Expansive COVID-19 relief package clears House and is headed to the White House
The House passed the largest peacetime fiscal relief measure in U.S. history today and it’s now on its way to President Donald Trump's desk. The Phase 3 Stimulus package totals roughly $2.3 trillion in direct aid to families, businesses, hospitals and states. The controversial voice vote marks the third bill lawmakers have passed to respond to the COVID-19 pandemic, since the outbreak began two months ago.
CARES Act Assistance for Small Businesses
Paycheck Protection Program – The CARES Act establishes the Paycheck Protection Program, a $350 billion loan program to help small & mid-sized businesses with cash flow during the COVID-19 crisis. If the business maintains their payroll for 8 weeks, the portion of the loan used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
Who is eligible to receive the loans?
- Businesses with 500 or less employees
- Businesses that meet current Small Business Administration (SBA) size standards
- Self-employed individuals and “gig economy” workers
- Certain nonprofits, including 501(c)(3) organizations and 501(c)(19) veteran organizations
- Tribal businesses with under 500 employees
What is the size of the loans?
The maximum loan size is 250% of the employer’s average monthly payroll, or $10 million (whichever is less).
What can loans be used for?
- Payroll costs (salary, wages, and payment of cash tips up to annual rate of $100,000 per employee)
- Continuation of health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Employee salaries, commissions, or similar compensations
- Payments of interest on mortgage obligations
- Rent, including rent under lease agreement
- Existing allowable uses under 7(a) program, which includes purchasing inventory, supplies, raw materials, and working capital
How does the loan forgiveness work?
- Borrowers are eligible for loan forgiveness equal to the amount they spend on payroll, interest on mortgages, rent, and utilities during the 8-week period after the origination date of the loan
- The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year, and by any reduction in pay of employee beyond 25% of their prior year compensation. To encourage employers to rehire any employees who have already been laid off, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period
Who makes and approves the loans?
- The loans will be 100% backed by the government, but the authority to make and approve loans is delegated to local banks and credit unions
- Financial institutions that are already approved 7(a) lenders would be automatically eligible to participate. The bill also directs the Treasury Department to create a streamlined process for becoming an approved lender so more financial institutions can participate
- Without going through all of SBA’s channels, lenders can make determinations on a borrower’s eligibility and creditworthiness. Instead of determining the ability for the businesses to repay, lenders will simply determine whether a business was operational on February 15, 2020, and whether it had employees for whom it paid salaries and payroll taxes, or a paid independent contractor
- SBA will provide lenders with a process fee for servicing the loan. The bill sets lender compensation fees at 5% for loans of not more than $350,000; 3% percent for loans of more than $350,000 and less than $2,000,000; and 1% for loans over $2,000,000
What happens to the portion of loan that is not forgiven?
- The remaining balance will maintain a 100% guarantee and have a maturity of not more than 10 years
- Loan payments are deferred at least six months
- The maximum interest rate is 4%
Can businesses receive this and an Economic Injury Disaster Loan?
It limits borrowers from receiving Paycheck Protection Program (PPP) loan and an SBA Economic Injury Disaster Loan (EIDL) for the same purpose. However, it allows a borrower who has an EIDL loan unrelated to COVID-19 to apply for a PPP loan, with an option to refinance that loan into the PPP loan.
This article created by the Iowa City Area Business Partnership and posted with permission.