In February 2020, the US President set up the Coronavirus Task Force and appointed Secretary Mnuchin to head it. The taskforce and Treasury worked together to provide direct and fast relief to one of the worst-hit sectors of the US, the small business sector. The aim was to provide the small business owners with some fund relief that would help them pay off their employees and keep the business afloat. With this in mind and with the thought of helping American families, businesses, and workers, the U.S. Department of Treasury, along with the Coronavirus Task Force, launched the CARES Act that authorizes $2.2 Tn spend to support the cause.

The CARES Act

The Act is covered by 800-pages that contains numerous provisions, all aimed to provide financial relief to millions of American families and businesses who are suffering the implications of the current pandemic situation. The Act is primarily aimed to:

• Keep American workers employed and paid by providing Small Business Retention Loans
• Help American families with their tax obligations by providing them with rebates, credits, expanded unemployment insurance, and by providing economic impact payments
• Assist in stabilizing the overall American economy
• Provide Coronavirus Relief Fund for Tribal, Local, and State governments

The Paycheck Protection Program

A quintessential part of the CARES act that addresses the needs of the US small business sector, specifically, is the Paycheck Protection Program.

This program is aimed to serve millions of its citizens who are currently employed by small businesses. The program has authorized a spend of $349 Bn which is aimed to be spent towards payments to small business employees and other expenses crucial to keep the business afloat.

Eligibility for the program

• Small businesses
• Sole proprietors
• Individual contractors
• Veterans organizations 501(c)(19)
• Tribal businesses (with less than 500 employees)
• Eligible non-profit organizations 501(c)(3)

The above-mentioned entities are eligible for the Paycheck Protection Program, provided they meet the size standards laid down by the program. Each entity can apply for just one loan against their TIN (Taxpayer Identification Number).

What the Paycheck Protection Program entails?

Through the Paycheck Protection Program, the SBA is encouraging small businesses to keep their employees on payroll and keep the business going. They are doing so by providing small business owners with 100% federally-backed credit through June 30, 2020. This includes up to 8 weeks of forgiveness for sole proprietors, eligible non-profit organizations, and small businesses. These loans are forgivable only if the business owners who take these loans out, retain their employees at comparable pay to what they were paying before the pandemic.

The Paycheck Protection Program also waives all kinds of SBA fees and has allowed deferral on loan repayments for a period of 6 months to 1 year, to reduce the pressure of financial obligations for small businesses.

Small businesses that have been impacted by the Coronavirus pandemic from February 15 – June 30, 2020, are eligible to apply for the Paycheck Protection Program loans. The loans will be available until the stated date of June 30.

How to know how much loan you can apply for?

While the sum of $349 Bn seems like a large one, but given the fact that over 99% of US’s total of 29 million firms are small businesses, the Treasury needs to set strict standards for how much loan can be withdrawn by any applicant.

Therefore, they have categorized the loans as per the duration for which the business stays operable during the timeframe of February 15 to June 30. Each such organization will be eligible to receive 250% of their average monthly payroll spend, during the abovementioned period. Here is a detailed glimpse of this arrangement and how it will pan out for you if you own a small business:

· If you are in business for the complete period as specified by the program, i.e., February 15 to June 30, then you are eligible for the maximum loan bracket of 250% of your average monthly payroll spend for this complete duration.
· If you are in a seasonal business that operates say from, March 1 to June 30, then you will receive 250% of your average monthly payroll spend for this specified period.
· If you are not in business during these months due to the seasonality of your business, or if you went out of business before February 15, then you will be able to apply for a loan that equals to 250% of your average monthly payroll spend, for January and February.
Initially, some businesses opted for the Economic Injury Disaster (EID) loan for the period between February 15 – June 30. These businesses, too, can refinance their EID loan with a Paycheck Protection Program loan. They can also add any other outstanding loan amount to that of their payroll amount and apply for the loan.

Following are the expenses that are eligible to be included in your Paycheck Protection Program loan calculation:

• Overall compensation (wages, salaries, cash tips, commissions, etc.)
• Payment for medical or sick leave, family leave or vacation
• Allowance for employee separation
• Payments towards employment retirement benefits
• Payment for insurance premiums and group healthcare benefits

Further, the following are the expenses that are not included while calculating your loan amount for the Paycheck Protection Program loan application:

• Compensation above the sum of $100,000 per employee
• Compensation for employees whose primary residence is outside the US
• Taxes imposed by the Internal Revenue Code:
• Payroll taxes (chapter 21)
• Retirement benefits and Railroad taxes (chapter 22)
• Income taxes withheld on wages (chapter 24)
• Loans utilized for similar purposes of yet another SBA loan that has already been claimed by the applicant
• Qualified family or sick leave for which credit has already been allowed under the FFCRA (Family First Coronavirus Response Act).

If you are an eligible small business owner who has received the loan, here are the expenses for which you can use the loan and be in compliance:

• Payroll costs
• Rent
• Utilities
• Employee salaries and compensations
• Group healthcare benefit
• Any family leaves for employees
• Insurance premiums
• Interest on other loans accrued before February 15

The SBA will forgive the Paycheck Protection Program loans fully, only if the following three requirements are taken care of:

• Loans received under this program are used exactly for the purposes established by the Act.
• Loans are used to pay no more than 8 weeks of payroll expenses that are eligible.
• Loans provided to businesses are used to pay employees comparable salaries that have been receiving before the pandemic.

For any amount spent that does not meet the abovementioned requirements, the business will be required to pay back the loan matching the same amount. For this amount, the SBA provides businesses with a repayment window of 10 years, at an interest rate of 4%, sans prepayment penalties or loan fees.

To calculate which costs qualify to be included in ascertaining the loan forgiveness amount, you can use the following formula:

Forgivable loan = Payroll costs + Utility payments + Mortgage interest payments

If you would like to be approved for loan forgiveness, then you must contact the SBA or any other approved lender and submit your application complete with documentation that verifies the number of employees you have on payroll, their compensation, and other documents that reflect your payments towards mortgage and utilities.

Please note, that once you claim a Paycheck Protection Program loan, you will no longer be eligible for Employee Retention Credit or deferment in payment of employer payroll taxes till 2021.

While the Act has stirred the market with small business owners wanting to apply for the Paycheck Protection Program loan, as early as possible, the pressure is growing on authorized lenders to study the loan applications and grant funding from the allotted amount. The task is not only demanding but could also lead to human errors given the short amount of time and the thousands of applications flowing in every second.

Lenders working with the SBA to grant loans to small businesses during this hour of need, can automate the process of underwriting and approving loan applications, which will help them churn out loan applications quicker and with higher accuracy.

LendFoundry has added the SBA Paycheck Protection Program workflow in its lending platform and will now allow lenders to originate and service these loans. The LendFoundry platform is now available for immediate deployment. Contact us to set up your demo of the LendFoundry platform.

Conclusion

The CARES Act takes a huge and important step towards ensuring public wellbeing by providing individuals with rebates and reliefs to the tune of $1200 for single taxpayers and $2400 for married taxpayers and ensuring that small businesses, that account for 99% of businesses in the US, are not forced to shut down operations and relieve their employees, thus, ensuring income stability to an extent. By taking care of up to 8 weeks (2 months) worth of payroll expenses, the SBA hopes to provide some breathing space to businesses that are trying to keep their operations running while ensuring their revenues are not severely affected.

• Paycheck Protection Program