax return and other similar documents will likely be required.
What documentation will I be expected to provide in order to receive forgiveness of the loan? At a later date you will be required to file an application for loan forgiveness along with documentation showing employees, payroll costs, rent and mortgage payments, and utility payments for the prior 8 week period.
Should I also file for an SBA Economic Injury Disaster Loan? This is fact-dependent. You can apply for these online and receive $10,000 in an emergency cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that can’t be met due to revenue loss. Moreover, there will be an opportunity to fold such loans into the Paycheck Protection Program loan.
Are there any downsides to taking this loan? That is a complicated question that is fact-dependent. The purpose of this law is to limit unemployment, so there are limitations on what amount of the loan will be forgiven if you let staff go without rehiring them in a certain period of time, or if you reduce compensation to employees making less than $100,000 by more than 25%.
Won’t lender and legal fees eat up a big portion of the loan proceeds? No. Lenders are paid a separate processing fee that is capped by statute, and that does not come out of loan proceeds. Lawyers serving as agents for borrowers would be paid a portion of this fee. No one may charge a fee in excess of this statutorily prescribed amount.
Do I really need a lawyer for the process? It is not required, but is certainly not a bad idea, especially in light of the fact there is no cost to you, and an attorney experienced in loan transactions may be able to assist in the process, ensure you are being treated fairly, and deal with any problems as they arise, allowing you to focus on your business during this critical time.