Money for Small Businesses: How The CARES Act Paycheck Protection Program Helps Businesses in Shutdown

The CARES Act became law on Friday, March 25, 2020, providing much-needed relief for a nation under siege. With most of the country under mandatory closure and quarantine orders, it has left millions of individuals out of work and businesses shuttered.

Congress included provisions in the Act to keep small businesses from bankruptcy. Within the CARES Act, a Paycheck Protection Program allocates $350 billion in loan assistance to small business owners impacted by the coronavirus. Below is a high level of view of the relief offered through the program:

What Businesses Qualify for Assistance?

  • The program includes small businesses that were in operation on February 15, 2020, with less than 500 employees. Hospitality businesses with fewer than 500 employees in one physical location, also qualify.
  • Nonprofits
  • Qualified self-employed workers, including independent contractors and sole proprietors.

What are Spending Restrictions?

  • Businesses commit to securing a single loan through the program, must only request what is necessary to support operations, and agree to use the funds for qualified expenses. The Act defines qualified expenses as the cost of retaining workers, meeting payroll, and covering essential business expenses such as lease payments, mortgage interest, and utility costs.

Loan Terms:

  • Loans will not require collateral or a personal guarantee, and owners do not need to show that it cannot secure credit from another source to qualify.
  • Under the program, loans receive deferred interest and payments for six months to a year with a maximum interest rate of 1%. The loan repayment can last up to two years. Businesses with existing SBA loans might also qualify for payment deferment on those loans.
  • The debt will not include annual fees, loan guarantee fees, or prepayment penalties.

How Much Can Small Businesses Borrow?

  • Small businesses can request the funds needed to cover essential business expenses for up to eight weeks. The limits are 2.5 times the average payroll from the previous year, up to 10 million. The 12-month period uses the date of the loan as the look back start date.
  • Payroll costs, for purposes of the loan, include salaries, commissions, and tips. Businesses can also add the cost of vacation pay, sick or family leave, health care costs, payments to employee retirement accounts, and payroll taxes. Wages paid to employees or independent contractors earning up to 100,000 also count.
  • Sole proprietor and independent contractor pay will use the average annual compensation based on the previous year’s tax return or 1099’s. Self-employed individuals must submit payroll tax filings for wage estimates.

How do Small Businesses Get Loan Forgiveness?

  • Loan forgiveness includes qualified expenses paid for the eight weeks from the loan origination. Qualified expenses include eligible payroll costs, utility payments, lease or rent payments, and interest on a business mortgage.
  • The level of loan forgiveness declines if the business reduces staff (compared to the previous year) or lowers wages by more than 25% of the prior quarter. Companies that rehire laid-off workers will not receive loan forgiveness penalties.
  • Borrowers must apply for loan forgiveness at the end of the eight-week term.

The Application Process:

  • Qualified banks, credit unions, and some nonbank lenders will begin taking loan applications on Friday, April 3, 2020. The SBA will distribute aid on a first-come, first-serve basis until exhausting the allotted amount. Most owners can apply with their local bank.

Final Thoughts

The Paycheck Protection Program will provide needed assistance to small businesses in the form of a forgivable loan earmarked to cover payroll costs and other essential business expenses. However, with 30.2 million small businesses, employing 58.9 million workers, the fund could run out of money at a rapid pace.

About The American Fair Credit Council

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